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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number:  0-54892

 

STARCO BRANDS, INC

(Exact name of registrant as specified in its charter)

 

Nevada

27-1781753

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

  

250 26th Street, Suite 200, Santa Monica, CA

(Address of principal executive offices)

90402

(Zip Code)

 

Registrant’s telephone number, including area code: (323) 266-7111

 

 

 

 

Securities Registered under Section 12(b) of the Exchange Act: 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which

registered

Common stock

STCB

OTC Markets Group OTCQB Tier

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒        No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes ☒        No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-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 equity, as of the latest practicable date:  As of November 14, 2022, the issuer had 221,647,203 shares of its common stock issued and outstanding.

 

1
Table of Contents

 

 

STARCO BRANDS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022

 

TABLE OF CONTENTS

 

 

Page 

PART I. FINANCIAL INFORMATION

  
     

ITEM 1.

Financial Statements

 3
     
 

Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021

 3
     
 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

 4
     
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021

 5
     
 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2022 and 2021

 6
     
 

Notes to Unaudited Condensed Consolidated Financial Statements

 7
     

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 21
     

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

 29
     

ITEM 4.

Controls and Procedures

 29
     

PART II. OTHER INFORMATION

 30
     

ITEM 1.

Legal Proceedings

 30
     

ITEM 1A.

Risk Factors

 30
     

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 30
     

ITEM 3.

Defaults Upon Senior Securities

 30
     

ITEM 4.

Mine Safety Disclosures

 30
     

ITEM 5.

Other Information

 30
     

ITEM 6.

Exhibits

 31
     

SIGNATURES

 33

 

2
Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

STARCO BRANDS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 
  

(Unaudited)

     

ASSETS

        
         

Current Assets:

        

Cash and cash equivalents

  470,362   338,863 

Accounts receivable, net, $1,360,457 and $174,059 from related party, respectively

  1,968,619   174,059 

Prepaid expenses and other assets

  337,394   733,020 

Inventory

  2,559,234   - 

Total Current Assets

  5,335,609   1,245,942 
         

Property and equipment, net

  12,420   - 

Operating lease right-of-use assets

  79,632   - 

Intangibles, net

  37,166   20,000 

Goodwill

  9,898,731   - 

Note receivable, related party

  95,640   95,640 
         

Total Assets

  15,459,198   1,361,582 
         

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

        
         

Current Liabilities:

        

Accounts payable

  495,017   592,665 

Other payables and accrued liabilities, $179,477 and $202,023 from related party, respectively

  501,001   1,002,798 

Stock payable

  -   654,166 

Treasury stock payable, current

  131,400   131,400 

Loans and advances payable, related party

  600,000   376,382 

Notes payable

  92,334   53,822 
Lease liability  81,223   - 

Total Current Liabilities

  1,900,975   2,811,233 
         

Treasury stock payable, net of current portion

  98,550   197,100 

Loans payable, net of current portion, $1,264,954 and $1,100,000 from related party, respectively

  1,357,288   1,100,000 

Total Liabilities

  3,356,813   4,108,333 
         

Commitments and Contingencies

          
         

Stockholders' Deficit:

        

Preferred stock, $.001 par value; 40,000,000 shares authorized; no shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively

  -   - 

Common stock, $.001 par value; 300,000,000 shares authorized; 221,647,203 and 159,140,665 shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively

  221,647   159,141 

Additional paid in capital

  28,738,630   15,950,403 

Treasury stock at cost

  (394,200)  (394,200)

Equity consideration payable

  1,897,727   - 

Accumulated deficit

  (18,355,366)  (18,388,186)

Total Starco Brands' Stockholders' Equity (Deficit)

  12,108,438   (2,672,842)
         

Non-controlling interest

  (6,053)  (73,909)

Total Stockholders' Equity (Deficit)

  12,102,385   (2,746,751)
         

Total Liabilities and Stockholders' Equity (Deficit)

  15,459,198   1,361,582 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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STARCO BRANDS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

September 30, 2022

  

September 30, 2021

  

September 30, 2022

  

September 30, 2021

 
                 
Revenue, $1,441,361 and $3,594,854 from related parties for the three and nine months ended September 30, 2022, net $1,658,253  $109,503  $3,811,746  $484,073 
                 

Cost of goods sold

  343,994   -   343,994   - 
                 

Gross profit

 $1,314,259  $109,503  $3,467,752  $484,073 
                 

Operating Expenses:

                

Compensation expense

 $176,148  $11,673  $395,974  $89,466 

Professional fees

  884,558   57,480   1,122,532   167,882 

Marketing, General and administrative

  364,331   430,176   1,677,991   750,540 

Marketing, related party

  -   -   131,614   - 

Total Operating Expenses

  1,425,037   499,329   3,328,111   1,007,888 
                 

Income (Loss) from operations

  (110,778)  (389,826)  139,641   (523,815)
                 

Other Income (Expense):

                

Interest expense

  (15,232)  (2,987)  (47,127)  (22,173)

Other income (expense)

  8,161   -   8,161   (3,500)

Total Other Income (Expense)

  (7,071)  (2,987)  (38,966)  (25,673)
                 

Income (loss) before provisions for income taxes

 $(117,849) $(392,813) $100,675  $(549,488)

Provision for income taxes

  -   -   -   - 
                 

Net Income (Loss)

 $(117,849) $(392,813) $100,675  $(549,488)

Net (income) loss attributable to non-controlling interest

 $(32,693) $-  $(67,856) $- 
                 

Net Income (Loss) attributable to Starco Brands

 $(150,542) $(392,813) $32,819  $(549,488)
                 

Income (Loss) per share, basic

 $(0.00) $(0.00) $0.00  $(0.00)

Income (Loss) per share, diluted

 $(0.00) $(0.00) $0.00  $(0.00)
                 

Weighted Average Shares Outstanding - Basic

  172,236,263   159,140,665   163,557,744   159,140,665 

Weighted Average Shares Outstanding - Diluted

  172,236,263   159,140,665   163,885,661   159,140,665 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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STARCO BRANDS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

 

  

Preferred Stock

  

Common Stock

  

Additional

Paid-in

  

Treasury

  

Accumulated

  

Non-controlling

  

Equity Consideration

  

Stockholders'

Equity

 
  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Stock

  

Deficit

  

Interest

  

Payable

  

(Deficit)

 

Balance at December 31, 2020

  -  $-   159,140,665  $159,141  $15,723,705  $-  $(16,137,021) $-  $-  $(254,175)
                                         

Estimated fair value of contributed services

  -   -   -   -   11,700   -   -   -   -   11,700 
                                         

Net loss

  -   -   -   -   -   -   (115,909)  -   -   (115,909)
                                         

Balance at March 31, 2021

  -  $-   159,140,665  $159,141  $15,735,405  $-  $(16,252,930) $-  $-  $(358,384)
                                         

Contributed services

  -   -   -   -   11,700   -   -   -   -   11,700 
                                         

Net loss

  -   -   -   -   -   -   (40,766)  -   -   (40,766)
                                         

Balance at June 30, 2021

  -  $-   159,140,665  $159,141  $15,747,105  $-  $(16,293,696) $-  $-  $(387,450)
                                         
Common stock repurchased  -   -   -   -   (32,850)  -   -   -   -   (32,850)
                                         

Contributed services

  -   -   -   -   11,700   -   -   -   -   11,700 
                                         

Net loss

  -   -   -   -   -   -   (392,813)  -   -   (392,813)
                                         

Balance at September 30, 2021

  -  $-   159,140,665  $159,141  $15,725,955  $-  $(16,686,508) $-  $-  $(801,412)
                                         
                                         

Balance at December 31, 2021

  -   -   159,140,665  $159,141   15,950,403   (394,200)  (18,388,186)  (73,909)  -  $(2,746,751)
                                         

Estimated fair value of contributed services

  -   -   -   -   54,862   -   -   -   -   54,862 
                                         

Estimated fair value of warrants issued

  -   -   -   -   53,741   -   -   -   -   53,741 
                                         

Net income

  -   -   -   -   -   -   40,949   11,862   -   52,811 
                                         

Balance at March 31, 2022

  -  $-   159,140,665  $159,141  $16,059,006  $(394,200) $(18,347,237) $(62,047) $-  $(2,585,337)
                                         

Estimated fair value of contributed services

  -   -   216,664   216   209,475   -   -   -   -   209,691 
                                         

Estimated fair value of warrants issued

  -   -   -   -   22,599   -   -   -   -   22,599 
                                         

Issuance of shares for cash

  -   -   151,250   151   150,343   -   -   -   -   150,494 
                                         

Recognition of deferred offering costs

  -   -   -   -   (135,434)  -   -   -   -   (135,434)
                                         

Issuance of shares related to stock payable

  -   -   728,570   729   654,166   -   -   -   -   654,895 
                                         

Net income

  -   -   -   -   -   -   142,413   23,301   -   165,714 
                                         

Balance at June 30, 2022

  -  $-   160,237,149  $160,237  $16,960,155  $(394,200) $(18,204,824) $(38,746) $-  $(1,517,378)
                                         

Estimated fair value of contributed services

  -   -   81,249   81   119,739   -   -   -   -   119,820 
                                         

Estimated fair value of warrants issued

  -   -   -   -   60,600   -   -   -   -   60,600 
                                         

Issuance of shares related to AOS acquisition

  -   -   61,328,805   61,329   11,598,135   -   -   -   -   11,659,464 
                                         

Equity payble related to AOS acquisition

  -   -   -   -   -   -   -   -   1,897,727   1,897,727 
                                         

Net income

  -   -   -   -   -   -   (150,542)  32,693   -   (117,849)
                                         

Balance at September 30, 2022

  -  $-   221,647,203  $221,647  $28,738,630  $(394,200) $(18,355,366) $(6,053) $1,897,727  $12,102,385 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

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STARCO BRANDS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

 

   

For the Nine Months Ended

 
   

September 30, 2022

    

September 30, 2021

  

Cash Flows From (Used In) Operating Activities:

                

Net income (loss)

   $ 100,675     $ (549,488 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

  

Loss on disposal of asset

     -       3,500  

Contributed services and stock services

     384,076       -  

Stock based compensation

     136,940       35,100  

Depreciation

     4,202       -  

Amortization

     6,013       -  

Changes in operating assets and liabilities:

                

Accounts receivable, related party

     (1,186,398 )     (100,869 )

Accounts receivable

     57,800       -  

Prepaids & other assets

     662,756       (252,175 )

Inventory

     (54,513 )     -  

Accounts payable

     (174,733 )     (44,150 )

Accrued expenses, related party

     (21,745 )     (77,817 )

Accrued liabilities

     (548,606 )     300,000  
                 

Net Cash Used In Operating Activities

     (633,533 )     (685,899 )
                 

Cash Flows From Investing Activities:

                

Cash Received in Acquisition of Business, net of cash paid

     193,670       -  

Purchases of intangibles

     -       (20,000 )
                 
Net Cash Provided by (Used) In Investing Activities     193,670       (20,000 )
                 

Cash Flows From Financing Activities:

                

Advances / loans from related parties

     480,906       936,888  

(Repayment of advances)/borrowings from related parties

     -       (492,831 )

Proceeds on notes payable

     92,334       80,291  

Payments on notes payable

     (53,822 )     -  

Proceeds from issuance of common stock

     150,494       -  

Repurchase of common stock

     (98,550 )     (32,850 )
                 

Net Cash Provided By Financing Activities

     571,362       491,498  
                 

Net Increase (Decrease) In Cash

     131,499       (214,401 )
                 

Cash - Beginning of Period

     338,863       773,322  
                 

Cash - End of Period

   $ 470,362     $ 558,921  
                 

Supplemental Cash Flow Information:

                

Cash paid for:

                

Interest paid

   $ 55,584     $ 22,261  

Income Taxes

   $ -     $ -  
                 

Noncash operating and financing activities:

                

Non-cash issuance of stock payable

   $ 654,166     $ -  

Reclass of offering costs to additional paid-in capital

   $ 135,434     $ -  
Estimated fair value of shares issued in acquisition   $ 13,557,191     $ -  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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STARCO BRANDS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

 

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Starco Brands, Inc. (STCB) was incorporated in the State of Nevada on  January 26, 2010, under the name Insynergy, Inc. On  September 7, 2017, STCB filed an Amendment to the Articles of Incorporation to change the corporate name to Starco Brands, Inc. The Board determined the change of STCB's name was in the best interests of the Company due to changes in its current and anticipated business operations. In  July 2017, STCB entered into a licensing agreement with The Starco Group (“TSG”), located in Los Angeles, California. The companies pivoted to commercializing novel consumer products manufactured by TSG. TSG is a private label and branded aerosol and liquid fill manufacturer with manufacturing assets in the following verticals: DIY/Hardware, paints, coatings and adhesives, household, hair care, disinfectants, automotive, motorcycle, arts & crafts, personal care cosmetics, personal care FDA, sun care, food, cooking oils, beverages, and spirits and wine.

 

During the third quarter of 2021, STCB formed two subsidiaries, Whipshots, LLC, a Wyoming limited liability company ("Whipshots LLC") and Whipshots, LLC, a Delaware limited liability company that was subsequently renamed Whipshots Holdings, LLC ("Whipshots Holdings"). Whipshots LLC was a wholly-owned subsidiary of STCB at formation which was subsequently contributed to Whipshots Holdings. Whipshots Holdings is a majority-owned subsidiary of STCB in which STCB owns 96% of the vested voting interests. There are unvested interests not owned by the Company for an additional 3% of the equity which has been issued subject to vesting requirements.

 

On September 12, 2022, STCB, through its wholly-owned subsidiary Starco Merger Sub Inc. (“Merger Sub”), completed its acquisition (the “AOS Acquisition”) of The AOS Group Inc., a Delaware corporation (“AOS”). The AOS Acquisition consisted of Merger Sub merging with and into AOS, with AOS being the surviving corporation. AOS is a wholly-owned subsidiary of STCB.

 

The accompanying condensed consolidated financial statements are of STCB and its subsidiaries Whipshots Holdings, Whipshots LLC, and AOS (collectively, the "Company").

 

In our opinion, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of unaudited consolidated financial position and the unaudited consolidated results of operations for interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 
 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

 

Basis of Consolidation

 

The consolidated financial statements of Starco Brands, Inc. include the accounts of STCB, our wholly owned subsidiary AOS, and our 96% owned subsidiary and its wholly owned subsidiaries, which are comprised of voting interest entities in which we have a controlling financial interest in accordance with ASC 810, Consolidation. All significant intercompany profits, losses, transactions and balances have been eliminated in consolidation in the condensed consolidated financial statements.

 

Our consolidated subsidiaries at September 30, 2022 include: AOS, Whipshots Holdings and its wholly owned subsidiary Whipshots

 

Basis of presentation

 

The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2021. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.

 

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Use of estimates

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of contributed services and recoverability of prepaid royalties. Actual results could differ from those estimates.

 

Concentrations of Credit Risk

 

We maintain our cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. We continually monitor our banking relationships and consequently have not experienced any losses in our accounts. We believe we are not exposed to any significant credit risk on cash.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents held at financial institutions may at times exceed insured amounts. The Company believes it mitigates such risk by investing in or through, as well as maintaining cash balances, with major financial institutions. The Company had $470,362 and $338,863 cash equivalents as of September 30, 2022, and December 31, 2021.

 

Accounts Receivable

 

Revenues that have been recognized but payment has not been received are recorded as accounts receivable. Losses on receivables will be recognized when it is more likely than not that a receivable will not be collected. An allowance for estimated uncollectible amounts will be recognized to reduce the amount of receivables to its net realizable value. All of our receivables are from related parties, other than revenues generated by our wholly owned subsidiary AOS. The allowance for uncollectible amounts is evaluated quarterly. There were no allowances related to uncollectable amounts at September 30, 2022 and December 31, 2021.

 

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.

 

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The carrying amount of the Company’s consolidated financial assets and liabilities, such as cash, prepaid expenses and accrued expenses approximate their fair value because of the short maturity of those instruments. The Company’s notes payable approximates the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at September 30, 2022.

 

Revenue recognition

 

STCB and its subsidiaries currently earn a majority of their revenue as royalties from the licensing agreements it has with TSG, a related entity, and other related parties. STCB licenses the right for TSG to manufacture and sell certain Starco Brands products. The amount of the licensing revenue received varies depending upon the product and the royalty percentage is determined beforehand in each agreement. The Company recognizes its revenue under these licensing agreements only when sales are made by TSG or other related parties to a third party.

 

AOS, one of STCB’s wholly owned subsidiaries, earns its revenues through the sale of premium body and skincare products. Revenue from retail sales is recognized shipment to the retailer. Revenue from eCommerce sales, including Amazon Fulfillment by Amazon ("Amazon FBA"), is recognized upon shipment of merchandise.

 

The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the licensee transferring goods or services to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company's licensee must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company's licensee's performance obligations are transferred to customers at a point in time, typically upon delivery.

 

Stock-based Compensation

 

The Company accounts for stock-based compensation per the provisions of ASC 718, Share-based Compensation (“ASC 718”), which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants, options, and restricted stock units). The fair value of each warrant and option is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The Company has not paid dividends historically and does not expect to pay them in the future. Expected volatilities are based on the volatility of comparable companies’ common stock. The expected term of awards granted is derived using estimates based on the specific terms of each award. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The grant date fair value of a restricted stock unit equals the closing price of our common stock on the trading day of the grant date.

 

Net income (loss) per common share

 

Net income (loss) per common share is computed pursuant to ASC 260, earnings per share. Per ASC 260 Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period. The weighted average number of common shares outstanding and potentially outstanding common shares assumes that the Company was incorporated as of the beginning of the first period presented. As of September 30, 2022, the Company had 352,087 shares related to compensation owed to advisors, which are subject to vesting, and 35,700,000 potentially dilutive shares from outstanding warrants. Approximately 300,000 shares of stock that is earned and to be issued to advisors are reflected in diluted shares outstanding for the nine months ended September 30, 2022 as the Company reported net income.

 

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Intangible Assets

 

Indefinite-lived intangible assets consist of certain trademarks. 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. There were no charges related to impairment during all periods presented.

 

Royalties and Licenses

 

Royalty-based obligations with content licensors are either paid in advance and capitalized as prepaid royalties or are accrued as incurred and subsequently paid. These royalty-based obligations are generally expensed to cost of revenue generally at the greater of the contractual rate or an effective royalty rate based on the total projected net revenue for contracts with guaranteed minimums. Prepayments made are generally made in connection with the development of a particular product, and therefore, we are generally subject to risk during the product phase. Payments earned after completion of the product (primarily royalty-based in nature) are generally expensed as cost of revenue.

 

The Company contracts with some licensors include minimum guaranteed royalty payments, which are initially recorded as an asset and as a liability at the contractual amount when no performance remains with the licensor. When performance remains with the licensor, we record guarantee payments as an asset when actually paid and as a liability when incurred, rather than recording the asset and liability upon execution of the contract.

 

Each quarter, we also evaluate the expected future realization of our royalty-based assets, as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through future revenue. Impairments or losses determined post-launch are charged to cost of revenue. We evaluate long-lived royalty-based assets for impairment using undiscounted cash flows when impairment indicators exist. If an impairment exists, then the related assets are written down to fair value. Unrecognized minimum royalty-based commitments are accounted for as executory contracts, and therefore, any losses on these commitments are recognized when the underlying intellectual property is abandoned (i.e., cease use) or the contractual rights to use the intellectual property are terminated.

 

Our minimum contractual obligations related to the above agreement as of September 30, 2022 are approximately $1,100,000 and $1,650,000 for the years ending December 31, 2023, and 2024, respectively.

 

PP&E

 

Property and equipment is recorded at cost. Depreciation is computed using straight-line over the estimated useful lives of the related assets. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed of, related costs and related accumulated depreciation are removed from the accounts. As of September 30, 2022, the Company had a total property and equipment of $16,622 with accumulated depreciation of $4,202. The Company did not have any property and equipment as of December 31, 2021. Depreciation expense was $4,202 for the three and nine months ended September 30, 2022 and had no depreciation expense for the three and nine months ended September 30, 2021.

 

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Leases

 

With the adoption of ASC 842, operating lease agreements are required to be recognized on the balance sheet as Right-of-Use (“ROU”) assets and corresponding lease liabilities. ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.

 

AOS, the Company’s wholly owned subsidiary leases its corporate office (“AOS Lease”). The AOS Lease is classified as an operating lease and has a term of 2 years, for approximately 1,372 square feet of office space located in West Hollywood, California. The lease expires in September 2023 and has a monthly base rental of $7,564 which increases 4% each year. The remaining weighted average term is 1.00 years. In March 2022, the Company entered into a sublease, whereby, the sublessor will take over the entire AOS Lease office space and the lease payment until the completion of the original AOS Lease term.

 

In accordance with ASC 842, Leases, the Company recognized a ROU asset and corresponding lease liability on the consolidated balance sheet for long-term office leases. See Note 10 – Leases for further discussion, including the impact on the consolidated financial statements and related disclosures.

 

Inventory

 

Inventory consists of premium body and skincare products. Inventory is measured using the first-in, first-out method and stated at average cost as of September 30, 2022. The value of inventories is reduced for excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and adjust the value of inventory when required. We recorded no inventory impairment losses for the nine months ended September 30, 2022.

 

Acquisitions, Intangible Assets and Goodwill

 

The condensed consolidated financial statements reflect the operations of an acquired business beginning as of the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values at the date of acquisition; goodwill is recorded for any excess of the purchase price over the fair values of the net assets acquired. Significant judgment is required to determine the fair value of certain tangible and intangible assets and in assigning their respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant tangible and intangible assets. The fair values are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. The Company typically employs an income method to measure the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances could affect the accuracy or validity of the estimates and assumptions. Determining the useful life of an intangible asset also requires judgment. Intangible assets are amortized over their estimated lives. Any intangible assets associated with acquired in-process research and development activities (“IPR&D”) are not amortized until a product is available for sale.

 

Segments

 

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer (“CEO”) is the Company’s chief operating decision maker and views the Company’s operations and manages its business in one operating segment, which is the business of developing and selling consumer good products. The Company operates in only one segment.

 

Recent accounting pronouncements

 

In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820) (“ASU 2022-03”). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this Update also require additional disclosures for equity securities subject to contractual sale restrictions. The provisions in this Update are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not expect to early adopt this ASU. The Company is currently evaluating the impact of adopting this guidance on the consolidated balance sheets, results of operations and financial condition.

 

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The Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

  
 

NOTE 3 – GOING CONCERN

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has an accumulated deficit of $18.4 million at September 30, 2022 including the impact of its net income of $0.1 million for the nine months ended September 30, 2022.  Net cash used in operating activities was $0.6 million for the nine months ended September 30, 2022. The Company’s ability to continue with this trend is unknown. The Company’s ability to raise additional capital through the future issuances of common stock and/or debt financing is unknown although the Company is actively raising capital via a Regulation A offering which was qualified in December 2021. As of September 30, 2022, the Company has raised approximately $200,000 via the aforementioned Regulation A offering. The obtainment of additional financing and the successful development of the Company’s contemplated plan of operations, to the attainment of profitable operations are necessary for the Company to continue operations. 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 consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

 
 

NOTE 4 - ACQUISITION

 

On September 12, 2022, STCB, through its wholly-owned subsidiary Merger Sub, completed the AOS Acquisition. The AOS Acquisition consisted of Merger Sub merging with and into AOS, with AOS being the surviving corporation. AOS is a maker of premium body and skincare products engineered to power and protect athletes. Starco acquired AOS as STCB is always looking for technologies and brands that have the ability to scale and change behavior. In the world of sport, there are currently no brands that have successfully penetrated multiple categories of consumer products.  AOS has historically been a personal care brand – offering products such as body wash, shampoo, deodorant and face wash.  Starco Brands, through its relationship with TSG, has access to intellectual property that will allow AOS vertically integrate manufacturing and expand into multiple consumer product categories – OTC, sun care, air care, beverage, etc.. The AOS Acquisition was completed through an all-stock deal, where the Company’s shares were  valued at $0.19 per share, which amount is equal to the fair value of the stock on the acquisition date. As consideration for the Meger, the Company reserved an aggregate of 61,400,000 restricted shares of Company common stock to issue to the AOS Stockholders (such stockholders as of immediately prior to the closing of the Merger, the “AOS Stockholders”), 5,000,000 restricted shares of Company common stock may be issued to the AOS Stockholders after an 18-month indemnification period, and offsetting against these additional shares will be the sole recourse for any indemnity claims by the Company against the AOS Stockholders. An additional 5,000,000 restricted shares of Company common stock may be issued to the AOS Stockholders contingent upon AOS meeting certain future sales metrics. Further, in the event that the AOS Stockholders have any indemnity claims against the Company or Merger Sub, the Company shall satisfy any such indemnity claims solely by the issuance of additional shares of its Company common stock, which shall not exceed, in the aggregate, 5,000,000 additional shares of Company common stock. Notwithstanding the foregoing, under the terms of the Merger Agreement, any AOS Stockholder that is not an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”), will receive cash in lieu of shares of Company common stock at a value equal to $0.0982 per share.

 

The 5,000,000 additional restricted shares of Company common stock to be issued after an 18-month indemnification period and the 5,000,000 earnout shares of Company common stock to be issued if certain future sales metrics are met, are deemed to be part of the consideration paid for the acquisition. The 5,000,000 additional shares of Company common stock that may be issued in the event of an indemnity claim against the Company are not deemed to be part of the consideration paid for the acquisition as the Company does not expect any additional shares will be issued under the indemnity clause.

 

As of September 30, 2022, the Company paid $6,991 in cash to non-accredited investors. Additionally, the Company will hold back $1,175 in cash, the equivalent of 11,961 shares to be paid to non-accredited investors.

 

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The AOS Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The preliminary fair values of the acquired assets and liabilities as of the acquisition date were:

 

Consideration1

 $13,558,366 
     

Assets acquired:

    

Cash and cash equivalents

  200,661 

Accounts receivable

  665,961 

Prepaid and other assets

  443,428 

Inventory

  2,504,722 

PP&E, net

  16,622 

Intangibles

  17,309 

Right of use asset

  85,502 

Total assets acquired

  3,934,205 
     

Liabilities assumed:

    

Accrued liabilities

  61,064 

Accounts payable

  125,967 

Right of use liability

  87,539 

Total liabilities assumed

  274,570 
     

Net assets acquired

  3,659,635 
     

Goodwill

 $9,898,731 

 

The preliminary purchase price allocation is based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. The Company will utilize recognized valuation techniques as part of its final valuation of the AOS Acquisition, which is expected to be complete in Q4 2022. The above purchase price allocation is preliminary and subject to change as the Company may further refine the determination of certain assets during the measurement period of one year. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented.

 

Subsequent to the AOS Acquisition, during the period September 13, 2022 through September 30, 2022, AOS earned $216,892 in revenue and incurred a net loss of approximately $4,600.

 

The Company incurred approximately $845,000 in transaction costs related to the AOS Acquisition, primarily coming from legal, banking, accounting and other professional service fees.

 

The following unaudited proforma condensed consolidated results of operations have been prepared, as if the Acquisition had occurred as of July 1, 2022 and 2021, and January 1, 2022 and 2021, for the three and nine months ended September 30, 2020, respectively:

 

1 Of the $13,558,366 consideration payable, $950,000 is contingent upon AOS Stockholders meeting certain future sales metrics

 

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PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022

(Unaudited)

 

  

For the Three Months Ended September 30, 2022

 
  

Starco Brands Inc.

  

The AOS Group Inc.

  

Proforma Starco Brands Inc.

 
             

Revenue

 $1,441,361  $1,124,404  $2,565,765 
             

Net Income (Loss)

 $(17,578) $(1,575,417) $(1,592,995)

Net (income) attributable to non-controlling interest

 $(32,693) $-   (32,693)
             

Net Income (Loss) attributable to Starco Brands

 $(50,271) $(1,575,417) $(1,625,688)

 

 

  

For the Nine Months Ended September 30, 2022

 
  

Starco Brands Inc.

  

The AOS Group Inc.

  

Proforma Starco Brands Inc.

 
             

Revenue

 $3,594,854  $4,141,348  $7,736,202 
             

Net Income (Loss)

 $200,946  $(2,517,001) $(2,316,055)

Net (income) attributable to non-controlling interest

 $(67,856) $-   (67,856)
             

Net Income (Loss) attributable to Starco Brands

 $133,090  $(2,517,001) $(2,383,911)

 

 

  

For the Three Months Ended September 30, 2021

 
  

Starco Brands Inc.

  

The AOS Group Inc.

  

Proforma Starco Brands Inc.

 
             

Revenue

 $109,503  $2,364,997  $2,474,500 
             

Net Income (Loss)

 $(392,813) $(1,125,739) $(1,518,552)

Net (income) attributable to non-controlling interest

 $-  $-   - 
             

Net Income (Loss) attributable to Starco Brands

 $(392,813) $(1,125,739) $(1,518,552)

 

 

  

For the Nine Months Ended September 30, 2021

 
  

Starco Brands Inc.

  

The AOS Group Inc.

  

Proforma Starco Brands Inc.

 
             

Revenue

 $484,073  $8,354,867  $8,838,940 
             

Net Income (Loss)

 $(549,488) $(2,371,570) $(2,921,058)

Net (income) attributable to non-controlling interest

  -  $-   - 
             

Net Income (Loss) attributable to Starco Brands

 $(549,488) $(2,371,570) $(2,921,058)

 

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A pro forma balance sheet was excluded from this disclosure as the transaction is already reflected in the September 30, 2022 condensed consolidated balance sheets, given there were minimal adjustments to the September 12, 2022 AOS closing balance sheet.

 
 

NOTE 5 – NOTES PAYABLE

 

In September 2021, the Company received a financing loan for its Directors and Officers Insurance (“D&O”). The loan bears interest at 4.4% and required monthly payments through June 2022. The Company paid the $53,822 balance as of December 31, 2021 off before the maturity date in June 2022.

 

In September 2022, the Company received a second financing loan for its Directors and Officers Insurance. The loan bears interest at 5.82% and requires monthly payments through June, 2023. During the three and nine months ending September 30, 2022, the Company paid approximately $756 in interest on the loan. The outstanding balance of the loan is $92,334 as of September 30, 2022.

 

See Note 7 - Related Party Transactions for loans to STCB from the Company's CEO. 

 
 

NOTE 6 – COMMITMENTS & CONTINGENCIES

 

On February 18, 2020, STCB received a demand letter from a law firm representing certain individuals who purchased the Breathe brand home cleaning products. The demand letter alleged that STCB had unlawfully, falsely and misleadingly labeled and marketed the Breathe brand of products to consumers in violation of the Consumer Products Safety Act, the Federal Hazardous Substance Act and the FTC Act, as well as various California and New York laws. While STCB denied any wrongdoing, a settlement was reached and paid in full, with no further obligation required by STCB.

 

On September 8, 2021, Whipshots LLC, entered into an Intellectual Property Purchase Agreement (the “Whipshots IP Agreement”) effective August 24, 2021, with Penguins Fly, LLC, a Pennsylvania limited liability company (“Seller”). The Whipshots IP Agreement provided that Seller would sell Whipshots LLC (“Buyer”) the trademarks “Whipshotz” and “Whipshots,” accompanying domain and social media handles of the same nomenclature, and certain intellectual property, documents, digital assets, customer data and other transferable rights under non-disclosure, non-compete, non-solicitation and confidentiality contracts benefiting the purchased intellectual property and documents (collectively, the “Acquired Assets”). The purchase price (“Purchase Price Payment”) for the Acquired Assets is payable to Seller, over the course of seven years, based on a sliding scale percentage of gross revenues actually received by Buyer solely from Buyer’s sale of Whipshots/Whipshotz products. The Purchase Price Payment shall be subject to a minimum amount in each contract year and the maximum aggregate amount payable to Seller under the Whipshots IP Agreement between $140,000 and $2,000,000 based on revenues generated by the products. In connection with this agreement the Company paid $20,000 (the Purchase Price Payment) during 2021, which was recorded as an indefinite-lived intangible asset.

 

On September 14, 2021, the Whipshots LLC entered into a License Agreement (“Whipshots License Agreement”) with Washpoppin Inc., (“Licensor”) a New York corporation. Pursuant to the License Agreement, Licensor shall license to the Company certain Licensed Property (as defined in the Whipshots License Agreement) of the recording artist professionally known as “Cardi B” (the “Artist”). As part of the Whipshots License Agreement, in exchange for royalty rates based on Net Sales (as defined in the License Agreement) during each applicable contract period, the Licensor warrants to cause the Artist to attend certain in person events, media interviews, participate in the development of the Licensed Products (as defined in the Whipshots License Agreement), and promote the Licensed Products through social media posts on the Artist’s social media platforms. The Company, through Whipshots LLC has committed to a minimum royalty payment under the Whipshots License Agreement of $3,300,000 in aggregate through 2024, subject to Licensor’s satisfaction of its obligations. During the three and nine months ended September 30, 2022 the Company incurred expenses related to this agreement of approximately $127,000 and $281,000, respectively, and had a prepaid royalty balance of approximately $127,000 as of September 30, 2022.

 

Following the 18-month indemnification period of the AOS Acquisition, the Company will issue AOS Stockholders an aggregate 489,825 shares and $1,175 in cash that is currently being held back. Additionally, and contingent upon AOS meeting certain future sales metrics over the indemnification period, the Company will issue an additional 5,000,000 shares of its common stock to AOS Stockholders. As of September 30, 2022, the Company expects to pay the AOS Stockholders the contingent 5,000,000 shares of its common stock for meeting certain sales metrics.

 

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NOTE 7 – RELATED PARTY TRANSACTIONS

 

During the year ended December 31, 2017, Sanford Lang, the Company’s former Chairman and CEO, advanced STCB $289,821 to pay for general operating expenses. The advance required a monthly interest payment of $2,545 and was due on demand. In June 2021, Mr. Lang and Mr. Goldrod executed agreements with STCB whereby the advance from Mr. Lang and all other amounts owed to each were repaid and both Mr. Lang and Mr. Goldrod resigned from the Board of Directors. Further, for a period of 36 months beginning in July 2021, STCB will repurchase an aggregate of $10,950 worth of shares each month from Mr. Lang and Mr. Goldrod, with the share price for each purchase to be set according to the volume weighted average trading price of the common stock over the last 10 days of the month. In the three and nine months ended September 30, 2022 STCB paid an aggregate of $32,850 and $98,550 respectively, to Mr. Lang and Mr. Goldrod per the agreements and anticipates that the corresponding share transfers will be settled in 2022.

 

As of September 30, 2022, the Company owed TSG $72,843 for expenses paid by TSG on behalf of STCB for expenses to launch licensed brands. As royalties have exceeded $250,000 in the aggregate, once the Company has an adequate cash reserve, TSG may deduct the incurred expenses from the subsequent royalty payments until TSG is paid in full. In addition, STCB owes TSG and its subsidiaries an additional $211,945 for expenses paid on behalf of STCB or funds advanced to the Company to pay for other operating expenses. TSG is owned by STCB's CEO, Ross Sklar.

 

Ross Sklar, CEO Notes

 

On January 24, 2020, STCB executed a promissory note ( “January 24, 2020 Note”), for $100,000 with Ross Sklar, Chief Executive Officer (“CEO”) of STCB. The January 24, 2020 Note bears interest at 4% per annum, compounds monthly, is unsecured, and matures two years from the original date of issuance. On July 19, 2022, the Company and Ross Sklar, agreed to amend and restate the January 24, 2020 Note. Mr. Sklar agreed to extend the term of the January 24, 2020 Note through the entry into a First Amended and Restated Promissory Note (the "Amended Note") in exchange for the Company paying the accrued and unpaid interest under the January 24, 2020 Note, including during the period following maturity date of the January 24, 2020 Note ( January 24, 2022 to July 19, 2022). In exchange for extending the term, Mr. Sklar waived the default interest rate of ten percent (10%) and agreed to interest accrual at the standard four percent (4%) rate during the period following maturity. The Amended Note carries a guaranteed 4% interest rate, matures on July 19, 2024, and has a 10% interest rate on a default of repayment at maturity. The Company, at its option, may prepay the Amended Note, in whole or in part, without prepayment penalty of any kind, and the obligations under the Amended Note will accelerate in full upon an Event of Default (as defined in the Amended Note).  

 

On June 28, 2021, STCB executed an additional promissory note ( “June 28, 2021 Note”), with Mr. Sklar in the principal amount of $100,000 with the same terms as the January 24, 2020 Note and a maturity date of June 28, 2023.

 

On September 17, 2021, STCB executed a third promissory note ( “September 17, 2021 Note”), with Mr. Sklar in the principal amount of $500,000 with the same terms as the January 24, 2020 Note and a maturity date of September 17, 2023.

 

On December 13, 2021, STCB executed a fourth promissory note ( “December 13, 2021 Note”), with Mr. Sklar in the principal amount of $500,000 with the same terms as the January 24, 2020 Note and a maturity date of December 12, 2023.

 

On February 14, 2022, STCB executed a fifth promissory note ( “February 14, 2022 Note”), in favor of Mr. Sklar, in the principal sum of $472,500, in exchange for a cash advance in the amount of $300,000 and payment of Company costs in the amount of $172,500. As with the other notes between the Company and our CEO, the February 14, 2022 Note bears interest at 4% per annum, is unsecured, and matures two years from the original date of issuance. This note may also convert into shares of Company common stock at the 10-day volume weighted average trading price of the Company common stock for the 10-day period prior to the issuance of the Note, which was calculated as $0.29 per share.

 

Other Related Party Transactions

 

As of September 30, 2022, the outstanding principal due to Mr. Sklar is $1,672,500 with approximately $6,000 of accrued interest due on these notes.

 

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During the three and nine months ended September 30, 2022, the Company incurred $0 and $131,614 of marketing expense from The Woo. David Dryer, STCB's EVP of Marketing, was a Managing Director at The Woo until February 2022.

 

During the three and nine months ended September 30, 2022, and September 30, 2021, the Company recognized revenue from related parties of $1.4 million and $3.6 million, respectively, and $0.1 million and $0.5 million, respectively. There were $1.4 million and $174,059 of accounts receivable and accrued accounts receivable from TSG and Temperance Distilling Company (“Temperance”) as of September 30, 2022 and December 31, 2021, respectively. All revenues earned in relation to these accounts receivable is from related parties. Mr. Sklar serves as the Chairman of Temperance.

 

During the year ended December 31, 2021, the Company advanced $95,640 to Temperance as a note and related to its initial production of Whipshots, recorded as note receivable, related party in the Company’s consolidated balance sheets. The note carries no interest and is payable on demand. 

 

During the three and nine months ended September 30, 2022, the Company received contributed services at a value of approximately $38,500, and $141,000, respectively. Such costs have been expensed and recorded as additional paid-in capital in the period the services were provided.

 
 

NOTE 8 – STOCK WARRANTS

 

On October 20, 2021, the Company entered into an agreement with Evan Greene for services to be performed. As consideration therefor, the Company granted Mr. Greene stock warrants to purchase 250,000 shares of common stock. The warrants vest over a two-year term. The warrants were valued using the Black-Scholes option pricing model under the following assumptions as found in the table below.

 

On October 21, 2021, the Company entered into an agreement with Robert Floyd for services to be performed. As consideration therefor, the Company granted Mr. Floyd stock warrants to purchase 300,000 shares of common stock. The warrants vest over a three-year term. The warrants were valued using the Black-Scholes option pricing model under the following assumptions as found in the table below.

 

On September 12, 2022, the Company entered into agreements with members of the Board and consultants for services to be performed. As consideration therefor, the Company granted those individuals stock warrants to purchase an aggregate of 33,150,000 shares of common stock. The warrants vest over a three-year term and expire five years from the vesting date. The warrants were valued using the Black-Scholes option pricing model under the following assumptions as found in the table below.

 

              Risk-        
  Number of           free        
  Stock  Stock  Strike  Expected  Interest  Dividend Expected Fair 

Date

 

Warrants

  

Price

  

Price

  

Volatility

  

Rate

  

Rate

 

Term

 

Value

 

10/20/2021

  250,000  $1,00  $1,00   75.00

%

  0.77

%

  0.00

%

1.0 years

 $63,000 

10/21/2021

  300,000  $0.90  $0.90   75.00

%

  0.77

%

  0.00

%

1.0 years

 $93,917 

9/12/2022

  33,150,000  $0.19  $0.19   103.09

%

  3.47

%

  0.00

%

3.0 years

 $4,088,769 

 

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A summary of the status of the Company’s outstanding stock warrants and changes during the periods is presented below:

 

  Shares       
  available       
  to purchase  Weighted  Weighted 
  with  Average  Average 
  

warrants

  

Price

  

Fair Value

 

Outstanding, December 31, 2020

  2,000,000  $1.05  $0.003 

Issued

  550,000  $0.95  $0.023 

Exercised

  -  $-  $- 

Cancelled

  -  $-  $- 

Expired

  -  $-  $- 

Outstanding, December 31, 2021

  2,550,000  $1.03  $0.007 

Issued

  33,150,000  $0.19  $0.19 

Exercised

  -  $-  $- 

Cancelled

  -  $-  $- 

Expired

  -  $-  $- 

Outstanding, September 30, 2022

  35,700,000  $0.25   0.19 
             

Exercisable, September 30, 2022

  2,225,000  $1.03  $0.007 

 

The Company granted stock warrants to purchase an aggregate of 33,150,000 and no shares of common stock during the nine months ended September 30, 2022 and 2021, respectively.

 

The weighted average grant date fair value of stock warrants granted and vested during the nine months ended September 30, 2022, was $4,088,769 and $37,686 respectively. The Company did not grant any stock warrants or have any stock warrants vest during the nine months ended September 30, 2021. The weighted average non-vested grant date fair value of non-vested stock warrants was $4,093,771 at September 30, 2022.

 

The following table summarizes information about stock warrants to purchase shares of the Company’s common stock outstanding and exercisable as of September 30, 2022: 

 

        

Weighted-

  

Weighted-

     
        

Average

  

Average

     

Range of

  

Outstanding

  

Remaining Life

  

Exercise

  

Number

 

exercise prices

  

Warrants

  

In Years

  

Price

  

Exercisable

 
$1.05