UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
Commission file number:
STARCO BRANDS, INC
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Securities Registered under Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | OTC Markets Group OTCQB Tier |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 14, 2022, the issuer had
STARCO BRANDS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS
| Page |
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| ITEM 1. |
3 | |
| Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 |
3 | |
| 4 | ||
| 5 | ||
| 6 | ||
| Notes to Unaudited Condensed Consolidated Financial Statements |
7 | |
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
| ITEM 3. |
29 | |
| ITEM 4. |
29 | |
| 30 | ||
| ITEM 1. |
30 | |
| ITEM 1A. |
30 | |
| ITEM 2. |
30 | |
| ITEM 3. |
30 | |
| ITEM 4. |
30 | |
| ITEM 5. |
30 | |
| ITEM 6. |
31 | |
| 33 | ||
PART I – FINANCIAL INFORMATION
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | ||||||||
| Accounts receivable, net, $ and $ from related party, respectively | ||||||||
| Prepaid expenses and other assets | ||||||||
| Inventory | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Note receivable, related party | ||||||||
| Total Assets | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | ||||||||
| Other payables and accrued liabilities, $ and $ from related party, respectively | ||||||||
| Stock payable | ||||||||
| Treasury stock payable, current | ||||||||
| Loans and advances payable, related party | ||||||||
| Notes payable | ||||||||
| Lease liability | ||||||||
| Total Current Liabilities | ||||||||
| Treasury stock payable, net of current portion | ||||||||
| Loans payable, net of current portion, $ and $ from related party, respectively | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Deficit: | ||||||||
| Preferred stock, par value; shares authorized; shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock, par value; shares authorized; and shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid in capital | ||||||||
| Treasury stock at cost | ( | ) | ( | ) | ||||
| Equity consideration payable | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Starco Brands' Stockholders' Equity (Deficit) | ( | ) | ||||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total Stockholders' Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Stockholders' Equity (Deficit) | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Revenue, $ and $ from related parties for the three and nine months ended September 30, 2022, net | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Compensation expense | $ | $ | $ | $ | ||||||||||||
| Professional fees | ||||||||||||||||
| Marketing, General and administrative | ||||||||||||||||
| Marketing, related party | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income (Loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other Income (Expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ( | ) | ||||||||||||||
| Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before provisions for income taxes | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Provision for income taxes | ||||||||||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net (income) loss attributable to non-controlling interest | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net Income (Loss) attributable to Starco Brands | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Income (Loss) per share, basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Income (Loss) per share, diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Weighted Average Shares Outstanding - Basic | ||||||||||||||||
| Weighted Average Shares Outstanding - Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid-in | Treasury | Accumulated | Non-controlling | Equity Consideration | Stockholders' Equity | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Interest | Payable | (Deficit) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | - | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||||||||||||||||||||
| Estimated fair value of contributed services | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||||||||||||||||||||||
| Contributed services | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Contributed services | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | ( | ) | ( | ) | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| Estimated fair value of contributed services | - | - | ||||||||||||||||||||||||||||||||||||||
| Estimated fair value of warrants issued | - | - | ||||||||||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| Estimated fair value of contributed services | ||||||||||||||||||||||||||||||||||||||||
| Estimated fair value of warrants issued | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of shares for cash | ||||||||||||||||||||||||||||||||||||||||
| Recognition of deferred offering costs | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of shares related to stock payable | ||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| Estimated fair value of contributed services | ||||||||||||||||||||||||||||||||||||||||
| Estimated fair value of warrants issued | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to AOS acquisition | ||||||||||||||||||||||||||||||||||||||||
| Equity payble related to AOS acquisition | - | - | ||||||||||||||||||||||||||||||||||||||
| Net income | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
| For the Nine Months Ended |
||||||||
| September 30, 2022 |
September 30, 2021 |
|||||||
| Cash Flows From (Used In) Operating Activities: |
||||||||
| Net income (loss) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
| Loss on disposal of asset |
||||||||
| Contributed services and stock services |
||||||||
| Stock based compensation |
||||||||
| Depreciation |
- | |||||||
| Amortization |
- | |||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable, related party |
( |
) | ( |
) | ||||
| Accounts receivable |
||||||||
| Prepaids & other assets |
( |
) | ||||||
| Inventory |
( |
) | ||||||
| Accounts payable |
( |
) | ( |
) | ||||
| Accrued expenses, related party |
( |
) | ( |
) | ||||
| Accrued liabilities |
( |
) | ||||||
| Net Cash Used In Operating Activities |
( |
) | ( |
) | ||||
| Cash Flows From Investing Activities: |
||||||||
| Cash Received in Acquisition of Business, net of cash paid |
||||||||
| Purchases of intangibles |
( |
) | ||||||
| Net Cash Provided by (Used) In Investing Activities | ( |
) | ||||||
| Cash Flows From Financing Activities: |
||||||||
| Advances / loans from related parties |
||||||||
| (Repayment of advances)/borrowings from related parties |
( |
) | ||||||
| Proceeds on notes payable |
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| Payments on notes payable |
( |
) | ||||||
| Proceeds from issuance of common stock |
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| Repurchase of common stock |
( |
) | ( |
) | ||||
| Net Cash Provided By Financing Activities |
||||||||
| Net Increase (Decrease) In Cash |
( |
) | ||||||
| Cash - Beginning of Period |
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| Cash - End of Period |
$ | $ | ||||||
| Supplemental Cash Flow Information: |
||||||||
| Cash paid for: |
||||||||
| Interest paid |
$ | $ | ||||||
| Income Taxes |
$ | $ | ||||||
| Noncash operating and financing activities: |
||||||||
| Non-cash issuance of stock payable |
$ | $ | ||||||
| Reclass of offering costs to additional paid-in capital |
$ | $ | ||||||
| Estimated fair value of shares issued in acquisition | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
STARCO BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Starco Brands, Inc. (STCB) was incorporated in the State of Nevada on January 26, 2010, under the name Insynergy, Inc. On September 7, 2017, STCB filed an Amendment to the Articles of Incorporation to change the corporate name to Starco Brands, Inc. The Board determined the change of STCB's name was in the best interests of the Company due to changes in its current and anticipated business operations. In July 2017, STCB entered into a licensing agreement with The Starco Group (“TSG”), located in Los Angeles, California. The companies pivoted to commercializing novel consumer products manufactured by TSG. TSG is a private label and branded aerosol and liquid fill manufacturer with manufacturing assets in the following verticals: DIY/Hardware, paints, coatings and adhesives, household, hair care, disinfectants, automotive, motorcycle, arts & crafts, personal care cosmetics, personal care FDA, sun care, food, cooking oils, beverages, and spirits and wine.
During the third quarter of 2021, STCB formed two subsidiaries, Whipshots, LLC, a Wyoming limited liability company ("Whipshots LLC") and Whipshots, LLC, a Delaware limited liability company that was subsequently renamed Whipshots Holdings, LLC ("Whipshots Holdings"). Whipshots LLC was a wholly-owned subsidiary of STCB at formation which was subsequently contributed to Whipshots Holdings. Whipshots Holdings is a majority-owned subsidiary of STCB in which STCB owns
On September 12, 2022, STCB, through its wholly-owned subsidiary Starco Merger Sub Inc. (“Merger Sub”), completed its acquisition (the “AOS Acquisition”) of The AOS Group Inc., a Delaware corporation (“AOS”). The AOS Acquisition consisted of Merger Sub merging with and into AOS, with AOS being the surviving corporation. AOS is a wholly-owned subsidiary of STCB.
The accompanying condensed consolidated financial statements are of STCB and its subsidiaries Whipshots Holdings, Whipshots LLC, and AOS (collectively, the "Company").
In our opinion, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of unaudited consolidated financial position and the unaudited consolidated results of operations for interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
Basis of Consolidation
The consolidated financial statements of Starco Brands, Inc. include the accounts of STCB, our wholly owned subsidiary AOS, and our
Our consolidated subsidiaries at September 30, 2022 include: AOS, Whipshots Holdings and its wholly owned subsidiary Whipshots
Basis of presentation
The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2021. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.
Use of estimates
The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of contributed services and recoverability of prepaid royalties. Actual results could differ from those estimates.
Concentrations of Credit Risk
We maintain our cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. We continually monitor our banking relationships and consequently have not experienced any losses in our accounts. We believe we are not exposed to any significant credit risk on cash.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents held at financial institutions may at times exceed insured amounts. The Company believes it mitigates such risk by investing in or through, as well as maintaining cash balances, with major financial institutions. The Company had $
Accounts Receivable
Revenues that have been recognized but payment has not been received are recorded as accounts receivable. Losses on receivables will be recognized when it is more likely than not that a receivable will not be collected. An allowance for estimated uncollectible amounts will be recognized to reduce the amount of receivables to its net realizable value. All of our receivables are from related parties, other than revenues generated by our wholly owned subsidiary AOS. The allowance for uncollectible amounts is evaluated quarterly. There were
Fair value of financial instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP) and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3: Pricing inputs that are generally unobservable inputs and not corroborated by market data.
The carrying amount of the Company’s consolidated financial assets and liabilities, such as cash, prepaid expenses and accrued expenses approximate their fair value because of the short maturity of those instruments. The Company’s notes payable approximates the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at September 30, 2022.
Revenue recognition
STCB and its subsidiaries currently earn a majority of their revenue as royalties from the licensing agreements it has with TSG, a related entity, and other related parties. STCB licenses the right for TSG to manufacture and sell certain Starco Brands products. The amount of the licensing revenue received varies depending upon the product and the royalty percentage is determined beforehand in each agreement. The Company recognizes its revenue under these licensing agreements only when sales are made by TSG or other related parties to a third party.
AOS, one of STCB’s wholly owned subsidiaries, earns its revenues through the sale of premium body and skincare products. Revenue from retail sales is recognized shipment to the retailer. Revenue from eCommerce sales, including Amazon Fulfillment by Amazon ("Amazon FBA"), is recognized upon shipment of merchandise.
The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the licensee transferring goods or services to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company's licensee must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company's licensee's performance obligations are transferred to customers at a point in time, typically upon delivery.
Stock-based Compensation
The Company accounts for stock-based compensation per the provisions of ASC 718, Share-based Compensation (“ASC 718”), which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants, options, and restricted stock units). The fair value of each warrant and option is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The Company has not paid dividends historically and does not expect to pay them in the future. Expected volatilities are based on the volatility of comparable companies’ common stock. The expected term of awards granted is derived using estimates based on the specific terms of each award. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The grant date fair value of a restricted stock unit equals the closing price of our common stock on the trading day of the grant date.
Net income (loss) per common share
Net income (loss) per common share is computed pursuant to ASC 260, earnings per share. Per ASC 260 Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period. The weighted average number of common shares outstanding and potentially outstanding common shares assumes that the Company was incorporated as of the beginning of the first period presented. As of September 30, 2022, the Company had
Intangible Assets
Indefinite-lived intangible assets consist of certain trademarks. These intangible assets are amortized but are tested for impairment annually or whenever impairment indicators exist.
The Company assesses potential impairment of its long-lived assets whenever events or changes in circumstances indicate that an asset or asset group’s carrying value may not be recoverable. Factors that are considered important that could trigger an impairment review include a current period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value, and the estimated fair value of the assets, with such estimated fair values determined using the best information available and in accordance with FASB ASC Topic 820, Fair Value Measurements. There were charges related to impairment during all periods presented.
Royalties and Licenses
Royalty-based obligations with content licensors are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made are generally made in connection with the development of a particular product, and therefore, we are generally subject to risk during the product phase. Payments earned after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.
The Company contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.
Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through future revenue. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If an impairment exists, then the related assets are written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.
Our minimum contractual obligations related to the above agreement as of September 30, 2022 are approximately $
PP&E
Property and equipment is recorded at cost. Depreciation is computed using straight-line over the estimated useful lives of the related assets. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed of, related costs and related accumulated depreciation are removed from the accounts. As of September 30, 2022, the Company had a total property and equipment of $
Leases
With the adoption of ASC 842, operating lease agreements are required to be recognized on the balance sheet as Right-of-Use (“ROU”) assets and corresponding lease liabilities. ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.
AOS, the Company’s wholly owned subsidiary leases its corporate office (“AOS Lease”). The AOS Lease is classified as an operating lease and has a term of
In accordance with ASC 842, Leases, the Company recognized a ROU asset and corresponding lease liability on the consolidated balance sheet for long-term office leases. See Note 10 – Leases for further discussion, including the impact on the consolidated financial statements and related disclosures.
Inventory
Inventory consists of premium body and skincare products. Inventory is measured using the first-in, first-out method and stated at average cost as of September 30, 2022. The value of inventories is reduced for excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and adjust the value of inventory when required. We recorded
Acquisitions, Intangible Assets and Goodwill
The condensed consolidated financial statements reflect the operations of an acquired business beginning as of the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values at the date of acquisition; goodwill is recorded for any excess of the purchase price over the fair values of the net assets acquired. Significant judgment is required to determine the fair value of certain tangible and intangible assets and in assigning their respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant tangible and intangible assets. The fair values are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. The Company typically employs an income method to measure the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances could affect the accuracy or validity of the estimates and assumptions. Determining the useful life of an intangible asset also requires judgment. Intangible assets are amortized over their estimated lives. Any intangible assets associated with acquired in-process research and development activities (“IPR&D”) are not amortized until a product is available for sale.
Segments
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer (“CEO”) is the Company’s chief operating decision maker and views the Company’s operations and manages its business in one operating segment, which is the business of developing and selling consumer good products. The Company operates in only
Recent accounting pronouncements
In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820) (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this Update also require additional disclosures for equity securities subject to contractual sale restrictions. The provisions in this Update are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not expect to early adopt this ASU. The Company is currently evaluating the impact of adopting this guidance on the consolidated balance sheets, results of operations and financial condition.
The Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 3 – GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has an accumulated deficit of $
NOTE 4 - ACQUISITION
On September 12, 2022, STCB, through its wholly-owned subsidiary Merger Sub, completed the AOS Acquisition. The AOS Acquisition consisted of Merger Sub merging with and into AOS, with AOS being the surviving corporation. AOS is a maker of premium body and skincare products engineered to power and protect athletes. Starco acquired AOS as STCB is always looking for technologies and brands that have the ability to scale and change behavior. In the world of sport, there are currently no brands that have successfully penetrated multiple categories of consumer products. AOS has historically been a personal care brand – offering products such as body wash, shampoo, deodorant and face wash. Starco Brands, through its relationship with TSG, has access to intellectual property that will allow AOS vertically integrate manufacturing and expand into multiple consumer product categories – OTC, sun care, air care, beverage, etc.. The AOS Acquisition was completed through an all-stock deal, where the Company’s shares were valued at $
The
As of September 30, 2022, the Company paid $
The AOS Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The preliminary fair values of the acquired assets and liabilities as of the acquisition date were:
| Consideration1 | $ | |||
| Assets acquired: | ||||
| Cash and cash equivalents | ||||
| Accounts receivable | ||||
| Prepaid and other assets | ||||
| Inventory | ||||
| PP&E, net | ||||
| Intangibles | ||||
| Right of use asset | ||||
| Total assets acquired | ||||
| Liabilities assumed: | ||||
| Accrued liabilities | ||||
| Accounts payable | ||||
| Right of use liability | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ||||
| Goodwill | $ |
The preliminary purchase price allocation is based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. The Company will utilize recognized valuation techniques as part of its final valuation of the AOS Acquisition, which is expected to be complete in Q4 2022. The above purchase price allocation is preliminary and subject to change as the Company may further refine the determination of certain assets during the measurement period of one year. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented.
Subsequent to the AOS Acquisition, during the period September 13, 2022 through September 30, 2022, AOS earned $
The Company incurred approximately $
The following unaudited proforma condensed consolidated results of operations have been prepared, as if the Acquisition had occurred as of July 1, 2022 and 2021, and January 1, 2022 and 2021, for the three and nine months ended September 30, 2020, respectively:
1 Of the $
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022
(Unaudited)
| For the Three Months Ended September 30, 2022 | ||||||||||||
| Starco Brands Inc. | The AOS Group Inc. | Proforma Starco Brands Inc. | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net (income) attributable to non-controlling interest | $ | ( | ) | $ | ( | ) | ||||||
| Net Income (Loss) attributable to Starco Brands | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| For the Nine Months Ended September 30, 2022 | ||||||||||||
| Starco Brands Inc. | The AOS Group Inc. | Proforma Starco Brands Inc. | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Net Income (Loss) | $ | $ | ( | ) | $ | ( | ) | |||||
| Net (income) attributable to non-controlling interest | $ | ( | ) | $ | ( | ) | ||||||
| Net Income (Loss) attributable to Starco Brands | $ | $ | ( | ) | $ | ( | ) | |||||
| For the Three Months Ended September 30, 2021 | ||||||||||||
| Starco Brands Inc. | The AOS Group Inc. | Proforma Starco Brands Inc. | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net (income) attributable to non-controlling interest | $ | $ | ||||||||||
| Net Income (Loss) attributable to Starco Brands | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| For the Nine Months Ended September 30, 2021 | ||||||||||||
| Starco Brands Inc. | The AOS Group Inc. | Proforma Starco Brands Inc. | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net (income) attributable to non-controlling interest | $ | |||||||||||
| Net Income (Loss) attributable to Starco Brands | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
A pro forma balance sheet was excluded from this disclosure as the transaction is already reflected in the September 30, 2022 condensed consolidated balance sheets, given there were minimal adjustments to the September 12, 2022 AOS closing balance sheet.
NOTE 5 – NOTES PAYABLE
In September 2021, the Company received a financing loan for its Directors and Officers Insurance (“D&O”). The loan bears interest at
In September 2022, the Company received a second financing loan for its Directors and Officers Insurance. The loan bears interest at
See Note 7 - Related Party Transactions for loans to STCB from the Company's CEO.
NOTE 6 – COMMITMENTS & CONTINGENCIES
On February 18, 2020, STCB received a demand letter from a law firm representing certain individuals who purchased the Breathe brand home cleaning products. The demand letter alleged that STCB had unlawfully, falsely and misleadingly labeled and marketed the Breathe brand of products to consumers in violation of the Consumer Products Safety Act, the Federal Hazardous Substance Act and the FTC Act, as well as various California and New York laws. While STCB denied any wrongdoing, a settlement was reached and paid in full, with no further obligation required by STCB.
On September 8, 2021, Whipshots LLC, entered into an Intellectual Property Purchase Agreement (the “Whipshots IP Agreement”) effective August 24, 2021, with Penguins Fly, LLC, a Pennsylvania limited liability company (“Seller”). The Whipshots IP Agreement provided that Seller would sell Whipshots LLC (“Buyer”) the trademarks “Whipshotz” and “Whipshots,” accompanying domain and social media handles of the same nomenclature, and certain intellectual property, documents, digital assets, customer data and other transferable rights under non-disclosure, non-compete, non-solicitation and confidentiality contracts benefiting the purchased intellectual property and documents (collectively, the “Acquired Assets”). The purchase price (“Purchase Price Payment”) for the Acquired Assets is payable to Seller, over the course of seven years, based on a sliding scale percentage of gross revenues actually received by Buyer solely from Buyer’s sale of Whipshots/Whipshotz products. The Purchase Price Payment shall be subject to a minimum amount in each contract year and the maximum aggregate amount payable to Seller under the Whipshots IP Agreement between $
On September 14, 2021, the Whipshots LLC entered into a License Agreement (“Whipshots License Agreement”) with Washpoppin Inc., (“Licensor”) a New York corporation. Pursuant to the License Agreement, Licensor shall license to the Company certain Licensed Property (as defined in the Whipshots License Agreement) of the recording artist professionally known as “Cardi B” (the “Artist”). As part of the Whipshots License Agreement, in exchange for royalty rates based on Net Sales (as defined in the License Agreement) during each applicable contract period, the Licensor warrants to cause the Artist to attend certain in person events, media interviews, participate in the development of the Licensed Products (as defined in the Whipshots License Agreement), and promote the Licensed Products through social media posts on the Artist’s social media platforms. The Company, through Whipshots LLC has committed to a minimum royalty payment under the Whipshots License Agreement of $
Following the 18-month indemnification period of the AOS Acquisition, the Company will issue AOS Stockholders an aggregate
NOTE 7 – RELATED PARTY TRANSACTIONS
During the year ended December 31, 2017, Sanford Lang, the Company’s former Chairman and CEO, advanced STCB $
As of September 30, 2022, the Company owed TSG $
Ross Sklar, CEO Notes
On January 24, 2020, STCB executed a promissory note ( “January 24, 2020 Note”), for $
On June 28, 2021, STCB executed an additional promissory note ( “June 28, 2021 Note”), with Mr. Sklar in the principal amount of $
On September 17, 2021, STCB executed a third promissory note ( “September 17, 2021 Note”), with Mr. Sklar in the principal amount of $
On December 13, 2021, STCB executed a fourth promissory note ( “December 13, 2021 Note”), with Mr. Sklar in the principal amount of $
On February 14, 2022, STCB executed a fifth promissory note ( “February 14, 2022 Note”), in favor of Mr. Sklar, in the principal sum of $
Other Related Party Transactions
As of September 30, 2022, the outstanding principal due to Mr. Sklar is $
During the three and nine months ended September 30, 2022, the Company incurred $
During the three and nine months ended September 30, 2022, and September 30, 2021, the Company recognized revenue from related parties of $
During the year ended December 31, 2021, the Company advanced $
During the three and nine months ended September 30, 2022, the Company received contributed services at a value of approximately $
NOTE 8 – STOCK WARRANTS
On October 20, 2021, the Company entered into an agreement with Evan Greene for services to be performed. As consideration therefor, the Company granted Mr. Greene stock warrants to purchase
On October 21, 2021, the Company entered into an agreement with Robert Floyd for services to be performed. As consideration therefor, the Company granted Mr. Floyd stock warrants to purchase
On September 12, 2022, the Company entered into agreements with members of the Board and consultants for services to be performed. As consideration therefor, the Company granted those individuals stock warrants to purchase an aggregate of
| Risk- | |||||||||||||||||||||||||||||
| Number of | free | ||||||||||||||||||||||||||||
| Stock | Stock | Strike | Expected | Interest | Dividend | Expected | Fair | ||||||||||||||||||||||
| Date | Warrants | Price | Price | Volatility | Rate | Rate | Term | Value | |||||||||||||||||||||
| 10/20/2021 | $ | $ | % | % | % |
| $ | ||||||||||||||||||||||
| 10/21/2021 | $ | $ | % | % | % |
| $ | ||||||||||||||||||||||
| 9/12/2022 | $ | $ | % | % | % |
| $ | ||||||||||||||||||||||
A summary of the status of the Company’s outstanding stock warrants and changes during the periods is presented below:
| Shares | ||||||||||||
| available | ||||||||||||
| to purchase | Weighted | Weighted | ||||||||||
| with | Average | Average | ||||||||||
| warrants | Price | Fair Value | ||||||||||
| Outstanding, December 31, 2020 | $ | $ | ||||||||||
| Issued | $ | $ | ||||||||||
| Exercised | $ | $ | - | |||||||||
| Cancelled | $ | $ | - | |||||||||
| Expired | $ | $ | - | |||||||||
| Outstanding, December 31, 2021 | $ | $ | ||||||||||
| Issued | $ | $ | ||||||||||
| Exercised | $ | $ | - | |||||||||
| Cancelled | $ | $ | - | |||||||||
| Expired | $ | $ | - | |||||||||
| Outstanding, September 30, 2022 | $ | |||||||||||
| Exercisable, September 30, 2022 | $ | $ | ||||||||||
The Company granted stock warrants to purchase an aggregate of
The weighted average grant date fair value of stock warrants granted and vested during the nine months ended September 30, 2022, was $
The following table summarizes information about stock warrants to purchase shares of the Company’s common stock outstanding and exercisable as of September 30, 2022:
| Weighted- | Weighted- | |||||||||||||||||
| Average | Average | |||||||||||||||||
| Range of | Outstanding | Remaining Life | Exercise | Number | ||||||||||||||
| exercise prices | Warrants | In Years | Price | Exercisable | ||||||||||||||
| $ | $ | |||||||||||||||||
| $ | ||||||||||||||||||
The compensation expense attributed to the issuance of the stock warrants is recognized as they are vested.
Total compensation expense related to the stock warrants was $
The aggregate intrinsic value is for total outstanding and exercisable warrants, which was based on our estimated fair value of the common stock of $
NOTE 9 – STOCKHOLDERS' EQUITY (DEFICIT)
On July 23, 2020, the Company granted
NOTE 10 – LEASES
The following table presents net lease cost and other supplemental lease information:
| Nine Months Ended | ||||
| September 30, 2022 | ||||
| Lease cost | ||||
| Operating lease cost (cost resulting from lease payments) | $ | |||
| Short term lease cost | ||||
| Sublease income | ( | ) | ||
| Net lease cost | $ | |||
| Operating lease – operating cash flows (fixed payments) | $ | |||
| Operating lease – operating cash flows (liability reduction) | $ | |||
| Current leases – right of use assets | $ | |||
| Current liabilities – operating lease liabilities | $ | |||
| Non-current liabilities – operating lease liabilities | $ | |||
| Operating lease ROU assets | $ | |||
| Weighted-average remaining lease term (in years) |
| |||
| Weighted-average discount rate | % | |||
The Company did not have any leases for the nine months ended September 30, 2021.
The Company obtained right-of-use assets of $
Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the nine months ended September 30, 2022:
| Fiscal Year | Operating Leases | |||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| Total future minimum lease payments | ||||
| Amount representing interest | ||||
| Present value of net future minimum lease payments | $ | |||
NOTE 11 – PROPERTY AND EQIUPMENT
Property and equipment, net consist of the following:
| September 30, 2022 | ||||
| Tools and equipment | $ | |||
| Computer equipment | ||||
| Property and equipment, gross | ||||
| Less: Accumulated depreciation | ( | ) | ||
| Property and equipment, net | $ | |||
The Company did not have property and equipment as of September 30, 2021.
NOTE 12 – INTANGIBLE ASSETS AND GOODWILL
Intangible assets, net consists of the following:
| September 30, 2022 | ||||||||||||
| Gross | Accumulated | Net | ||||||||||
| Carrying | Amortization | |||||||||||
| Amount |
|
| ||||||||||
| Trademark | $ | $ | - | $ | ||||||||
| Domain name | ||||||||||||
| Intangible Assets | $ | $ | $ | |||||||||
| September 30, 2021 | ||||||||||||
| Gross | Accumulated | Net | ||||||||||
| Carrying | Amortization | |||||||||||
| Amount |
|
| ||||||||||
| Trademark | $ | $ | - | $ | ||||||||
| Intangible Assets | $ | $ | $ | |||||||||
As of September 30, 2022, future expected amortization expense of Intangible assets was as follows:
| Fiscal Period: | ||||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total amortization remaining | $ |
The changes in the carrying amounts of goodwill during the nine months ended September 30, 2022 were as follows.
| Balance at December 31, 2021 | $ | |||
| Acquisitions | ||||
| Measurement period adjustments | ||||
| Balance at September 30, 2022 | $ |
As of September 30, 2022, all goodwill recognized is allocated to the AOS acquisition.
NOTE 13 - SUBSEQUENT EVENTS
Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855, from the balance sheet date through the date the financial statements were issued, and other than the below, has determined that no material subsequent events exist.
On November 1, 2022, the Company entered into an agreement with Omri Moalem for services to be performed. As consideration therefor, the Company granted Mr. Moalem stock warrants to purchase
On November 3, 2022, the Company entered into an agreement with Libertatum, LLC (“Libertatum”) for services to be performed. As consideration therefor, the Company granted Libertatum stock warrants to purchase
| Date | Number of Stock Warrants | Stock Price | Strike Price | Expected Volatility | Risk-free Interest Rate | Dividend Rate | Expected (in years) | Fair Value | ||||||||||||||||||||||||
| 11/01/2022 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
| 11/03/2022 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND OTHER FEDERAL SECURITIES LAWS, PARTICULARLY THOSE ANTICIPATING FUTURE FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, GROWTH, OPERATING STRATEGIES AND SIMILAR MATTERS, INCLUDING WITHOUT LIMITATION, STATEMENTS CONCERNING THE IMPACTS OF THE COVID-19 PANDEMIC ON OUR BUSINESS, OPERATIONS, RESULTS OF OPERATIONS, LIQUIDITY, INVESTMENTS AND FINANCIAL CONDITION. WE HAVE BASED THESE FORWARD-LOOKING STATEMENTS ON OUR CURRENT INTENT, EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, AND THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND ASSUMPTIONS ABOUT US THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “COULD,” “WOULD,” “INTEND,” “PROJECT,” “CONTEMPLATE,” “POTENTIAL,” “EXPECT,” “PLAN,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “CONTINUE,” OR THE NEGATIVE OF SUCH TERMS OR OTHER SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH A DISCREPANCY INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN OUR OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. ANY OF THE FORWARD-LOOKING STATEMENTS THAT WE MAKE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OTHER PUBLIC REPORTS AND STATEMENTS WE MAKE MAY TURN OUT TO BE INACCURATE AS A RESULT OF OUR BELIEFS AND ASSUMPTIONS WE MAKE IN CONNECTION WITH THE FACTORS SET FORTH ABOVE OR BECAUSE OF OTHER UNIDENTIFIED AND UNPREDICTABLE FACTORS. IN ADDITION, OUR BUSINESS AND FUTURE RESULTS ARE SUBJECT TO A NUMBER OF OTHER FACTORS, INCLUDING THOSE FACTORS SET FORTH IN THE “RISK FACTORS” SECTION OF OUR AMENDED ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") ON AUGUST 25, 2022. BECAUSE OF THESE AND OTHER UNCERTAINTIES, OUR ACTUAL FUTURE RESULTS MAY BE MATERIALLY DIFFERENT FROM THE RESULTS INDICATED BY THESE FORWARD-LOOKING STATEMENTS, AND YOU SHOULD NOT RELY ON SUCH STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF. THESE RISKS COULD CAUSE OUR ACTUAL RESULTS FOR 2022 AND BEYOND TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS BY OR ON BEHALF OF US, AND COULD NEGATIVELY AFFECT OUR FINANCIAL CONDITION, LIQUIDITY AND OPERATING AND STOCK PRICE PERFORMANCE.
Our Business
Starco Brands, Inc. (formerly Insynergy Products, Inc.), which we refer to as "the Company," "our Company," "STCB," "we," "us" or "our," was incorporated in the State of Nevada on January 26, 2010. On September 7, 2017, the Company filed an Amendment to the Articles of Incorporation to change the corporate name to Starco Brands, Inc. The Board determined the change of the Company’s name was in the best interests of the Company due to changes in our current and anticipated business operations at that time. In July 2017, we entered into a licensing agreement with The Starco Group ("TSG"), located in Los Angeles, California. TSG is a private label and branded aerosol and liquid fill manufacturer with manufacturing assets in the following verticals: DIY/Hardware, paints, coatings and adhesives, household, hair care, disinfectants, automotive, motorcycle, arts & crafts, personal care cosmetics, personal care FDA, sun care, food, cooking oils, beverages, and spirits and wine. Upon entering into the licensing agreement with TSG, we pivoted to commercializing novel consumer products manufactured by TSG.
During the third quarter of 2021, STCB formed two subsidiaries, Whipshots, LLC, a Wyoming limited liability company ("Whipshots LLC") and Whipshots, LLC, a Delaware limited liability company that was subsequently renamed Whipshots Holdings, LLC ("Whipshots Holdings"). Whipshots LLC was a wholly-owned subsidiary of STCB at formation which was subsequently contributed to Whipshots Holdings. Whipshots Holdings is a majority-owned subsidiary of STCB in which STCB owns 96% of the vested voting interests. There are unvested interests not owned by the Company for an additional 3% of the equity which has been issued subject to vesting requirements.
On September 12, 2022, STCB, through its wholly-owned subsidiary Starco Merger Sub Inc. (“Merger Sub”), completed its acquisition (the “AOS Acquisition”) of The AOS Group Inc., a Delaware corporation (“AOS”). The AOS Acquisition consisted of Merger Sub merging with and into AOS, with AOS being the surviving corporation. AOS is a wholly-owned subsidiary of STCB.
Executive Overview
In July 2017, our Board of Directors entered into a licensing agreement with TSG to pursue a new strategic marketing plan involving commercializing leading edge products with the intent to sell them through brick and mortar and online retailers. We are a company whose mission is to create behavior-changing products and that spark excitement for our consumers. Our core competency is leveraging cultural trends, building power brands, and driving awareness via innovative marketing tactics. The licensing agreement with TSG provided us with certain products on an exclusive and royalty-free basis and other products on a non-exclusive and royalty basis, in the categories of food, household cleaning, air care, spirits and personal care.
The current CEO and owner of TSG, Ross Sklar, was named our CEO in August of 2017. Mr. Sklar has a long track record of commercializing technology in industrial and consumer markets. Mr. Sklar has built teams of manufacturing personnel, research and development, and sales and marketing professionals over the last 20 years and has grown TSG into a successful and diversified manufacturer supplying a wide range of products to some of the largest retailers in the United States.
We conducted extensive research and have identified a number of untapped consumer needs that we can address through our portfolio of novel technologies. We are now executing on this vision and since inception have launched four product lines.
The Breathe® Household cleaning aerosol line is an environmentally friendly line of household cleaning aerosol products. Breathe was the EPA Safer Choice Program Partner of the Year. This line is propelled by nitrogen, which makes up approximately 80% of the earth’s breathable air. Breathe was named EPA’s Safer Choice Program’s Partner of the Year and also achieved the Good Housekeeping Seal of approval.
We also launched the Breathe® Hand Sanitizer Spray in April 2020. This invention was created and patents were filed by Alim Enterprises, LLC, (“AE”) an entity owned by Mr. Sklar. Originally the technology was developed for Blue Cross Laboratories, LLC, (“BCL”) a personal care consumer products manufacturer owned by Mr. Sklar’s TSG. The product was developed as a result of supply chain collapse during the Covid-19 outbreak and increased demand for hand sanitizers. The traditional packaging components used in manufacturing hand sanitizer became very difficult to procure. BCL, located in Santa Clarita, California, is an at scale manufacturer established approximately 50 years ago with personal care products, including hand sanitizer. Due to the outbreak of Covid-19, many traditional component supply chains became overly stressed and BCL could not source enough bottles and caps. Through AE, the concept of a spray hand sanitizer was invented. AE filed patents on what it believes to be the first ever aerosol spray hand sanitizer with a 75% alcohol solution that utilizes only compressed air and nitrogen as the product’s propellant. AE and its intellectual property counsel believe the product is novel and warrants a utility patent. In February 2021, AE assigned the patent application to us as contemplated by a 2020 memorandum of understanding among AE, us and TSG.
The product is being manufactured by BOV Solutions, a division of TSG that is an at scale FDA, CFR210/211 manufacturer of aerosol and OTC products. The Breathe Hand Sanitizer Spray can only be made in an FDA facility that has at scale aerosol capabilities. The product is being sold through BOV Solutions and TSG’s existing distribution footprints in the United States. We launched the product in April 2020 via a press release in partnership with Dollar General, announcing its distribution in each of their 15,000+ stores. We have also partnered with Wegmans, HLA and J Winkler. Since then, the product is in distribution through The Home Depot, Lowes, American Pharmacy, AutoZone, The Farm Shop, Harris Teeter, UNFI, Kehe, Macy’s, Smart & Final, Weeks and others. The product comes in three sizes, 1oz., 5oz., and 9.5oz. sprays and is available directly on our website www.breathesanitizer.com and on Amazon.com and Walmart.com.
We are also the marketer of record, but not the owner of record of, Betterbilt Chemical’s Kleen Out® branded drain opener and for the Winona® Butter Flavor Popcorn Spray. We provide marketing services for these brands pursuant to the terms of agreements governing our marketing. Both products are available in Walmart stores.
In 2019, Winona Popcorn Spray entered into a co-marketing partnership with Delish (a Hearst owned media brand). The brand is now distributed throughout Walmart stores nationwide. We also launched the Winona Popcorn Spray on Amazon through our strategic partner Pattern (formally iServe), who is a shareholder in our company. Winona Popcorn Spray is also sold in H-E-B grocery stores. The Company also launched a new caramel flavor which is also distributed through Walmart and H-E-B. Sales grew significantly in 2021 and the Company expects sales to continue to grow in this space as management plans to increase the Company's sales personnel in 2022 for this product line.
On September 8, 2021, we, Whipshots LLC, entered into an Intellectual Property Purchase Agreement effective August 24, 2021, with Penguins Fly, LLC, pursuant to which Whipshots LLC purchased the trademarks “Whipshotz” and “Whipshots”. The purchase price for these trademarks is payable to Penguins Fly, LLC over the course of seven years, based on a sliding scale percentage between 2% and 5% of gross revenues actually received by us solely from our sale of Whipshots/Whipshotz products.
On September 14, 2021, we, Whipshots Holdings, entered into a License Agreement with Washpoppin Inc., a New York corporation (“Washpoppin”) pursuant to which Washpoppin licensed certain intellectual property of the recording artist professionally known as “Cardi B” to us for use associated with the Company’s new product line consisting of vodka-infused, whipped-cream aerosols, under the brand name “Whipshots”. We launched these products under the Whipshots™ brand in the fourth quarter of 2021 and first quarter of 2022. In addition, we entered into Distribution Agreements with various distributors pursuant to which such distributors will act as the exclusive distributors of Whipshots™ in various geographic locations.
During December 2021, we launched Whipshots at a hosted event during Art Basel in Miami. This launch event garnered over 1.7 billion earned media impressions world-wide. We launched the product via the Whip Drop program on whipshots.com, with a limited quantity of cans to be sold each day for the month of December 2021. Following the success of our online launch, we launched brick and mortar retail distribution in the first quarter of 2022 and signed a national distribution agreement with RNDC, one of the largest spirits distributors in the nation. We also announced distribution through GoPuff and BevMo. We expect to register Whipshots in all states but starting in select markets with plans to grow cautiously.
In September 2022, through our wholly-owned subsidiary, Merger Sub, we acquired AOS in the AOS Acquisition. The AOS acquisition consisted of Merger Sub merging with and into AOS, with AOS being the surviving corporation (the “Merger”). AOS is a wholly-owned subsidiary of STCB. AOS makes premium body and skincare products engineered to power and protect athletes from pregame to gametime to postgame. We believe AOS’s leading-edge deodorants, face and body creams and lotions, and shower and wash-off products align perfectly with our manufacturing expertise, including over-the-counter (OTC), respiratory, sun care, pain management, performance supplements, food, beverage and apparel.
On September 12, 2022, STCB, through its wholly-owned subsidiary Merger Sub, completed the AOS Acquisition. The AOS Acquisition consisted of Merger Sub merging with and into AOS, with AOS being the surviving corporation. AOS is a maker of premium body and skincare products engineered to power and protect athletes. Starco acquired AOS as STCB is always looking for technologies and brands that have the ability to scale and change behavior. In the world of sport, there are currently no brands that have successfully penetrated multiple categories of consumer products. AOS has historically been a personal care brand – offering products such as body wash, shampoo, deodorant and face wash. Starco Brands, through its relationship with TSG, has access to intellectual property that will allow AOS vertically integrate manufacturing and expand into multiple consumer product categories – OTC, sun care, air care, beverage, etc..The AOS Acquisition was completed through an all-stock deal, where the Company’s shares were valued at $0.19 per share, which amount is equal to the fair value of the stock on the acquisition date. As consideration for the Meger, the Company reserved an aggregate of 61,400,000 restricted shares of Company common stock to issue to the AOS Stockholders (such stockholders as of immediately prior to the closing of the Merger, the “AOS Stockholders”), 5,000,000 restricted shares of Company common stock may be issued to the AOS Stockholders after an 18-month indemnification period, and offsetting against these additional shares will be the sole recourse for any indemnity claims by the Company against the AOS Stockholders. An additional 5,000,000 restricted shares of Company common stock may be issued to the AOS Stockholders contingent upon AOS meeting certain future sales metrics. Further, in the event that the AOS Stockholders have any indemnity claims against the Company or Merger Sub, the Company shall satisfy any such indemnity claims solely by the issuance of additional shares of its Company common stock, which shall not exceed, in the aggregate, 5,000,000 additional shares of Company common stock. Notwithstanding the foregoing, under the terms of the Merger Agreement, any AOS Stockholder that is not an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”), will receive cash in lieu of shares of Company common stock at a value equal to $0.0982 per share.
The 5,000,000 additional restricted shares of Company common stock to be issued after an 18-month indemnification period and the 5,000,000 earnout shares of Company common stock to be issued if certain future sales metrics are met, are deemed to be part of the consideration paid for the acquisition. The 5,000,000 additional shares of Company common stock that may be issued in the event of an indemnity claim against the Company are not deemed to be part of the consideration paid for the acquisition.
As of September 30, 2022, the Company paid $6,991 in cash to non-accredited investors. Additionally, the Company will hold back $1,175 in cash, the equivalent of 11,961 shares to be paid to non-accredited investors.
As long as we can raise capital, our plans are to launch other products in spray foods and condiments, air care, sun care, hair care, personal care, spirits and beverages over the next 48 months. Although the initial market reception of our new lines has been encouraging, we may encounter a number of hurdles that could prevent this and future product launches from achieving sustained commercial success. Financing growth and launching of new products is key and our ability to raise further capital is critical to the execution of our plans. In 2021, we pursued financing via a Regulation A offering which was qualified on December 9, 2021 and engaged The Dalmore Group to assist as the broker- dealer of record in this process, in which up to 56,818,181 shares of common stock may be sold to the public at a per share price of $1.00. As of September 30, 2022, the Company has raised approximately $200,000 via the aforementioned Regulation A offering.
We will need to rely on sales of our common stock and other sources of financing to raise additional capital. The purchasers and manner of any share issuance will be determined according to our financial needs and the available exemptions to the registration requirements of the Securities Act. We have re-evaluated our previous plan of utilizing the services of Deutsch Marketing, and are now planning to utilize, as best as possible with limited financing, the services of other marketing and social marketing agencies and Interpublic owned marketing and public relations agencies to support our marketing strategy. We will also utilize the marketing capabilities of Hearst Media for certain product lines with its co-branding arrangements. This provides significant support for our products’ current retail and online distribution.
Our ultimate goal is to become a leading owner of power brands and third-party marketer of cutting-edge technologies in the consumer products marketplace whose success is expected to increase shareholder value. We will continue to evaluate this and other opportunities to further set our strategy for 2022 and beyond.
For more information, please visit our websites at www.starcobrands.com, www.breathecleaning.com, www.breathesanitizer.com, www.whipshots.com, and www.artofsport.com.
Results of Operations
For the Three Months Ended September 30, 2022 and 2021
| September 30, |
September 30, |
|||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Revenues |
$ | 1,658,253 | $ | 109,503 | $ | 1,548,750 | ||||||
| Cost of goods sold |
343,994 | - | 343,994 | |||||||||
| Gross profit |
1,314,259 | 109,503 | 1,204,756 | |||||||||
| Operating expenses: |
||||||||||||
| Compensation expense |
176,148 | 11,673 | 164,475 | |||||||||
| Professional fees |
884,558 | 57,480 | 827,078 | |||||||||
| Marketing, General and administrative |
364,331 | 430,176 | (65,845 | ) | ||||||||
| Total operating expense |
1,425,037 | 499,329 | 925,708 | |||||||||
| Loss from operations |
(110,778 | ) | (389,826 | ) | 279,048 | |||||||
| Other income (expense): |
||||||||||||
| Interest expense |
(15,232 | ) | (2,987 | ) | (12,245 | ) | ||||||
| Other income (expense) |
8,161 | - | 8,161 | |||||||||
| Total other income (expense) |
(7,071 | ) | (2,987 | ) | (4,084 | ) | ||||||
| Income (loss) before provisions for income taxes |
(117,849 | ) | (392,813 | ) | 274,964 | |||||||
| Provision for income taxes |
- | - | - | |||||||||
| Net income (loss) |
(117,849 | ) | (392,813 | ) | 274,964 | |||||||
| Net (income) attributable to non-controlling interest | (32,693 | ) | - | (32,693 | ) | |||||||
| Net income (loss) attributable to Starco Brands |
$ | (150,542 | ) | $ | (392,813 | ) | $ | 242,271 |
|
|||
Revenues
For the three months ended September 30, 2022, the Company recorded revenues of $1.6 million compared to $0.1 million for the three months ended September 30, 2021, an increase of $1.5 million and a percentage increase of 1,414%. Royalty revenue represented 87% and 100%, or $1.4 million and $0.1 million, respectively, of all revenues with $0.2 million and $0 coming from our wholly owned subsidiary, AOS. This increase was largely due to sales of Whipshots™ during the period, which was not marketed during the same period last year, which consisted mainly of sales of Breath cleansing products. The royalty rate that the Company is paid varies on a per product basis of wholesale sales of our branded and non-corporate owned licensed products. Revenues are from our marketing licensing agreements with TSG and other affiliated companies for various products mentioned above. The increase in the current period is primarily due to initial volume sales of our Whipshots™, partially offset by declines in sales of Breathe cleaning and sanitizer products.
Operating Expenses
For the three months ended September 30, 2022, compensation expense increased $164,475, or 1,409%, to $176,148 compared to $11,673 for the three months ended September 30, 2021. The increase is a result of increases in stock-based compensation from warrants, independent contractors and contributed services to support the launch and growth of Whipshots™.
For the three months ended September 30, 2022, the Company incurred $884,558 in professional fees compared to $57,480 for the three months ended September 30, 2021, an increase of $827,078, or 1,439%. Professional fees are mainly for accounting, auditing and legal services associated with the acquisition of AOS and our quarterly filings as a public company and advisory and valuation services. The increase is primarily due to an increase in banking, acquisition legal, corporate legal and audit fees.
For the three months ended September 30, 2022, the Company incurred $364,331 in marketing, general and administrative expense as compared to $430,176 for the three months ended September 30, 2021, a decrease of $65,845 or 15%. The decrease can be attributed to a small decrease in spending on marketing, as the largest marketing expense was recorded in the second quarter of fiscal year 2022 for the initial license payments related to the promotional launch for Whipshots™. Additionally, the increase in spending can be attributed to an increase in stock based compensation related to the warrants issued during the three months ended September 30, 2022.
For the three months ended September 30, 2022, and 2021 the Company do not incur any expenses in Marketing, related party expenses. The sequential decrease during the period can be attributed to changing our classification of marketing expense from a third-party firm to related party once our EVP of marketing joined the Company full time in February 2022 and ceased being affiliated with the third-party firm.
Other Income and Expense
For the three months ended September 30, 2022, we had total other expense of $7,071 compared to other expense of $2,987 for the three months ended September 30, 2021. The increase in total other expense was due to the increase in interest expense related to an increase in our related party notes payable during the period ended September 30, 2022.
Net Income
For the three months ended September 30, 2022, the Company recorded net loss of $117,849 as compared to a net loss of $392,813 in the prior year period. Our decrease in loss is primarily the result of the increase in revenues earned off of Whipshots™ offset in part by increases in marketing, compensation, and professional fees.
For the Nine Months Ended September 30, 2022 and 2021
| September 30, |
September 30, |
|||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Revenues |
$ | 3,811,746 | $ | 484,073 | $ | 3,327,673 | ||||||
| Cost of goods sold |
343,994 | - | 343,994 | |||||||||
| Gross profit |
3,467,752 | 484,073 | 2,983,679 | |||||||||
| Operating expenses: |
||||||||||||
| Compensation expense |
395,974 | 89,466 | 306,508 | |||||||||
| Professional fees |
1,122,532 | 167,882 | 954,650 | |||||||||
| Marketing, General and administrative |
1,677,991 | 750,540 | 927,451 | |||||||||
| Marketing, related party |
131,614 | - | 131,614 | |||||||||
| Total operating expense |
3,328,111 | 1,007,888 | 2,320,223 | |||||||||
| Income (loss) from operations |
139,641 | (523,815 | ) | 663,456 | ||||||||
| Other income (expense): |
||||||||||||
| Interest expense |
(47,127 | ) | (22,173 | ) | (24,954 | ) | ||||||
| Other income (expense) |
8,161 | (3,500 | ) | 11,661 | ||||||||
| Total other income (expense) |
(38,966 | ) | (25,673 | ) | (13,293 | ) | ||||||
| Income (loss) before provisions for income taxes |
100,675 | (549,488 | ) | 650,163 | ||||||||
| Provision for income taxes |
- | - | - | |||||||||
| Net income (loss) |
100,675 | (549,488 | ) | 650,163 | ||||||||
| Net (income) attributable to non-controlling interest | (67,856 | ) | - | (67,856 | ) | |||||||
| Net income (loss) attributable to Starco Brands |
$ | 32,819 | $ | (549,488 | ) | $ | 582,307 | |||||
Revenues
For the nine months ended September 30, 2022, the Company recorded revenues of $3.8 million compared to $0.5 million for the nine months ended September 30, 2021, an increase of $3.3 million and a percentage increase of 687%. Royalty revenue represented 94% and 100%, or $3.6 million and $0.5 million, respectively, of all revenues with $0.2 million and $0 coming from our wholly owned subsidiary, AOS. This increase was largely due to sales of Whipshots™ during the period, which was not marketed during the same period last year, which consisted mainly of sales of Breath cleansing products. The royalty rate that the Company is paid varies on a per product basis of wholesale sales of our branded and non-corporate owned licensed products. Revenues are from our marketing licensing agreements with TSG and other affiliated companies for various products mentioned above. The increase in the current period is primarily due to initial volume sales of our Whipshots™, partially offset by declines in sales of Breathe cleaning and sanitizer products.
Operating Expenses
For the nine months ended September 30, 2022, compensation expense increased $306,508, or 343%, to $395,974 compared to $89,466 for the nine months ended September 30, 2021. The increase is a result of increases in independent contractors and contributed services to support the launch and growth of Whipshots™.
For the nine months ended September 30, 2022, the Company incurred $1,122,532 in professional fees compared to $167,882 for the nine months ended September 30, 2021, an increase of $954,650, or 569%. Professional fees are mainly for accounting, auditing and legal services associated with the acquisition of AOS and our quarterly filings as a public company and advisory and valuation services. The increase is primarily due to an increase in banking, acquisition legal, corporate legal and audit fees.
For the nine months ended September 30, 2022, the Company incurred $1,677,991 in marketing, general and administrative expense as compared to $50,540 for the nine months ended September 30, 2021, an increase of $927,451, or 124%. The increase can be attributed to an increase in spending on marketing, including initial license payments related to the promotional launch for Whipshots™. Additionally, the increase in spending can be attributed to an increase in stock based compensation related to the warrants issued during the nine months ended September 30, 2022.
For the nine months ended September 30, 2022, the Company incurred $131,614 in Marketing, related party expenses as compared to none for the nine months ended September 30, 2021, a decrease of $52,320. The decrease for the period can be attributed to our no longer classifying marketing expense from a third-party firm as related party once our EVP of marketing joined the Company full time in February 2022 and ceased being affiliated with the third-party firm.
Other Income and Expense
For the nine months ended September 30, 2022, we had total other expense of $38,966 compared to other expense of $25,673 for the nine months ended September 30, 2021. The increase in total other expense was primarily due to an increase in interest expense related to increases in our related party notes payable.
Net Income
For the nine months ended September 30, 2022, the Company recorded net income of $100,675 as compared to a net loss of $549,488 in the prior year period. Our increase in net income is primarily the result of the increase in revenue partially offset by the increase in expenditures related to marketing, compensation, and professional services.
Liquidity and Capital Resources
As reflected in the accompanying unaudited condensed consolidated financial statements, we had an accumulated deficit of approximately $18.4 million, had net income of $0.1 million and used net cash for operating activities of $0.6 million for the nine months ended September 30, 2022.
Our primary uses of cash are to fund working capital, operating expenses, and debt service. Historically, we have financed our operations primarily through issuances of equity and debt securities, and to a lesser extent, through cash flows from our operations.
As of September 30, 2022, we had $0.5 million in cash, current debt obligations of $0.7 million, and long-term debt obligations of $1.4 million. We believe that our cash on-hand and cash received from operations, as well as our ability to borrow funds from our related parties, will provide sufficient financial flexibility to meet working capital requirements and to fund debt service requirements for the remainder of 2022 as well as the foreseeable future.
On January 24, 2020, STCB executed a promissory note (“January 24, 2020 Note”), for $100,000 with Ross Sklar, Chief Executive Officer (“CEO”) of STCB. The January 24, 2020 Note bears interest at 4% per annum, compounds monthly, is unsecured, and matures two years from the original date of issuance. On July 19, 2022, the Company and Ross Sklar, agreed to amend and restate the January 24, 2020 Note. Mr. Sklar agreed to extend the term of the January 24, 2020 Note through the entry into a First Amended and Restated Promissory Note (the "Amended Note") in exchange for the Company paying the accrued and unpaid interest under the January 24, 2020 Note, including during the period following maturity date of the January 24, 2020 Note (January 24, 2022 to July 19, 2022). In exchange for extending the term, Mr. Sklar waived the default interest rate of ten percent (10%) and agreed to interest accrual at the standard four percent (4%) rate during the period following maturity. The Amended Note carries a guaranteed 4% interest rate, matures on July 19, 2024, and has a 10% interest rate on a default of repayment at maturity. The Company, at its option, may prepay the Amended Note, in whole or in part, without prepayment penalty of any kind, and the obligations under the Amended Note will accelerate in full upon an Event of Default (as defined in the Amended Note).
On June 28, 2021, STCB executed an additional promissory note (“June 28, 2021 Note”), with Mr. Sklar in the principal amount of $100,000 with the same terms as the January 24, 2020 Note and a maturity date of June 28, 2023.
On September 17, 2021, STCB executed a third promissory note (“September 17, 2021 Note”), with Mr. Sklar in the principal amount of $500,000 with the same terms as the January 24, 2020 Note and a maturity date of September 17, 2023.
On December 13, 2021, STCB executed a fourth promissory note (“December 13, 2021 Note”), with Mr. Sklar in the principal amount of $500,000 with the same terms as the January 24, 2020 Note and a maturity date of December 12, 2023.
On February 14, 2022, STCB executed a fifth promissory note (“February 14, 2022 Note”), in favor of Mr. Sklar, in the principal sum of $472,500, in exchange for a cash advance in the amount of $300,000 and payment of Company costs in the amount of $172,500. As with the other notes between the Company and our CEO, the February 14, 2022 Note bears interest at 4% per annum, is unsecured, and matures two years from the original date of issuance. This note may also convert into shares of Company common stock at the 10-day volume weighted average trading price of the Company common stock for the 10-day period prior to the issuance of the Note, which was calculated as $0.29 per share.
Critical Accounting Estimates and Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Financial Statements.
We are subject to various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when management concludes that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.
We recognize deferred tax assets (future tax benefits) and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities represent the expected future tax return consequences of those differences, which are expected to be either deductible or taxable when the assets and liabilities are recovered or settled. Future tax benefits have been fully offset by a 100% valuation allowance as management is unable to determine that it is more likely than not that this deferred tax asset will be realized.
Revenue recognition
The Company and its subsidiaries earn a majority of their revenue as royalties from the licensing agreements it has with TSG, a related entity, and other related parties. The Company licenses the right for TSG to manufacture and sell certain Starco Brands products. The amount of the licensing revenue received varies depending upon the product and is determined beforehand in each agreement. The Company recognizes its revenue only when sales are made by TSG or other related parties to a third party.
AOS, a wholly owned subsidiary of STCB, earns its revenues through the sale of premium body and skincare products. Revenue from retail sales is recognized shipment to the retailer. Revenue from eCommerce sales, including Amazon Fulfillment by Amazon ("Amazon FBA"), is recognized upon shipment of merchandise.
Off-Balance Sheet Arrangements
We have obligations related to certain royalty arrangements where our minimum contractual obligations as of September 30, 2022, are approximately $1,100,000 and $1,650,000 for the years ending December 31, 2023 and 2024, respectively. Apart from the foregoing, we have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
Recent Accounting Pronouncements
In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820) (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this Update also require additional disclosures for equity securities subject to contractual sale restrictions. The provisions in this Update are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not expect to early adopt this ASU. The Company is currently evaluating the impact of adopting this guidance on the consolidated balance sheets, results of operations and financial condition.
Management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as we are a "smaller reporting company."
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Interim Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. The disclosure controls and procedures ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that, as of September 30, 2022, these disclosure controls and procedures were not effective.
A material weakness, as defined in the standards established by the Sarbanes-Oxley, is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
The ineffectiveness of the Company’s internal control over financial reporting was due to the following material weaknesses:
| • |
Lack of risk assessment procedures on internal controls to detect financial reporting risks in a timely manner; |
| • |
Lack of segregation of duties; and |
| • |
Lack of sufficient formal procedures and controls to achieve complete and accurate financial reporting, including controls over the preparation and review of journal entries and account reconciliations. |
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022, that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
None.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item. For a list of risk factors, please refer to our Amended Annual Report on Form 10-K/A for the year ended December 31, 2021, as filed with the SEC on August 25, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchase of Securities.
On June 13, 2021, the Company entered into Separation Agreements (the "Separation Agreements") with Sanford Lang ("Mr. Lang") and Martin Goldrod ("Mr. Goldrod") whereas, effective as of June 16, 2021, Mr. Lang and Mr. Goldrod each resigned from their positions as members of the Board of Directors in exchange for certain separation benefits (the "Separation Benefits"). As consideration for the Separation Benefits, and not in addition to the same, the Company agreed to purchase an amount of the shares of the Company per month from Mr. Lang and Mr. Goldrod at a price per share that when aggregated with all shares purchased in each month would equal monthly Separation Benefit payments of $7,950 to Mr. Lang and monthly Separation Benefit payments of $3,000 to Mr. Goldrod (the "Repurchases"). The Repurchases made during the third quarter of 2022 are set forth below.
| Approximate | ||||||||||||||||
| Total Number of | Dollar Value of | |||||||||||||||
| Shares Purchased | Shares That May | |||||||||||||||
| as Part of Publicly | Yet Be Purchased | |||||||||||||||
| Total Number of | Average Price | Announced Plans | Under the Plans or | |||||||||||||
| Period |
Shares Purchased |
Paid Per Share |
or Programs |
Programs |
||||||||||||
| 7/1/2022 - 7/31/2022 |
132,571 | $ | 0.08 | 549,888 | $ | 251,850 | ||||||||||
| 8/1/2022 - 8/31/2022 |
109,500 | $ | 0.10 | 659,388 | $ | 240,900 | ||||||||||
| 9/1/2022 - 9/30/2022 |
97,696 | $ | 0.11 | 757,084 | $ | 229,950 | ||||||||||
On September 12, 2022, the Company issued an aggregate of 33,150,00 stock warrants to purchase shares of the Company’s common stock at an exercise price of $0.19 per share to certain directors, employees and consultants for services to be provided to the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINING SAFETY DISCLOSURES
Not applicable.
None
EXHIBIT INDEX
| Exhibit No. |
Exhibit Description |
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| 3.1 (*) |
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| 3.2 (*) |
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| 3.3 (*) |
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| 3.3 (*) |
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| 10.1 (*) |
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| 10.18(†) |
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| 10.20(†) |
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| 31.1 (#) |
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
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| 31.2 (#) |
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
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| 32.1 (#)(##) |
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| 32.2 (#)(##) |
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| 101.INS |
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
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| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
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| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
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| 101.PRE |
Inline XBRL Taxonomy Presentation Linkbase Document. |
|
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| (*) |
Incorporated by reference to the filing indicated. |
| (+) |
In accordance with Item 601(a)(5) of Regulation S-K, certain schedules (or similar attachments) to this exhibit have been omitted from this filing. Such omitted schedules (or similar attachments) include information relating to the Purchase Price Payment. The registrant will provide a copy of any omitted schedule to the SEC or its staff upon request. In accordance with Item 601(b)(10)(iv) of Regulation S-K, certain provisions or terms of the Agreement have been redacted. Such redacted information includes information about the Purchase Price Payment. The registrant will provide an unredacted copy of the exhibit on a supplemental basis to the SEC or its staff upon request. |
| (#) |
Filed herewith. |
| (##) |
The certifications attached as Exhibits 32.1 and 32.2 that accompany this report, are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Starco Brands, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this report irrespective of any general incorporation language contained in such filing. |
| (†) |
Certain of the exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request. |
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| STARCO BRANDS, INC |
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| (Registrant) |
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| By: |
/s/ Ross Sklar |
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| Ross Sklar |
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| Chief Executive Officer (Principal Executive Officer) Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
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| November 16, 2022 |
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