UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR
THE QUARTERLY PERIOD ENDED
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission
File Number
(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 pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| OTC Markets Group OTCQB Tier |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 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, a 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 ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of November 14, 2024, there were shares of the registrant’s Class A common stock and shares of the registrant’s Class B common stock outstanding. On February 9, 2023, the registrant’s “common stock” was renamed “Class A common stock” and a new class of common stock was created which was referred to as “Class B common stock”. Throughout this report, any reference to common stock prior to February 9, 2023, shall represent the same number of Class A common stock following February 9, 2023.
STARCO BRANDS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for credit losses of $ | ||||||||
| Accounts receivable, related parties | ||||||||
| Prepaid expenses and other assets | ||||||||
| Inventory | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable, related parties | ||||||||
| Other payables and accrued liabilities | ||||||||
| Accrued interest, related parties | ||||||||
| Fair value of Share Adjustment | ||||||||
| Treasury stock payable, current | ||||||||
| Notes payable, $ | ||||||||
| Line of Credit | ||||||||
| Lease liability, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Lease liability, net of current portion | ||||||||
| Revolving loan, net of discounts | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 7) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding, at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Class A common stock, $ par value; shares authorized; and shares issued and outstanding, at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Class B common stock, $ par value; shares authorized shares issued and outstanding, at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid in capital | ||||||||
| Treasury stock at cost | ( | ) | ( | ) | ||||
| Equity consideration payable | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Starco Brands’ Stockholders’ Equity | ||||||||
| Non-controlling interest | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Revenue, related parties | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Cost of goods sold, related parties | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Compensation expense | $ | $ | $ | $ | ||||||||||||
| Professional fees | ||||||||||||||||
| Marketing, general and administrative | ||||||||||||||||
| Fair value share adjustment loss (income) | ( | ) | ||||||||||||||
| Total operating expenses, net | ||||||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other Expense (Income): | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other expense (income) | ( | ) | ||||||||||||||
| Total other expense, net | ||||||||||||||||
| (Loss) income before provision for income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Provision for income taxes | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Net income attributable to non-controlling interest | $ | $ | $ | $ | ||||||||||||
| Net (loss) income attributable to Starco Brands | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| (Loss) income per share, basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| (Loss) income 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.
| 4 |
STARCO BRANDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(Unaudited)
| Class A Common Stock | Class B Common Stock | Additional Paid-in | Treasury | Accumulated | Non-controlling | Equity Consideration | Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Stock Payable | Deficit | Interest | Payable | Equity (Deficit) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | | |||||||||||||||||||||||||||
| Estimated fair value of contributed services and stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of shares from Soylent acquisition | - | |||||||||||||||||||||||||||||||||||||||
| Equity payable from Soylent acquisition | - | |||||||||||||||||||||||||||||||||||||||
| Skylar purchase price acquisition adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net income | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
| Estimated fair value of contributed services and stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Soylent acquisition measurement period adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net income | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Estimated fair value of contributed services and stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Soylent acquisition measurement period adjustment | - | - | ||||||||||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Soylent Share Adjustment | - | |||||||||||||||||||||||||||||||||||||||
| Equity payable related to Soylent acquisition | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Equity payable related to AOS acquisition | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Share repurchase | - | |||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Soylent Share Adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Equity payable related to Skylar acquisition | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Net (loss) income | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, 2024 | September 30, 2023 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Contributed services | ||||||||
| Stock-based compensation | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of debt discount | ||||||||
| Loss on stock payable share adjustment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable, related parties | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Operating lease right-of-use asset | ( | ) | ||||||
| Accounts payable | ||||||||
| Accounts payable, related parties | ||||||||
| Other payables and accrued liabilities | ||||||||
| Accrued interest, related parties | ( | ) | ( | ) | ||||
| Operating lease liability | ( | ) | ||||||
| Net Cash Provided By/(Used In) Operating Activities | ( | ) | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Cash acquired in Acquisition of Business, net of cash paid | ||||||||
| Purchases of intangibles | ( | ) | ( | ) | ||||
| Purchases of property & equipment | ( | ) | ( | ) | ||||
| Net Cash Used In Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Payments to/receipts from related parties | ( | ) | ||||||
| Proceeds from notes receivable | ||||||||
| Proceeds from notes payable | ||||||||
| Payments to notes payable | ( | ) | ( | ) | ||||
| Issuance of common stock for business acquisition | ( | ) | ||||||
| Proceeds from Line of Credit | ||||||||
| Payments to Line of Credit | ( | ) | ( | ) | ||||
| Proceeds from Revolving Loan | ||||||||
| Payments for Revolving Loan | ( | ) | ||||||
| Repurchase of common stock | ( | ) | ||||||
| Net Cash (Used In)/Provided By Financing Activities | ( | ) | ||||||
| Net (Decrease)/ Increase In Cash | ( | ) | ||||||
| Cash - Beginning of Period | ||||||||
| Cash - End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Settlement of Soylent share adjustment | $ | $ | ||||||
| Estimated fair value of shares issued in acquisitions | $ | $ | ||||||
| Estimated fair value of shares payable to be issued for acquisitions | $ | $ | ||||||
| Debt discount on notes payable issued with warrants | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
STARCO BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
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 of Directors (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.
On December 29, 2022, STCB, through its wholly-owned subsidiary Starco Merger Sub II. Inc. (“First Merger Sub”) completed its acquisition (the “Skylar Acquisition”) of Skylar Body, Inc. (“Skylar Inc.”). The Skylar Acquisition consisted of First Merger Sub merging with and into Skylar Inc. (“First Merger”) with Skylar Inc. being the surviving corporation, and immediately following the First Merger, and as part of the same overall transaction as the First Merger, Skylar Inc. merged with and into Second Merger Sub (the “Second Merger”) with the Second Merger Sub being the surviving entity Skylar Body, LLC (“Skylar”). Skylar is a wholly-owned subsidiary of STCB.
On February 15, 2023, the Company, through its wholly-owned subsidiary Starco Merger Sub I, Inc. (“Starco Merger Sub I”), completed its acquisition (the “Soylent Acquisition”) of Soylent Nutrition, Inc., a Delaware corporation (“Soylent”). The Soylent Acquisition consisted of Starco Merger Sub I merging with and into Soylent, with Soylent being the surviving corporation. Soylent is a wholly-owned subsidiary of STCB.
The accompanying consolidated financial statements are of STCB and its subsidiaries AOS, Skylar, Soylent, Whipshots Holdings and its wholly owned subsidiary Whipshots LLC (collectively, the “Company”).
On
January 3, 2023, the Board of the Company approved the Amended and Restated Articles of Incorporation of Starco Brands,
Inc. (the “Amended and Restated Articles). On January 6, 2023, the stockholders of the Company representing
| 7 |
NOTE 2 – GOING CONCERN
The
accompanying condensed 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 identified that a substantial doubt exists
related to the Company’s ability to meet its obligations as they become due within one year of the date of the financial statements
being issued. Principal conditions that gave rise to this substantial doubt include historical net losses as indicated by the Company’s
accumulated deficit of approximately $
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The
condensed consolidated financial statements of Starco Brands, Inc. include the accounts of STCB, our wholly owned subsidiary AOS, our
wholly owned subsidiary Skylar, our wholly owned subsidiary Soylent, and our
Our consolidated subsidiaries at September 30, 2024 include: AOS, Skylar, Soylent, Whipshots Holdings and its wholly owned subsidiary Whipshots LLC. Intercompany accounts and transactions have been eliminated upon consolidation.
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, 2023. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.
Reclassification
During the first quarter of 2024, the Company discovered a misclassification of expenses related to outbound shipping, product fulfilment, and warehouse costs; such had been grouped under Marketing, general and administrative expenses (which are part of operating expenses) during the year ended December 31, 2023. Management determined that these expenses should have been classified as Cost of goods sold and the current period financials reflect the appropriate classification. To allow for the conformity of presentation of the prior period financial statements to the current period financial statements, and to maintain comparability among the periods presented in compliance with U.S. GAAP, the Company has reclassified the prior year expenses as presented below:
| Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| Account | Previously Recorded Balance | Corrected Balance | Reclassification Made | Previously Recorded Balance | Corrected Balance | Reclassification Made | ||||||||||||||||||
| Statement of Operations | ||||||||||||||||||||||||
| Cost of goods sold | (1) | (1) | ( | ) | ( | ) | ||||||||||||||||||
| Marketing, general and administrative | ||||||||||||||||||||||||
| (1) |
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and equity-based transactions at the date of the financial statements and the revenues and expenses during the reporting period. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
| 8 |
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. Significant estimates include the timing for revenue recognition, testing goodwill for impairment, recoverability of long-lived assets, income taxes and related valuation allowances, fair value of contributed services, and assumptions used in the Black-Scholes valuation methods, such as expected volatility, risk-free interest rate and expected dividend rate.
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 a maturity of three months or less when purchased to be cash equivalents. There
were
Accounts Receivable
We
measure accounts receivable at net realizable value. This value includes an appropriate allowance for credit losses to present the net
amount expected to be collected on the financial asset. We calculate the allowance for credit losses based on available relevant information,
in addition to historical loss information, the level of past-due accounts based on the contractual terms of the receivables, reasonable
and supportable forecasts, and our relationships with, and the economic status of, our partners and customers. The allowance for credit
losses is evaluated quarterly, which is $
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 condensed consolidated financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, prepaid expenses, and accrued expenses approximate their fair value because of the short maturity of those instruments. The Company’s notes payable approximate 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, 2024 and December 31, 2023.
| 9 |
The following table summarizes the financial instruments of the Company at fair value based on the valuation approach applied to each class of security as of September 30, 2024:
| Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Carrying Value at September 30, 2024 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Liabilities: | ||||||||||||||||
| Fair Value of potential Share Adjustment | $ | $ | $ | $ | ||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
Pursuant to the Soylent Acquisition, the Company may be required to issue the Share Adjustment (as defined in Note 5) to the former owners of Soylent based upon the stock price of the Company on the Adjustment Date (as defined in Note 5). The Company engaged a third-party valuation firm to estimate the fair value of this contingent liability by performing a Monte Carlo simulation to forecast the value of the Company’s stock and the implied value of the Share Adjustment. See NOTE 5 – ACQUISITIONS for further discussion. The fair value of the share adjustment on the Soylent Acquisition date was $. The inputs to estimate the fair value of the share adjustment were the market price of the Company’s common stock, the option expected term, the volatility of the Company’s common stock price and the risk-free interest rate. Significant changes to any unobservable input may result in a significant change in the fair value measurement.
| Fair Value of Share Adjustment | ||||
| Balance at December 31, 2023 | $ | |||
| Fair Value of Shares Issued | ( | ) | ||
| Loss on Fair Value of Share Adjustment | ||||
| Balance at September 30, 2024 | $ | |||
Property and Equipment, net
Property
and equipment are recorded at historical cost, net of depreciation. All property and equipment with a cost of $
Revenue Recognition
STCB, excluding its subsidiaries, earns a majority of its revenues through the sale of food products, primarily through Winona. Revenue from retail sales is recognized at shipment to the retailer.
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 at shipment to the retailer. Revenue from eCommerce sales, including Amazon Fulfilment by Amazon (“Amazon FBA”), is recognized upon shipment of merchandise.
Skylar, one of STCB’s wholly owned subsidiaries, earns its revenues through the sale of fragrances. Revenue from retail sales is recognized at shipment to the retailer. Revenue from eCommerce sales, including Amazon FBA, is recognized upon shipment of merchandise.
Soylent, one of STCB’s wholly owned subsidiaries, earns its revenues through the sale of nutritional drinks. Revenue from retail sales is recognized at shipment to the retailer. Revenue from eCommerce sales, is recognized upon shipment of merchandise.
| 10 |
Whipshots
Holdings, an
The Company applies the requirements of ASC 606, Revenue from Contracts with Customers, which includes the following five-step model in order to determine the recognition of revenue: (i) Identify the contract with a customer; (ii) Identify the performance obligation in the contract; (iii) determine 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.
Income Taxes
The Company follows Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income in the period that includes the enactment date.
The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”) with regards to uncertainty income taxes. Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the condensed consolidated financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.
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.
| 11 |
Net income (loss) per share of common stock is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the year. All outstanding options are considered potential common stock. The dilutive effect, if any, of stock payable and warrants are calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, outstanding warrants have been excluded from the Company’s computation of net loss per share of common stock for the three and nine months ended September 30, 2024 and 2023.
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Warrants | ||||||||
| Stock options | ||||||||
| Acquisition Stock Consideration Payable | ||||||||
| Total | ||||||||
Intangible Assets
Definite-lived
intangible assets consist of certain domain names. Definite-lived intangible assets are amortized utilizing the straight-line method
over the assets’ estimated useful lives, which approximate
Indefinite-lived intangible assets consist of certain trademarks and formula lists. These intangible assets are not 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. During the nine months ended September 30, 2024 and 2023, the Company did not record asset impairment charges related to its intangible assets.
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.
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Our 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 royalty-based obligations remaining as of September 30, 2024 are approximately $
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 leased its corporate office (“AOS Lease”). The AOS Lease was classified as an
operating lease and had a term of
On
May 1, 2024, the Company entered into a three-year lease agreement (the “Citrus Lease”) with a lessor who is a related party
(see Note 8 for additional information) for the rental of the second and third floors of a premise containing approximately
In accordance with ASC 842, Leases, the Company recognized an ROU asset and corresponding lease liability on the condensed consolidated balance sheet for long-term office leases. See Note 11 – Leases for further discussion, including the impact on the condensed consolidated financial statements and related disclosures.
Inventory
Inventory consists of premium body and skincare products, fragrances and nutritional products. Inventory is measured using the first-in, first-out method and stated at average cost as of September 30, 2024. 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 did not record any inventory impairment losses for the nine months ended September 30, 2024 and 2023.
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.
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Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.
We review goodwill for impairment at least annually or more frequently if indicators of impairment exist. Our goodwill impairment test may require the use of qualitative judgements and fair-value techniques, which are inherently subjective. Impairment loss, if any, is recorded when the fair value of a reporting unit’s goodwill is less than its carrying value.
impairment losses related to goodwill were recognized for the nine months ended September 30, 2024 and 2023. As of September 30, 2024
and December 31, 2023 goodwill was $
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 (“CODM”) and views the Company’s operations and manages its business in three reportable operating segments: (i) Starco Brands, which includes AOS, Whipshots Holdings and Whipshots LLC, (ii) Skylar, and (iii) Soylent. The CODM assesses performance of operating segments and determines the allocation of resources based primarily on gross profit as a whole.
Recently Issued Accounting Pronouncements
All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
NOTE 4 – SEGMENTS
The Company has the following reportable segments:
Starco Brands. The Starco Brands segments generate revenue through the development and sales of consumer good products. The Starco Brands segment includes STCB, AOS, Whipshots Holdings and Whipshots LLC.
Skylar. The Skylar segment generates revenue through the sale of fragrances.
Soylent. The Soylent segment generates revenue through the sale of nutritional products, mainly drinks.
Balance sheet data are reviewed by the CODM on a consolidated basis; therefore, disaggregated balance sheet data are not presented.
The following tables present gross profit by reporting segment:
| Nine Months Ended September 30, 2024 | ||||||||||||||||
| Starco Brands | Skylar | Soylent | Total | |||||||||||||
| Gross revenues | $ | $ | $ | $ | ||||||||||||
| Gross revenues, related parties | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of revenues, related parties | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||
| Starco Brands | Skylar | Soylent1 | Total | |||||||||||||
| Gross revenues | $ | $ | $ | $ | ||||||||||||
| Gross revenues, related parties | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of revenues, related parties | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| 1 |
| 14 |
NOTE 5 – ACQUISITIONS
Soylent Acquisition
On
February 15, 2023, the Company, through its wholly-owned subsidiary Starco Merger Sub I completed the Soylent Acquisition. The
Soylent Acquisition consisted of Starco Merger Sub I merging with and into Soylent, with Soylent being the surviving corporation.
Soylent is the maker of a wide range of plant-based “complete nutrition” and “functional food” products with
a lineup of plant-based convenience shakes, powders and bars that contain proteins, healthy fats, functional amino acids and
essential nutrients. Through its relationship with TSG and other strong partners, the Company has access to intellectual property
that will allow Soylent to vertically integrate manufacturing and expand, positioning Soylent to be the future of nutritional
products. The Soylent Acquisition was completed through a cash and stock deal, where the Company paid $
On March 15, 2024, the Company and certain former stockholders of Soylent and current stockholders of the Company’s Class A common stock (the “Consenting Stockholders”), entered into a stockholder agreement (“Stockholder Agreement”) with the Company, which modified the treatment of certain terms of the Soylent Merger Agreement with respect to the Consenting Stockholders. The Stockholder Agreement (i) revises the calculation for the Consenting Stockholders’ respective pro rata share of the Share Adjustment (as defined in the Soylent Merger Agreement) to utilize a customary 30-day moving volume-weighted average price (“VWAP”) in calculating the price per share of the Class A common stock at each adjustment date, and (ii) bifurcates the calculation for Consenting Stockholders’ respective pro rata share of the Share Adjustment into two adjustments, the first adjustment calculable based on the VWAP ending February 14, 2024 (“First Adjustment Date”), and the second adjustment calculable based on the VWAP ending May 15, 2025 (“Second Adjustment Date”). Generally, if the trading price of the Acquiror Common Stock (as defined in the Soylent Merger Agreement) based on the VWAP, is below $ per share on each of February 14, 2024 and May 15, 2025, then, at no additional cost to the Consenting Stockholders, additional shares of Acquiror Common Stock are issuable based on the calculation methodology set forth in the Stockholder Agreement. As of the date of this filing, and including joinders to the Stockholder Agreement signed subsequent to March 15, 2024, the Consenting Stockholders represent approximately % of the total shares held by all former stockholders of Soylent issued pursuant to the Soylent Merger Agreement. Certain other former stockholders of Soylent may sign joinders to the Stockholder Agreement following the date of this filing.
| 15 |
The
fair value of the rights to receive these shares was estimated by a third-party valuation firm to be $ per share on the acquisition
date or an approximate share adjustment value of $
Effective
February 14, 2024, the First Adjustment Date, the Company settled $
Effective
May 20, 2024, it was determined, in accordance with the Soylent Merger Agreement, that shares of the shares of Class
A common stock held back from the Soylent Shareholders were not due, the effect of which resulted in an adjustment to the liability
of $
Effective
February 14, 2024, the Company settled the Soylent Opening Balance Holdback by issuing shares of Class A common stock to the
Soylent Shareholders as outlined in the Soylent Merger Agreement. The Soylent Opening Balance Holdback was recorded as equity consideration
payable on the December 31, 2023 balance sheet in the amount of $
The Soylent Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations.
Sklyar Acquisition
On December 29, 2022, STCB, through its wholly-owned subsidiaries First Merger Sub and Second Merger Sub, completed the “Skylar Acquisition.” In a two-step process, during the First Merger, First Merger Sub merged with and into Skylar Inc. and as part of the same overall transaction, during the Second Merger, Skylar Inc. merged with and into Second Merger Sub to result in Skylar as the surviving entity. Skylar is a wholly-owned subsidiary of STCB. On December 31, 2023, shares were issued to the former shareholders of Skylar (the “Skylar Shareholders”) as Skylar reached all earnout sales metrics outlined in the merger agreement (the “Skylar Merger Agreement”).
Following the 18-month holdback period from the date of the Skylar Acquisition on December 29, 2022, the Company issued Skylar Shareholders an aggregate amount of shares of Class A common stock, for which it recorded an equity consideration payable on the balance sheet, which totaled $ as of June 30, 2024. Effective June 30, 2024, the Company settled the equity payable by issuing shares of Class A common stock to the Skylar Shareholders.
NOTE 6 – NOTES PAYABLE
Insurance Loans
The
Company has several financing loans for general liability, directors and officers insurance and other insurance liabilities, which
bear interest at varying percentages and require monthly payments. As of September 30, 2024, the remaining balance of these loans
was $
Soylent Revolver
On
February 10, 2023, the Company’s subsidiary Soylent entered into a line of credit with a revolving credit commitment of $
| 16 |
The
Soylent Revolver matured on February 10, 2024 and was in default under the loan documents for failing to pay off the balance at maturity.
The Company entered into an agreement with the bank to forbear the bank’s rights to exercise its rights and remedies under the
loan documents until June 10, 2024, for a forbearance fee of $
During
April and May 2024, the Company made two principal payments totaling $
Gibraltar Loan and Security Agreement
On May 24, 2024, (i) Starco Brands, Inc., a Nevada corporation (“Starco” or the “Company”), (ii) and each of Starco’s subsidiaries, Whipshots Holdings, LLC, a Delaware limited liability company (“Whipshots Holdings”), Whipshots, LLC, a Wyoming limited liability company (“Whipshots”), The AOS Group Inc., a Delaware corporation (“AOS Group”), Skylar Body, LLC, a Delaware limited liability company (“Skylar”), Soylent Nutrition, Inc., a Delaware corporation (“Soylent”; and together with Starco, Whipshots Holdings, Whipshots, AOS Group, Skylar, each individually, a “Borrower” and collectively, the “Borrowers”), and (iii) Gibraltar Business Capital, LLC, a Delaware limited liability company (the “Lender”) entered into a Loan and Security Agreement (the “Loan and Security Agreement”), allowing Starco Brands to reduce a portion of its long term debt (including retiring the Soylent Revolver) and expand its access to working capital. Capitalized terms not otherwise defined will have the meanings set forth in the Loan and Security Agreement.
The
Loan and Security Agreement provides for a revolving line of credit in the amount not to exceed $
Each
Revolving Loan advanced under the Revolving Loan Commitment bears interest at a rate per annum equal to One Month Term SOFR plus the
Applicable Margin. If a Revolving Loan or any portion thereof is considered a part of the Permitted Overadvance Amount under the Loan
and Security Agreement, the Applicable Margin for such loan shall be increased by an additional two percent (
| 17 |
Accrued and unpaid interest on the unpaid principal balance of the Revolving Loans shall be due and payable commencing on June 1, 2024 and on the first date of each calendar month thereafter. All accrued and unpaid interest shall be due and payable on the maturity date.
Subject
to the satisfaction of certain terms and conditions described in the Loan and Security Agreement, the Borrowers may request to increase
the Revolving Loan Commitment by an aggregate amount not less than $
The Loan and Security Agreement contains customary limitations, including limitations on indebtedness, liens, fundamental changes to business or organizational structure, investments, loans, advances, guarantees, and acquisitions, asset sales, dividends, stock repurchases, stock redemptions, and the redemption, payment or prepayment of other debt, and transactions with affiliates. We are also subject to financial covenants, including a minimum EBITDA covenant and a maximum Unfinanced Capital Expenditures covenant.
The
Loan and Security Agreement also contains customary events of default, including nonpayment of principal, interest, fees, or other amounts
when due, violation of covenants, breaches of representations or warranties, cross defaults, change of control, insolvency, bankruptcy
events, and material judgments. Some of these events of default allow for grace periods or are qualified by materiality concepts. Upon
the occurrence of an event of default, the outstanding obligations under the Loan and Security Agreement may be accelerated and become
due and payable immediately. As of September 30, 2024, the Company was in compliance with all loan covenants relating to the agreement
and the available borrowing amount was approximately $
CEO Notes
See Note 8 - Related Party Transactions for loans to STCB from the Company’s CEO.
NOTE 7– COMMITMENTS & CONTINGENCIES
Whipshots
On
September 8, 2021, Whipshots LLC, a Wyoming limited liability company (“Whipshots LLC”) entered into an Intellectual Property
Purchase Agreement, effective August 24, 2021, with Penguins Fly, LLC, a Pennsylvania limited liability company (“Penguins”).
The agreement provided that Penguins would sell the trademarks “Whipshotz” and “Whipshots”, the 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”) to Whipshots LLC. The purchase price for the Acquired
Assets will be payable to Penguins, over the course of seven years, based on a sliding scale percentage of gross revenues actually received
by the Company solely from the sale of Whipshots/Whipshotz Products. The payment are subject to a minimum amount in each contract year
and a maximum aggregate amount. In connection with this agreement the Company paid $
On
September 14, 2021, Whipshots Holdings, LLC (formerly Whipshots, LLC) a Delaware limited liability company (“Whipshots Holdings”),
entered into a License Agreement (the “Washpoppin License Agreement”) with Washpoppin Inc., a New York corporation (“Washpoppin”).
Pursuant to the Washpoppin License Agreement, Washpoppin licensed certain Licensed Property (as defined therein) of the recording artist
professionally known as “Cardi B” (the “Artist”) to us. Whipshots Holdings and Washpoppin entered into an amended
and restated Washpoppin License Agreement (“A&R Washpoppin License Agreement”), with an effective date of November 27,
2023. As part of the A&R Washpoppin License Agreement, in exchange for royalty rates based on Net Sales (as defined therein) during
each applicable contract period, the Washpoppin warrants to cause the Artist to attend certain in person events, media interviews, participate
in the development of the Licensed Products (as defined therein), and promote the Licensed Products through social media posts on the
Artist’s social media platforms. We have committed to a minimum royalty payment under the A&R Washpoppin License Agreement
of an aggregate of $
| 18 |
NOTE 8 – RELATED PARTY TRANSACTIONS
During
the year ended December 31, 2017, Sanford Lang, the Company’s former Chairman and CEO, advanced STCB $
Ross Sklar, CEO Notes
On
August 11, 2023, the Company issued to Sklar a consolidated secured promissory note (the “Consolidated Secured Promissory Note”)
in the principal sum of $
| Original | Original | Original | Revised | Revised | ||||||||||||
| Balance | maturity | rate | maturity | rate | ||||||||||||
| January 24, 2020 Amended Note | $ | % | Prime
+ | % | ||||||||||||
| June 28, 2021 Note | % | Prime
+ | % | |||||||||||||
| September 17, 2021 Note | % | Prime
+ | % | |||||||||||||
| December 13, 2021 Note | % | Prime
+ | % | |||||||||||||
| December 29, 2022 Note | Prime
+ | % | Prime
+ | % | ||||||||||||
| March 3, 2023 Note | Prime
+ | % | Prime
+ | % | ||||||||||||
| $ | (1) | |||||||||||||||
| (1) |
The restructuring is accounted for as a debt modification. On May 31, 2024, the Consolidated Secured Promissory Note was amended by that certain Amendment to Consolidated Secure Promissory Note, by and between STCB and Mr. Sklar, dated May 31, 2024 (the “2024 Consolidated Note Amendment” and together with the Consolidated Secured Promissory Note, the “Amended Consolidated Secured Promissory Note”). The 2024 Consolidated Note Amendment, among other things, extended the maturity date to August 31, 2026, provided that to the extent amounts remain due and payable on the maturity date, it will be extended until August 31, 2027.
The
Company also issued a February 14, 2022 Note to Sklar in the principal amount of $
The
February 14, 2022 Note bore interest at
Loan Security Agreement – Related Party
On May 24, 2024, the Company entered into the Loan and Security Agreement, which allowed the Company to reduce long-term debt and expand its access to working capital (see Note 6). In connection with the Loan and Security Agreement, the Lender required Mr. Sklar to enter into a subordination agreement pursuant to which Mr. Sklar’s rights under (i) the February 14, 2022 Note, as amended and (ii) the Consolidated Secured Promissory Note would be subordinated to the lender’s rights under the Loan and Security Agreement.
In
exchange for the subordination of and the maturity extension reflected in the Amended Consolidated Secured Promissory Note, $
| 19 |
For
the three months ended September 30, 2024 and 2023, the outstanding notes held by Mr. Sklar incurred interest expense of $
Operating Lease – Related Party
On
May 1, 2024, the Company entered into the Citrus Lease with a lessor who is a related party (see Note 3 and Note 11 for additional information)
for the rental of the second and third floors of a premise containing approximately
In
accordance with ASC 842 - Leases, the Company recognized an ROU asset and corresponding lease liability for $
Other Related Party Transactions
During
the three months ended September 30, 2024 and 2023, the Company recognized revenue from related parties of $
During
the three months ended September 30, 2024 and 2023, the Company received contributed services at a value of approximately
NOTE 9 – STOCK WARRANTS
On
each of September 12, 2022, November 1, 2022, November 3, 2022, and June 1, 2023, the Company entered into agreements with members of
the Board and consultants for services to be performed. As consideration therefore, the Company granted those individuals stock warrants
to purchase an aggregate of
On
December 29, 2022 and March 3, 2023, the Company entered into agreements with Sklar, for warrants to purchase shares of common stock
to be issued as a funding fee for an aggregate principal amount of $
The table below summarizes the grants of stock warrants and includes the assumptions used for valuation under the Black-Scholes option pricing model.
| Number of | Expected | |||||||||||||||||||||||||||||||
| Stock | Stock | Strike | Expected | Interest | Dividend | Term | Fair | |||||||||||||||||||||||||
| Date | Warrants | Price | Price | Volatility | Rate | Rate | (years) | Value | ||||||||||||||||||||||||
| 9/12/2022 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
| 11/1/2022 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
| 11/3/2022 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
| 12/29/2022 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
| 3/3/2023 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
| 6/1/2023 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
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 Average | Weighted Average Remaining Contractual | Aggregate | |||||||||||||
| with warrants | Exercise Price | Term (in years) | Intrinsic Value | |||||||||||||
| Outstanding, December 31, 2023 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | - | - | - | |||||||||||||
| Cancelled | - | - | - | |||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding, September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2024 | $ | $ | ||||||||||||||
| Outstanding, December 31, 2022 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | - | - | - | |||||||||||||
| Cancelled | - | - | - | |||||||||||||
| Expired | ( | ) | - | - | ||||||||||||
| Outstanding, September 30, 2023 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2023 | $ | $ | ||||||||||||||
| 20 |
The
Company granted stock warrants to purchase
The following table summarizes information about stock warrants to purchase shares of the Company’s Class A common stock outstanding and exercisable as of September 30, 2024:
| 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 $ and $ for the three months ended September 30, 2024 and 2023, respectively; total compensation expense related to the stock warrants was $ and $ for the nine months ended September 30, 2024 and 2023, respectively, and was included in compensation expense on the statement of operations. As of September 30, 2024, there was $ in future compensation cost related to non-vested stock warrants.
The aggregate intrinsic value as of September 30, 2024 is $ for total outstanding and exercisable warrants, which was based on our estimated fair value of the common stock of $, had all warrant holders exercised their warrants as of that date, net of the aggregate exercise price.
On November 27, 2023, the Company’s Board of Directors approved the 2023 Equity Incentive Plan (the “Equity Plan”). The Equity Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock unit awards, and other stock-based awards, collectively, the “Stock Awards”. Stock Awards may be granted under the Equity Plan to the Company’s, and its subsidiaries’, employees, officers, directors and consultants. The maximum number of shares of Class A common stock available for issuance under the Equity Plan is shares.
On January 1, 2024, the Company entered into agreements with employees and consultants for services to be performed. As consideration therefore, the Company granted stock options (the “Options”) under the Company’s Equity Plan to purchase up to shares of Class A common stock.
On May 16, 2024, the Company entered into agreements with three employees and a consultant for services to be performed pursuant to which the Company granted Options under the Company’s Equity Plan to purchase up to an aggregate of shares of Class A common stock.
Options were valued using the Black-Scholes option pricing model under the following assumptions as found in the table below. There were no stock options issued or outstanding for the three and nine months ended September 30, 2023.
| Date | Number of Stock Options | Stock Price1 | Strike Price | Expected Volatility | Interest Rate | Dividend Rate | Expected Term (years)2 | Fair Value | ||||||||||||||||||||||||
| 1/1/2024 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
| 05/16/2024 | $ | $ | % | % | % | $ | ||||||||||||||||||||||||||
| 1 | ||
| 2 |
| 21 |
| Shares available to | Weighted Average | Weighted Average Remaining Contractual | Aggregate | |||||||||||||
| purchase with options | Exercise Price | Term (in years) | Intrinsic Value | |||||||||||||
| Outstanding, December 31, 2023 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | - | - | - | |||||||||||||
| Cancelled/Forfeited | ( | ) | - | - | ||||||||||||
| Expired | - | - | - | |||||||||||||
| Outstanding, September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2024 | $ | $ | ||||||||||||||
The compensation expense attributed to the issuance of the stock options is recognized as they are vested. Total compensation expense related to the stock options was $ and for the three months ended September 30, 2024 and 2023, respectively; total compensation expense related to the stock options was $ and for the nine months ended September 30, 2024 and 2023, respectively, and was included in compensation expense on the statement of operations. As of September 30, 2024, there was $ in future compensation cost related to non-vested stock options.
The
aggregate intrinsic value as of September 30, 2024 is
NOTE 11 – LEASES
The following table presents net lease cost and other supplemental lease information:
| Nine Months Ended | ||||
| September 30, 2024 | ||||
| Lease cost | ||||
| Operating lease cost (cost resulting from lease payments) | $ | |||
| 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(1) | % | |||
| (1) |
| 22 |
| Nine Months Ended | ||||
| September 30, 2023 | ||||
| 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 | % | |||
Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the nine months ended September 30, 2024:
| Fiscal Year | Operating Leases | |||
| Remainder of 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| Total future minimum lease payments | ||||
| Less: Imputed Interest | ( | ) | ||
| Present value of net future minimum lease payments | $ | |||
NOTE 12 – STOCKHOLDERS’ EQUITY
Common Stock Issuances for the Nine Months Ended September 30, 2024
Effective
February 14, 2024, the Company settled the Soylent Opening Balance Holdback and $
Effective
February 14, 2024, the First Adjustment Date, the Company settled $
Effective
May 20, 2024, it was determined, in accordance with the Soylent Merger Agreement, that shares of the shares of Class
A common stock held back from the Soylent Shareholders were not due, the effect of which resulted in an adjustment to the liability
of $
Following
the 18-month holdback period from the date of the AOS Acquisition, during which the Company had no outstanding claims, effective March
12, 2024, the Company issued the former shareholders of AOS an aggregate of shares of Class A common stock and $
Following
the 18-month holdback period from the date of the Skylar Acquisition, during the second quarter of 2024, the Company issued the Skylar
Shareholders an aggregate amount of shares of Class A common stock, which satisfied an equity consideration payable of $
NOTE 13 – PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Computer equipment | $ | $ | ||||||
| Tools and equipment | ||||||||
| Furniture and equipment | ||||||||
| CIP | ||||||||
| Property and equipment, gross | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
For
the three and nine months ended September 30, 2024, the Company incurred $
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NOTE 14 – INTANGIBLE ASSETS
Intangible assets, net consists of the following:
| September 30, 2024 | ||||||||||||
| Gross | Accumulated | |||||||||||
| Carrying Amount | Amortization | Net | ||||||||||
| Trade names and trademarks | ||||||||||||
| Customer relationships | ||||||||||||
| Domain names | ||||||||||||
| Intangible Assets | $ | $ | $ | |||||||||
| December 31, 2023 | ||||||||||||
| Gross | Accumulated | |||||||||||
| Carrying Amount | Amortization | Net | ||||||||||
| Trade names and trademarks | ||||||||||||
| Customer relationships | ||||||||||||
| Domain names | ||||||||||||
| Intangible Assets | $ | $ | $ | |||||||||
For
the three and nine months ended September 30, 2024, the Company incurred $
As of September 30, 2024, future expected amortization expense of intangible assets was as follows:
| Fiscal period: | September 30, 2024 | |||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total amortization remaining | $ | |||
NOTE 15 – INVENTORY
Inventory by major class are as follows:
| September 30, 2024 | December 31, 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
NOTE 16 – 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 has determined that no subsequent events exist.
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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. 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 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2023, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) ON APRIL 3, 2024. 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 2024 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.
Business Overview
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 under the name Insynergy, Inc. 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, the Company 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, the Company pivoted to commercializing novel consumer products manufactured by TSG.
In 2022, the Company embarked on a strategy to grow its consumer product line offerings through the acquisition of multiple subsidiaries with established behavior changing products and brands. With an increased product line and its existing partner relationships, the Company has continued expanding its vertical and consumer base through 2024.
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Executive Overview
In July 2017, our Board 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 brands. Our core competency is inventing brands, marketing, building trends, pushing awareness and social marketing. The licensing agreement with TSG provided STCB 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 the CEO of STCB in August of 2017. Mr. Sklar has spent his career 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. As the Company continues to grow the number of products and brands under the STCB umbrella, it will continue to leverage its relationship with TSG to streamline its product manufacturing.
Product Development
We have conducted extensive research and have identified specific channels to penetrate with a portfolio of novel technologies. We are executing on this vision and, since our inception, have launched and /or served as the marketer of record for various product lines.
Winona®
STCB is the marketer of record, but not the owner of record of, the Winona® Butter Flavor Popcorn Spray. STCB provides marketing services for Winona pursuant to a licensing agreement. Winona Popcorn Spray is also sold in H-E-B grocery stores. STCB also launched the Winona Popcorn Spray on Amazon through our strategic partner Pattern (formally iServe), who is a stockholder in STCB. Sales grew significantly in 2022 and 2023, the Company expects sales to continue to grow in this space as management plans to increase the Company’s sales personnel in 2024 for this product line.
Whipshots®
In December 2021, the Company launched a new product line consisting of vodka-infused, whipped-cream aerosols, under the brand name “Whipshots.” The launch event was held at Art Basel in Miami and garnered over 1 billion impressions world-wide. The Company launched the product on whipshots.com with a limited quantity of cans to be sold each day for the month of December. Whipshots® sold out every single day of the month. The Company launched brick and mortar retail distribution in the first quarter of 2022, signed a distribution agreement with RNDC, one of the largest spirits distributors in the nation, as distribution agreements with others. Whipshots® is currently distributed in 41 of 50 states. The Company also signed distribution deals with GoPuff and BevMo. Initially the Company introduced three flavors of Whipshots® to the market – Vanilla, Mocha and Caramel. Since the initial launch, the Company has introduced new and Limited Time flavors such as Peppermint, Lime, Pumpkin Spice and Strawberry. We plan to continue to offer various additional Limited Time flavors in 2024. Whipshots® is produced by Temperance Distilling Company (“Temperance”), of which Sklar is the majority shareholder.
Whipshots® and Whipshotz® Trademarks
On September 8, 2021, Whipshots LLC, a Wyoming limited liability company (“Whipshots LLC”) entered into an Intellectual Property Purchase Agreement, effective August 24, 2021, with Penguins Fly, LLC, a Pennsylvania limited liability company (“Penguins”). The agreement provided that Penguins would sell the trademarks “Whipshotz” and “Whipshots”, the 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”) to Whipshots LLC. The purchase price for the Acquired Assets will be payable to Penguins, over the course of seven years, based on a sliding scale percentage of gross revenues actually received by us solely from our sale of Whipshots/Whipshotz Products. The payment are subject to a minimum amount in each contract year and a maximum aggregate amount.
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Whipshots® Licensing/Marketing
On September 14, 2021, Whipshots Holdings, LLC (formerly Whipshots, LLC) a Delaware limited liability company (“Whipshots Holdings”), entered into a License Agreement (the “Washpoppin License Agreement”) with Washpoppin Inc., a New York corporation (“Washpoppin”). Pursuant to the Washpoppin License Agreement, Washpoppin licensed certain Licensed Property (as defined therein) of the recording artist professionally known as “Cardi B” (the “Artist”) to us. Whipshots Holdings and Washpoppin entered into an amended and restated Washpoppin License Agreement (“A&R Washpoppin License Agreement”), with an effective date of November 27, 2023.
As part of the A&R Washpoppin License Agreement, in exchange for royalty rates based on Net Sales (as defined therein) during each applicable contract period, the Company granted Whipshots Holdings shares to Washpoppin to cause the Artist to attend certain in person events, media interviews, participate in the development of the Licensed Products (as defined therein), and promote the Licensed Products through social media posts on the Artist’s social media platforms. We have committed to a minimum royalty payment under the A&R Washpoppin License Agreement of an aggregate of $3,300,000 through 2025, subject to Washpoppin’s satisfaction of its obligations.
The Art of Sport® and AOS®
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. AOS® is the maker of Art of Sport® premium body and skincare products engineered to power and protect athletes and brings over the counter respiratory, sun care, women and children, pain management, performance supplements, food, beverage and apparel product lines under STCB auspices.
Skylar®
On December 29, 2022, STCB, through its wholly-owned subsidiary Starco Merger Sub II, Inc. (“Merger Sub II”), completed its acquisition (the “Skylar Acquisition”) of Skylar Body, Inc., a Delaware corporation (“Skylar Inc.”) through the merger of Merger Sub II with and into Skylar Inc. Immediately following the Skylar Acquisition Skylar Inc. merged with and into Skylar Body, LLC (“Skylar”) a wholly-owned subsidiary of STCB, with Skylar as the surviving entity. Skylar® is a wholly-owned subsidiary of STCB. Skylar® is the maker of fragrances that are hypoallergenic and safe for sensitive skin.
Soylent®
On February 15, 2023, STCB, through its wholly-owned subsidiary Starco Merger Sub I, Inc. (“Merger Sub I”), completed its acquisition (the “Soylent Acquisition”) of Soylent Nutrition, Inc., a Delaware corporation (“Soylent”). The Soylent Acquisition consisted of Merger Sub I merging with and into Soylent, with Soylent being the surviving corporation. Soylent® is a wholly-owned subsidiary of STCB. Soylent® is the maker of a wide range of plant-based “complete nutrition” and “functional food” products with a lineup of plant-based convenience shakes, powders and bars that contain proteins, healthy fats, functional amino acids and essential nutrients.
Distribution Agreements
In November of 2021, we entered into separate Distribution Agreements (each a “Distribution Agreement” and, collectively, the “Distribution Agreements”) with each of (i) National Distributing Company, Inc., a Georgia corporation, (ii) Republic National Distributing Company, LLC, a Delaware limited liability company, and (iii) Young’s Market Company, LLC, a Delaware limited liability company (each a “Distributor” and, collectively, the “Distributors”) each with an effective date as of November 1, 2021. Pursuant to the Distribution Agreements, the Distributors will act as the exclusive distributor for STCB in the Territories set forth on Exhibit B for the Products set forth on Exhibit A, to each such Distribution Agreement, as amended from time to time. The Distribution Agreements cover 41 U.S. States and the District of Columbia.
Pursuant to the terms of the Distribution Agreements, the Distributors serve as the exclusive distributors in such Territories for Whipshots®. The Distribution Agreements provide the Distributors rights to expand the Territories and Products covered under each such Distribution Agreement as we expand our product lines and distribution channels. The expansion of Territories and Products may be exercised under various rights, including rights of first refusal to serve as an exclusive distributor of new Products in new Territories. The Company has also agreed to grant the Distributors “most favored nations” pricing providing for the lowest price available across the United States and its territories and possessions (the “US Territory”), and to grant Distributors any volume or other discounts that are offered to any other distributor in the US Territory by us, provided such action is not a violation of applicable law.
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Broker Agreements
In November of 2021, we entered into separate Broker Agreements (each a “Broker Agreement” and, collectively, the “Broker Agreements”) with both Republic National Distributing Company, LLC, a Delaware limited liability company, and Young’s Market Company, LLC, a Delaware limited liability company (each a “Broker” and, collectively, the “Brokers”) each with an effective date as of November 1, 2021. Pursuant to the Broker Agreements, the Broker acts as the exclusive broker for us in the Territories set forth on Exhibit B for the Products set forth on Exhibit A, to each such Broker Agreement, as amended from time to time. Each Broker will receive a commission rate of 10%. The foregoing Broker Agreements now cover 9 U.S. States.
Competition
The household, personal care and beverage consumer products market in the U.S. is mature and highly competitive. Our competitive set has grown with our recent acquisitions and consists of consumer products companies, including large and well-established multinational companies as well as smaller regional and local companies. These competitors include Johnson & Johnson, The Procter & Gamble Company, Unilever, Diageo, CytoSport, Inc., Abbott Nutrition, Nestlé, Owyn, Clean Reserve, The 7 Virtues and others. Within each product category, most of our products compete with other widely advertised brands and store brand products.
Competition in our product categories is based on a number of factors including price, quality and brand recognition. We benefit from the strength of our brands, a differentiated portfolio of quality branded and store brand products, as well as significant capital investment in our manufacturing facilities. We believe the strong recognition of the Whipshots® and Soylent® brands among U.S. consumers, along with the growing brand recognition of Skylar®, gives us a competitive advantage.
Growth Strategy
As long as the Company can raise capital, the Company plans to launch other products in spray foods and condiments, over the counter respiratory, air care, skin care, sun care, hair care, personal care, pain management, performance supplements, plant-based convenience shakes, powders and bars, apparel, fragrances, spirits and beverages over the next 36 months. Financing growth and launching of new products through our key subsidiaries is key to the Company’s ability to raise further capital.
We will need to rely on sales of our Class A 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. This provides significant support for our current retail and online distribution. We also plan to raise capital in the future through a compliant offering.
We continue to strive towards becoming a leading brand owner and third-party marketer of cutting edge technologies in the consumer products marketplace whose success is expected to increase stockholder value. The Company will continue to evaluate this and other opportunities to further set its strategy for 2024 and beyond.
For more information and to view our products, you may visit our websites at www.starcobrands.com, www.whipshots.com, www.bingeworthyflavor.com, www.artofsport.com, www.skylar.com and www.soylent.com. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Quarterly Report.
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Offices
Our principal executive offices are located at 706 N Citrus Ave, Los Angeles, California, 90038, and our telephone number is (323) 266-7111. Our website is www.starcobrands.com and the Company makes its SEC reports available on the website. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Quarterly Report.
Results of Operations
Comparison of the three months ended September 30, 2024 to the three months ended September 30, 2023
| September 30, | September 30, | |||||||||||
| 2024 | 2023 | Change | ||||||||||
| Revenues | $ | 14,006,349 | $ | 15,209,504 | $ | (1,203,155 | ) | |||||
| Revenues, related parties | 1,480,007 | 2,463,542 | (983,535 | ) | ||||||||
| Cost of goods sold | 8,131,015 | 9,178,845 | (1,047,830 | ) | ||||||||
Cost of goods sold, related parties | 968,934 | 752,424 | 216,510 | |||||||||
| Gross profit | 6,386,407 | 7,741,777 | (1,355,370 | ) | ||||||||
| Operating expenses: | ||||||||||||
| Compensation expense | 2,185,256 | 1,811,832 | 373,424 | |||||||||
| Professional fees | 434,698 | 1,380,680 | (945,982 | ) | ||||||||
| Marketing, general and administrative | 4,236,433 | 4,955,578 | (719,145 | ) | ||||||||
| Fair value share adjustment loss | 5,105,535 | (3,144,411 | ) | 8,249,946 | ||||||||
| Total operating expense | 11,961,922 | 5,003,679 | 6,958,243 | |||||||||
| (Loss) income from operations | (5,575,515 | ) | 2,738,098 | (8,313,613 | ) | |||||||
| Other expense: | ||||||||||||
| Interest expense | 303,155 | 255,775 | 47,380 | |||||||||
| Other expense | 378,418 | 121,072 | 257,346 | |||||||||
| Total other expense, net | 681,573 | 376,847 | 304,726 | |||||||||
| (Loss) income before provisions for income taxes | (6,257,088 | ) | 2,361,251 | (8,618,339 | ) | |||||||
| Provision for income taxes | - | - | - | |||||||||
| Net (loss) income | (6,257,088 | ) | 2,361,251 | (8,618,339 | ) | |||||||
| Net income attributable to non-controlling interest | 87,838 | 34,221 | 53,617 | |||||||||
| Net (loss) income attributable to Starco Brands | $ | (6,344,926 | ) | $ | 2,327,030 | $ | (8,671,956 | ) | ||||
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Revenues
For the three months ended September 30, 2024, the Company recorded revenues of $14,006,349 compared to $15,209,504 for the three months ended September 30, 2023, resulting in a decrease of $1,203,155 or 8%. The decrease in the current period was primarily due to a decrease in Soylent revenue driven by a product category realignment at a major retail customer. This reduction was partially offset by increases in sales for Winona and Art of Sport
Revenues, related parties
For the three months ended September 30, 2024, the Company recorded related party revenues of $1,480,007 compared to $2,463,542 for the three months ended September 30, 2023, resulting in a decrease of $983,535 or 40%. The decrease in the current period was largely driven by lower Whipshots sales due to industry destocking and lower levels of new retailer loading.
Operating Expenses
For the three months ended September 30, 2024, compensation expenses increased $373,424, or 21%, to $2,185,256 from $1,811,832 for the three months ended September 30, 2023; the increase is a result of converting a portion of independent contractors to full-time employees.
For the three months ended September 30, 2024, the Company incurred $434,698 in professional fees compared to $1,380,680 for the three months ended September 30, 2024, for a decrease of $945,982, or 69%. Professional fees are mainly for contractors, accounting, auditing and legal services associated with business operations, merger activity, and our quarterly filings as a public company, and advisory and valuation services. The decrease is primarily due to reduced legal and audit-related expenses in the current year period compared to expenses related to the acquisitions of Soylent, Skylar, and AOS in the prior year period.
For the three months ended September 30, 2024, the Company incurred $4,236,433 in marketing, general and administrative expense as compared to $4,955,578 for the three months ended September 30, 2023, for a decrease of $719,145 or 15%, which was largely driven by reduced marketing spend and a focus on operational efficiencies.
For the three months ended September 30, 2024, the Company incurred a fair value share adjustment loss of $5,105,535; such was due to an increase in the fair value of the Soylent Shareholders’ rights to potentially receive additional Starco shares, increasing from $0.235 per share as of June 30, 2024 to $0.253 per share as of September 30, 2024.
Other Income and Expense
For the three months ended September 30, 2024, we had total other expense, of $681,573 compared to total other expense, net of $376,847 for the three months ended September 30, 2023. For the three months ended September 30, 2024, the Company had interest expense and other expense of $303,155 and $378,418, respectively, compared to interest expense and other expense of $255,775 and $121,072, respectively, for the three months ended September 30, 2023.
Net (Loss) Income
For the three months ended September 30, 2024, the Company recorded a net loss of $6,257,088 as compared to net income of $2,361,251 for the three months ended September 30, 2023. The increase in net loss is primarily due to a loss on the change in fair value of the stock payable for shares due to Soylent Stockholders, in addition to increases in expenses from the acquired businesses AOS, Skylar and Soylent.
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Comparison of the nine months ended September 30, 2024 to the nine months ended September 30, 2023
| September 30, | September 30, | |||||||||||
| 2024 | 2023 | Change | ||||||||||
| Revenues | $ | 41,816,348 | $ | 38,124,740 | $ | 3,691,608 | ||||||
| Revenues, related parties | 4,731,430 | 8,201,377 | (3,469,947 | ) | ||||||||
| Cost of goods sold | 24,563,628 | 24,348,693 | 214,935 | |||||||||
| Cost of goods sold, related parties | 2,879,614 | 1,663,124 | 1,216,490 | |||||||||
| Gross profit | 19,104,536 | 20,314,300 | (1,209,764 | ) | ||||||||
| Operating expenses: | ||||||||||||
| Compensation expense | 7,195,932 | 5,285,421 | 1,910,511 | |||||||||
| Professional fees | 2,771,608 | 4,177,424 | (1,405,816 | ) | ||||||||
| Marketing, general and administrative | 14,073,064 | 12,947,350 | 1,125,714 | |||||||||
| Fair value share adjustment loss | 15,703,049 | 2,751,360 | 12,951,689 | |||||||||
| Total operating expense | 39,743,653 | 25,161,555 | 14,582,098 | |||||||||
| Loss from operations | (20,639,117 | ) | (4,847,255 | ) | (15,791,862 | ) | ||||||
| Other expense (income): | ||||||||||||
| Interest expense | 711,304 | 617,289 | 94,015 | |||||||||
| Other expense (income) | 739,756 | (211,802 | ) | 951,558 | ||||||||
| Total other expense, net | 1,451,060 | 405,487 | 1,045,573 | |||||||||
| Loss before provisions for income taxes | (22,090,177 | ) | (5,252,742 | ) | (16,837,435 | ) | ||||||
| Provision for income taxes | - | - | - | |||||||||
| Net loss | (22,090,177 | ) | (5,252,742 | ) | (16,837,435 | ) | ||||||
| Net income attributable to non-controlling interest | 276,909 | 160,014 | 116,895 | |||||||||
| Net loss attributable to Starco Brands | $ | (22,367,086 | ) | $ | (5,412,756 | ) | $ | (16,954,330 | ) | |||
Revenues
For the nine months ended September 30, 2024, the Company recorded revenues of $41,816,348 compared to $38,124,740 for the nine months ended September 30, 2023 for an increase of $3,691,608 or 10%; the increase in the current period was largely due to recognition of a full nine months of revenue from Soylent in the current period versus only seven and a half months of sales from Soylent in the prior period, as the Company acquired Soylent in February 2023. This increase in Soylent revenue was augmented by growth in sales of Winona.
Revenues, related parties
For the nine months ended September 30, 2024, the Company recorded related party revenues of $4,731,430 compared to $8,201,377 for the nine months ended September 30, 2023, resulting in a decrease of $3,469,947 or 42%. The decrease in the current period was largely driven by reduced sales of Whipshots.
Operating Expenses
For the nine months ended September 30, 2024, compensation expense increased $1,910,511, or 36%, to $7,195,932 from $5,285,421 for the nine months ended September 30, 2023; the increase is a result of converting a portion of independent contractors to full-time employees in the current period.
For the nine months ended September 30, 2024, the Company incurred $2,771,608 in professional fees compared to $4,177,424 in the prior period for a decrease of $1,405,816, or 34%. Professional fees are mainly for contractors, accounting, auditing and legal services associated with business operations, merger activity, and our quarterly filings as a public company, and advisory and valuation services. The decrease in the nine months ended September 30, 2024 as compared to the same period in 2023 is primarily due to a decrease in expenses (contractor fees, legal, and audit fees) in the current year period compared to expenses related to the acquisitions of Soylent, Skylar, and AOS in the prior year period.
For the nine months ended September 30, 2024, the Company incurred $14,073,064 in marketing, general and administrative expense compared to $12,947,530 for the nine months ended September 30, 2023 for an increase of $1,125,714, or 9%. The increase can be attributed to the addition of the acquired businesses and an increase in spending on marketing and increased amortization expense.
For the nine months ended September 30, 2024, the Company incurred a fair value share adjustment loss of $15,703,049. This was due to an increase in the fair value of the Soylent sellers’ rights to potentially receive additional Starco shares, increasing from $0.136 per share as of December 31, 2023 to $0.253 per share as of September 30, 2024.
Other Income and Expense
For the nine months ended September 30, 2024, we had total other expense, net of $1,451,060 compared to total other expense, net of $405,487 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the Company had interest expense and other expense of $711,304 and $739,756, respectively, compared to interest expense and other income of $617,289 and $211,802, respectively, for the nine months ended September 30, 2023.
Net Income (Loss)
For the nine months ended September 30, 2024, the Company recorded a net loss of $22,090,177 compared to a net loss of $5,252,742 for the nine months ended September 30, 2023. The increase in net loss is primarily due to a loss on the change in fair value of the stock payable for shares due to Soylent Stockholders, in addition to increases in expenses from the acquired businesses AOS, Skylar and Soylent.
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Liquidity and Capital Resources
As reflected in the accompanying condensed consolidated financial statements, the Company has an accumulated deficit of approximately $86.1 million at September 30, 2024. Our net cash used in financing activities was $377,101 for the nine months ended September 30, 2024, due primarily to payments toward i) lines of credit, ii) a revolving loan, iii) notes payable and iv) loans from related parties of approximately $23.5 million, offset by proceeds from a revolving loan and a note payable of approximately $23.2 million. This compared to $535,974 in cash provided by financing activities for the nine months ended September 30, 2023, due primarily to approximately $0.8 million of loan advances from Ross Sklar, which was partially offset by net payments on the line of credit and repurchases of common stock totaling approximately $250,000.
Our net cash provided by operating activities was $517,879 for the nine months ended September 30, 2024. Operating expenses for the nine months ended September 30, 2024 totaling $39,743,653 include items such as marketing and administrative costs, consultant compensation, insurance, legal and other professional fees, compliance, website maintenance and loss on share fair value adjustment.
On January 24, 2020, STCB executed a promissory note for $100,000 with Sklar. The note bore interest at 4% per annum, compounded monthly, was unsecured, and matured two years from the original date of issuance. This loan was subsequently amended to mature on July 19, 2023. On June 28, 2021, STCB executed an additional promissory note with 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 with Sklar in the principal amount of $500,000 with the same terms as the prior notes and a maturity date of September 17, 2023. On December 13, 2021, STCB executed a fourth promissory note with Sklar in the principal amount of $500,000 with the same terms as the prior notes and a maturity date of December 12, 2023. On February 14, 2022, STCB executed a fifth promissory note with Sklar in the principal amount of $472,500 with the same terms as the prior notes and a maturity date of February 14, 2024. This note is also convertible into the Class A common stock at Sklar’s option with a conversion price of $0.29 per share. On May 10, 2024, the maturity date of this note was extended to December 31, 2024. On December 29, 2022, STCB executed a sixth promissory note with Sklar in the principal amount of $2,000,000. This note bore interest at Prime + 4% per annum, compounds monthly, is secured, matures on August 1, 2023, and included warrants to purchase 285,714 shares of our common stock at a price of $0.01 per share. On March 3, 2023, STCB executed a seventh promissory note with Sklar in the principal amount of $800,000. This note bore interest at Prime + 4% per annum, compounds monthly, is secured, matures on July 1, 2023, and included warrants to purchase 114,286 shares of our common stock at a price of $0.01 per share.
On August 11, 2023, the Company issued to Sklar a consolidated secured promissory note (the “Consolidated Secured Promissory Note”) in the principal sum of $4,000,000, with a maturity date of December 31, 2024. The Consolidated Secured Promissory Note carries a floating interest rate comprised of the Wall Street Journal Prime Rate (re-assessed on the first date of each month (plus 2%), and is secured by an amended and restated consolidated security agreement (the “Amended and Restated Consolidated Security Agreement”), by and between the Company and Sklar, dated August 11, 2023, The Consolidated Secured Promissory Note consolidated the outstanding loan obligations of the Company to Sklar evidenced pursuant to (i) the January 24, 2020 Amended Note, (ii) the June 28, 2021 Note, (iii) the September 17, 2021 Note, (iv) the December 13, 2021 Note, (v) the December 29, 2022 Note, and (vi) the March 3, 2023 Note, as summarized in the table below. The Amended and Restated Consolidated Security Agreement merged and integrated the December 29, 2022 Security Agreement and the March 3, 2023 Security Agreement, and provides a security interest in the Collateral (as defined in the Amended and Restated Consolidated Security Agreement) to secure the repayment of all principal, interest, costs, expenses and other amounts then or thereafter due under the Consolidated Secured Promissory Note until by the maturity date. Sklar was authorized to file financing statements to perfect the security interest in the Collateral without authentication by the Company. The following table represents Prior Notes that were part of the restructuring and related prior and updated terms (under the Consolidated Secured Promissory Note):
| Original | Original | Original | Revised | Revised | ||||||||||||
| Balance | maturity | rate | maturity | rate | ||||||||||||
| January 24, 2020 Amended Note | $ | 100,000 | 7/19/2023 | 4 | % | 12/31/2024 | Prime + 2 | % | ||||||||
| June 28, 2021 Note | 100,000 | 6/28/2023 | 4 | % | 12/31/2024 | Prime + 2 | % | |||||||||
| September 17, 2021 Note | 500,000 | 9/17/2023 | 4 | % | 12/31/2024 | Prime + 2 | % | |||||||||
| December 13, 2021 Note | 500,000 | 12/13/2023 | 4 | % | 12/31/2024 | Prime + 2 | % | |||||||||
| December 29, 2022 Note | 2,000,000 | 8/1/2023 | Prime + 4 | % | 12/31/2024 | Prime + 2 | % | |||||||||
| March 3, 2023 Note | 800,000 | 7/1/2023 | Prime + 4 | % | 12/31/2024 | Prime + 2 | % | |||||||||
| $ | 4,000,000 | (1) | ||||||||||||||
| (1) | Note that $1,527,500 of this total was repaid to Mr. Sklar from proceeds under the Gibraltar Loan. |
The restructuring is accounted for as a debt modification. On May 31, 2024, the Consolidated Secured Promissory Note was amended by that certain Amendment to Consolidated Secure Promissory Note, by and between STCB and Mr. Sklar, dated May 31, 2024 (the “2024 Consolidated Note Amendment” and together with the Consolidated Secured Promissory Note, the “Amended Consolidated Secured Promissory Note”). The 2024 Consolidated Note Amendment, among other things, extended the maturity date to August 31, 2026, provided that to the extent amounts remain due and payable on the maturity date, it will be extended until August 31, 2027.
The Company also issued a February 14, 2022 Note to Sklar in the principal amount of $472,500 that was not included in the note consolidation. On May 10, 2024, the Company and Sklar entered into an amendment to the February 14, 2022 Note to extend the maturity date of the February 14, 2022 Note to December 31, 2024. The February 14, 2022 Note bore interest at 4% per annum, was unsecured, and was to mature 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. The February 14, 2022 Note has been repaid in full and the Company has no further obligations under such note.
Additionally, on May 24, 2024, the Company entered into the Loan and Security Agreement, which allowed the Company to reduce long-term debt and expand its access to working capital (see Note 6). In connection with the Loan and Security Agreement, the Lender required Mr. Sklar to enter into a subordination agreement pursuant to which Mr. Sklar’s rights under (i) the February 14, 2022 Note, as amended and (ii) the Consolidated Secured Promissory Note would be subordinated to the lender’s rights under the Loan and Security Agreement.
In exchange for the subordination of and the maturity extension reflected in the Amended Consolidated Secured Promissory Note, $2,000,000 of the revolving loan available cash under the Loan and Security Agreement was used to repay the February 14, 2022 Note in its entirety and to pay down the interest and a portion of principal balance on the Amended Consolidated Secured Promissory Note. As of September 30, 2024 and December 31, 2023, the outstanding principal due to Mr. Sklar under outstanding notes was $2,472,500 and $4,472,500, respectively. As of September 30, 2024 and December 31, 2023, there was no accrued interest due on these notes.
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On May 24, 2024, (i) Starco Brands, Inc., a Nevada corporation (“Starco” or the “Company”), (ii) and each of Starco’s subsidiaries, Whipshots Holdings, LLC, a Delaware limited liability company (“Whipshots Holdings”), Whipshots, LLC, a Wyoming limited liability company (“Whipshots”), The AOS Group Inc., a Delaware corporation (“AOS Group”), Skylar Body, LLC, a Delaware limited liability company (“Skylar”), Soylent Nutrition, Inc., a Delaware corporation (“Soylent”; and together with Starco, Whipshots Holdings, Whipshots, AOS Group, Skylar, each individually, a “Borrower” and collectively, the “Borrowers”), and (iii) Gibraltar Business Capital, LLC, a Delaware limited liability company (the “Lender”) entered into a Loan and Security Agreement (the “Loan and Security Agreement”), allowing Starco Brands to reduce a portion of its long term debt (including retiring the Soylent Revolver) and expand its access to working capital. Capitalized terms not otherwise defined will have the meanings set forth in the Loan and Security Agreement.
The Loan and Security Agreement provides for a revolving line of credit in the amount not to exceed $12.5 million at any one time, or the Revolving Loan Commitment Amount in return for a first priority security interest in the Collateral. The Revolving Commitment Amount is supplemented by a Permitted Overadvance Amount of $1.5 million. The first $1.5 million in Revolving Loans drawn on this line will be considered permitted overadvances, and the Permitted Overadvance Amount shall be reduced by $125,000 beginning on June 1, 2024, and the first day of each month thereafter. The aggregate principal balance of all Revolving Loans outstanding at any time shall not exceed the Revolving Loan Availability, which is equal to the lesser of the Revolving Loan Commitment Amount or the Borrowing Base Amount; if the aggregate principal balance does exceed the availability, the Company shall immediately make a repayment to eliminate such excess. The Revolving Line matures on May 24, 2026, and such Maturity Date will be automatically extended for one (1) year, subject to the satisfaction of certain terms and conditions described in the Loan and Security Agreement.
Each Revolving Loan advanced under the Revolving Loan Commitment bears interest at a rate per annum equal to One Month Term SOFR plus the Applicable Margin. If a Revolving Loan or any portion thereof is considered a part of the Permitted Overadvance Amount under the Loan and Security Agreement, the Applicable Margin for such loan shall be increased by an additional two percent (2.00%) per annum. Revolving Loans may be repaid at any time and reborrowed up to, but not including the Maturity Date. On the Maturity Date, the outstanding aggregate principal balance of all Revolving Loans shall be due and payable. The interest rate for the revolving loan was 10.00% as of September 30, 2024.
Accrued and unpaid interest on the unpaid principal balance of the Revolving Loans shall be due and payable commencing on June 1, 2024 and on the first date of each calendar month thereafter. All accrued and unpaid interest shall be due and payable on the maturity date.
Subject to the satisfaction of certain terms and conditions described in the Loan and Security Agreement, the Borrowers may request to increase the Revolving Loan Commitment by an aggregate amount not less than $1 million not exceeding $2.5 million. Such request may be accepted by Lender in its sole and absolute discretion.
The Loan and Security Agreement contains customary limitations, including limitations on indebtedness, liens, fundamental changes to business or organizational structure, investments, loans, advances, guarantees, and acquisitions, asset sales, dividends, stock repurchases, stock redemptions, and the redemption, payment or prepayment of other debt, and transactions with affiliates. We are also subject to financial covenants, including a minimum EBITDA covenant and a maximum Unfinanced Capital Expenditures.
The Loan and Security Agreement also contains customary events of default, including nonpayment of principal, interest, fees, or other amounts when due, violation of covenants, breaches of representations or warranties, cross defaults, change of control, insolvency, bankruptcy events, and material judgments. Some of these events of default allow for grace periods or are qualified by materiality concepts. Upon the occurrence of an event of default, the outstanding obligations under the Loan and Security Agreement may be accelerated and become due and payable immediately. As of September 30, 2024, the Company was in compliance with all loan covenants relating to the agreement and the available borrowing amount was approximately $5.8 million.
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Going Concern
The unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q 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 identified that a substantial doubt exists related to the Company’s ability to meet its obligations as they become due within one year of the date of the financial statements being issued. Principal conditions that gave rise to this substantial doubt include historical net losses as indicated by the Company’s accumulated deficit of approximately $86,100,000 at September 30, 2024, which includes the impact of its net losses of $6,527,088 and $22,090,177 for the three and nine months ended September 30, 2024, and total debt on the balance sheet of $8,808,010 as of September 30, 2024, with a small portion of the debt coming due within one year of the date of the financial statements being issued. Management evaluated the principal conditions that initially give rise to the substantial doubt and note that the historical net losses and accumulated deficit impact are justified as they are primarily made up of non-cash expenses or one-time non-recurring expenses, such as goodwill impairment, stock-based compensation expense, fair value share adjustment loss and acquisition transaction expenses. Total debt of $8,080,010 on the balance sheet as of September 30, 2024 includes $2,472,500 of notes payable to Ross Sklar (“Sklar”), who has a large minority ownership of the Company that provides incentive for Mr. Sklar to extend or refinance the notes before the notes become due, as seen historically (see Note 8). Management plans include (i) continuing to increase net cash provided by operating activities, which was $517,879 for the nine months ended September 30, 2024, while decreasing net cash provided by financing activities, and (ii) obtaining an alternative financing source to pay off all current debt outstanding and to provide additional working capital, if needed. To achieve these objectives, management has proposed and approved plans to increase top line revenue for each segment while decreasing overall expenses as a percentage of revenue, as a result of realizing synergies from the acquisitions of AOS, Skylar and Soylent, and utilizing the Company’s back-end shared service model to reduce expenses. These conditions and the ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the aforementioned uncertainties.
Working Capital Surplus Deficit
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Current assets | $ | 28,970,685 | $ | 25,235,590 | ||||
| Current liabilities | 57,758,203 | 57,672,403 | ||||||
| Working capital deficit | $ | (28,787,518 | ) | $ | (32,436,813 | ) | ||
The increase in current assets is primarily due to increases in prepaid expenses and other current assets and inventory of approximately $1.5 million and $2.5 million, respectively, offset by a decrease in accounts receivable of approximately $0.6 million. Current liabilities stayed relatively constant, which is primarily a result of an increase in accounts payable and other payables and accrued liabilities of approximately $5.7 million and $1.0 million, respectively, offset by decreases in notes payables, lines of credit and the fair value of share adjustment account of approximately $2.0 million, $3.8 million and $1.4 million, respectively.
Cash Flows
Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash provided by (used in) operating activities | $ | 517,879 | $ | (286,820 | ) | |||
| Net cash (used in) investing activities | (286,327 | ) | (183,646 | ) | ||||
| Net cash (used in) provided by financing activities | (377,101 | ) | 535,974 | |||||
| (Decrease) increase in cash | $ | (145,549 | ) | $ | 65,508 | |||
Operating Activities
Net cash provided by operating activities was $517,879 for the nine months ended September 30, 2024 and was primarily due to the impact of the loss for the nine month period and an increase in prepaid expenses and other assets of $1,458,391, offset by loss on stock payable share adjustment of $15,703,049 and an increase in accounts payable, accounts payable-related parties and other payables/accrued liabilities of $7,262,562.
Net cash used in operating activities was $286,820 for the nine months ended September 30, 2023 and was primarily due to an increase in accounts receivable of $2,397,559 and inventory of $1,575,691, which was partially offset by an increase in of accounts payable of $2,512,173 and other accrued liabilities of 327,648.
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Investing Activities
Net cash used in investing activities was $286,327 for the nine months ended September 30, 2024 and was due to the purchase of property and equipment and intangibles.
Net cash used in investing activities was $183,646 for the nine months ended September 30, 2023 and was primarily due to the purchase of intangibles in the amount of approximately $233,108 and was partially offset by cash received in the acquisition of a business of $68,062.
Financing Activities
For the nine months ended September 30, 2024, net cash used in financing activities was $377,101, which primarily includes payments toward (i) lines of credit, (ii) a revolving loan, (iii) notes payable and iv) loans from related parties of approximately $23.5 million, offset by proceeds from a revolving loan and a note payable of approximately $23.2 million.
For the nine months ended September 30, 2023, net cash provided by financing activities was $535,974, which primarily includes $800,000 of loan advances from Ross Sklar, which was partially offset by net payments on the line of credit of $136,500 and $98,550 of repurchases of common stock.
Off-Balance Sheet Arrangements
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.
Effects of Inflation
Inflationary factors such as increases in the costs to acquire goods and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of revenues if the selling prices of our services do not increase with these increased costs.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in conformity with US GAAP. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs, expenses and related disclosures. These estimates and assumptions are often based on historical experience and judgements that we believe to be reasonable under the circumstances at the time made. However, all such estimates and assumptions are inherently uncertain and unpredictable, and actual results may differ. It is possible that other professionals, applying their own judgement to the same facts and circumstances, could develop and support alternative estimates and assumptions that could result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis.
We consider our critical accounting estimates to include the assumptions and estimates associated with timing for revenue recognition, testing goodwill for impairment, recoverability of long-lived assets, income taxes, fair value of contributed services, and assumptions used in the Black-Scholes valuation methods, such as expected volatility, risk-free interest rate and expected dividend rate. Our significant accounting policies are more fully described in the notes to our Condensed Consolidated Financial Statements. We believe that the following accounting policies and estimates are critical to our business operations and understanding our financial results.
Acquisition Accounting
We account for acquisitions in accordance with the acquisition method of accounting pursuant to ASC 805, Business Combinations. Accordingly, for each acquisition, we record the fair value of the assets acquired and liabilities assumed as of the acquisition date and recognize the excess of the consideration paid over the fair value of the net assets acquired as goodwill. For each acquisition, the fair value of assets acquired and liabilities assumed is determined based on assumptions that reasonable market participants would use to value the assets in the principal (or most advantageous) market.
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In determining the fair value of the assets acquired and the liabilities assumed in connection with acquisitions, management engages third-party valuation experts. Management is responsible for these internal and third-party valuations and appraisals.
Revenue Recognition
STCB, excluding its subsidiaries, earns a majority of its revenues through the sale of food products, primarily through Winona. Revenue from retail sales is recognized at shipment to the retailer.
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 at shipment to the retailer. Revenue from eCommerce sales, including Amazon Fulfillment by Amazon (“Amazon FBA”), is recognized upon shipment of merchandise or FOB destination.
Skylar, one of STCB’s wholly owned subsidiaries, earns its revenues through the sale of fragrances. Revenue from retail sales is recognized at shipment to the retailer. Revenue from eCommerce sales, including Amazon FBA, is recognized either upon shipment of merchandise or FOB destination.
Soylent, one of STCB’s wholly owned subsidiaries, earns its revenues through the sale of nutritional drinks. Revenue from retail sales is recognized at shipment to the retailer. Revenue from eCommerce sales, is recognized upon shipment of merchandise.
Whipshots Holdings, an 85% owned subsidiary, earns its revenues as royalties from the licensing agreements it has with Temperance, a related entity. STCB licenses the right for Temperance to manufacture and sell vodka infused whipped cream. The amount of the licensing revenue received varies depending upon the product and the royalty percentage is based on contractual terms. The Company recognizes its revenue under these licensing agreements only when sales are made by Temperance to a third party.
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.
Goodwill Impairment
Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.
We review goodwill for impairment at least annually or more frequently if indicators of impairment exist. Our goodwill impairment test may require the use of qualitative judgements and fair-value techniques, which are inherently subjective. Impairment loss, if any, is recorded when the fair value of goodwill is less than its carrying value for each reporting unit.
No impairment losses related to goodwill were recognized for the nine months ended September 30, 2024 and 2023.
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Recoverability of Long-Lived Assets
We review intangible assets, property, equipment and software with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted cash flows that the asset or asset group is expected to generate. If assets are determined to be impaired, the impairment loss to be recognized equals the amount by which the carrying value of the asset or group of assets exceeds its fair value. Significant estimates include but are not limited to future expected cash flows, replacement cost and discount rates. There were no impairment losses related to long-lived assets for the nine months ended September 30, 2024 and 2023.
Income Taxes
The Company follows Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income in the period that includes the enactment date.
The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”) with regards to uncertainty income taxes. Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the condensed consolidated financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the condensed consolidated financial statements unless otherwise disclosed, and 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 condensed consolidated financial position or results of operations.
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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) and through the COSO 2013 framework 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, 2024, 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 condensed 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 an audit committee |
| ● | Lack of corporate documentation |
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, 2024 that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
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 Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on April 3, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Sale of Securities.
On January 1, 2024, the Company entered into agreements with employees and consultants for services to be performed. As consideration therefore, the Company granted Options to purchase 4,660,000 shares of common stock. The Options expire ten years from the grant date and vest over various time periods ranging from two to four years, with the majority vesting over a four-year term.
Effective February 14, 2024, the Company settled the Soylent Opening Balance Holdback and $2,446,380 equity consideration payable by issuing 16,309,203 shares of Class A common stock to the Soylent Shareholders as outlined in the Soylent merger agreement.
Effective February 14, 2024, the Soylent Share Adjustment Date, the Company settled $18,099,951 of the $36,931,330 fair value liability outstanding on December 31, 2023 by issuing 133,087,875 shares of Class A common stock to the Soylent Shareholders as outlined in the Soylent Merger Agreement and Stockholders Agreement. After the effect of the shares issued during the quarter and changes in the derivative liability at period end, the total share adjustment value as of March 31, 2024 is $20,753,328.
On May 16, 2024, the Company entered into agreements with three employees and a consultant for services to be performed pursuant to which the Company granted Options under the Company’s Equity Plan to purchase up to an aggregate of 390,000 shares of Class A common stock. The Options expire ten years from the grant date and vest over a four-year term.
Effective May 20, 2024, it was determined, in accordance with the Soylent Merger Agreement, that 7,445,490 shares of the 18,571,429 shares of Class A common stock held back from the former Soylent shareholders were not due, the effect of which resulted in an adjustment to the liability of $1,012,587; in conjunction with an increase in the fair value of the derivative liability at period end, the total share adjustment value on the balance sheet as of June 30, 2024 was $30,441,480.
On March 12, 2024, the 18-month holdback period from the date of the AOS Acquisition was completed, the Company had no outstanding claims and issued the former shareholders of AOS an aggregate 4,979,731 shares of Class A common stock and $6,137 in cash that was being held back on the December 31, 2023 balance sheet.
Following the 18-month holdback period from the date of the Skylar Acquisition on December 29, 2022, effective June 30, 2024, the Company issued former Skylar shareholders an aggregate amount of 11,573,660 shares of Class A common stock, which satisfied an equity consideration payable of $2,314,732 on the balance sheet as of June 30, 2024.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. MINING SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS
EXHIBIT INDEX
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| 31.1 (#) | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| 31.2 (#) | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| 32.1 (#)(##) | Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. | |
| 32.2 (#)(##) | Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. | |
| 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). | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| (#) | Filed herewith. |
| (*) | 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 may have been omitted from this filing. 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 may have been redacted. The Registrant will provide an unredacted copy of the exhibit on a supplemental basis to the SEC or its staff upon request. |
| † | 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. |
| (##) | 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. |
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SIGNATURES
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 | ||
| (Registrant) | ||
| By: | /s/ Ross Sklar | |
| Ross Sklar | ||
| Interim Chief Financial Officer and duly authorized officer | ||
| (Principal Financial and Accounting Officer) | ||
| November 14, 2024 | ||
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