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. Yes ☐
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).
Yes ☐
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 ☐
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 13, 2023, 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 30, 2023
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | ||||||||
| Accounts receivable, net, $ | ||||||||
| Prepaid expenses and other assets | ||||||||
| Inventory | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Note receivable, related party | ||||||||
| Total Assets | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | ||||||||
| Other payables and accrued liabilities | ||||||||
| Accrued interest, $ | ||||||||
| Fair value of potential Share Adjustment | ||||||||
| Treasury stock payable, current | ||||||||
| Notes payable, $ | ||||||||
| Line of Credit | ||||||||
| Lease liability | ||||||||
| Total Current Liabilities | ||||||||
| Treasury stock payable, net of current portion | ||||||||
| Loans payable, net of current portion, $ | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding, at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Class A common stock, $ par value; shares authorized; and shares issued and outstanding, at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Class B common stock, $ par value; shares authorized shares issued and outstanding, at September 30, 2023 and December 31, 2022, 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, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Revenue, $ | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Compensation expense | $ | $ | $ | $ | ||||||||||||
| Professional fees | ||||||||||||||||
| Marketing, general and administrative | ||||||||||||||||
| Marketing, related party | ||||||||||||||||
| Fair value share adjustment loss (gain) | ( | ) | ||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other Expense (Income): | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other expense (income) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other expense (income) | ||||||||||||||||
| Income (loss) before provision for income taxes | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Net income (loss) attributable to non-controlling interest | $ | |||||||||||||||
| Net income (loss) attributable to Starco Brands | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Income (loss) per share, basic | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Income (loss) per share, diluted | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Weighted Average Shares Outstanding – Basic | ||||||||||||||||
| Weighted Average Shares Outstanding – Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
STARCO BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Unaudited)
| Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid-in | Treasury | Accumulated | Non-controlling | Equity Consideration | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Interest | Payable | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | ) | ( | ) | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||
| Estimated fair value of contributed services and stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Estimated fair value of warrants issued | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||
| Estimated fair value of contributed services | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Estimated fair value of warrants issued | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for cash | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Recognition of deferred offering costs | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to stock payable | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||
| Estimated fair value of contributed services | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Estimated fair value of warrants issued | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to AOS acquisition | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Equity payable related to AOS acquisition | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||||||
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, 2023 AND 2022
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, 2023 | September 30, 2022 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (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, related party | ( | ) | ( | ) | ||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Operating lease right of use asset | ||||||||
| Accounts payable | ( | ) | ||||||
| Other payables and accrued liabilities, related party | ( | ) | ( | ) | ||||
| Other payables and accrued liabilities | ( | ) | ||||||
| Operating lease liability | ( | ) | ||||||
| Net Cash 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) Provided by Investing Activities | ( | ) | ||||||
| Cash Flows From Financing Activities: | ||||||||
| Advances / loans from related parties | ||||||||
| Issuance of common stock for business acquisition | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Proceeds from notes receivable | ||||||||
| Payments to notes payable | ( | ) | ( | ) | ||||
| Proceeds from Line of Credit | ||||||||
| Payment to Line of Credit | ( | ) | ||||||
| Proceeds from issuance of common stock | ||||||||
| Repurchase of common stock | ( | ) | ( | ) | ||||
| Net Cash Provided By Financing Activities | ||||||||
| Net Increase In Cash | ||||||||
| Cash - Beginning of Period | ||||||||
| Cash - End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Noncash operating and financing activities: | ||||||||
| Non-cash issuance of stock payable | $ | $ | ||||||
| Reclass of offering costs to additional paid-in capital | $ | $ | ||||||
| Estimated fair value of shares issued in 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, 2023 AND 2022
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Starco Brands, Inc. (STCB) was incorporated in the State of Nevada on January 26, 2010, under the name Insynergy, Inc. On September 7, 2017, STCB filed an Amendment to the Articles of Incorporation to change the corporate name to Starco Brands, Inc. The Board determined the change of STCB’s name was in the best interests of the Company due to changes in its current and anticipated business operations. In July 2017, STCB entered into a licensing agreement with The Starco Group (“TSG”), located in Los Angeles, California. The companies pivoted to commercializing novel consumer products manufactured by TSG. TSG is a private label and branded aerosol and liquid fill manufacturer with manufacturing assets in the following verticals: DIY/Hardware, paints, coatings and adhesives, household, hair care, disinfectants, automotive, motorcycle, arts & crafts, personal care cosmetics, personal care FDA, sun care, food, cooking oils, beverages, and spirits and wine.
During
the third quarter of 2021, STCB formed two subsidiaries, Whipshots, LLC, a Wyoming limited liability company (“Whipshots
LLC”) and Whipshots, LLC, a Delaware limited liability company that was subsequently renamed Whipshots Holdings, LLC (“Whipshots
Holdings”). Whipshots LLC was a wholly-owned subsidiary of STCB at formation which was subsequently contributed to Whipshots Holdings.
Whipshots Holdings is a majority-owned subsidiary of STCB in which STCB owns
On September 12, 2022, STCB, through its wholly-owned subsidiary Starco Merger Sub Inc. (“Merger Sub”), completed its acquisition (the “AOS Acquisition”) of The AOS Group Inc., a Delaware corporation (“AOS”). The AOS Acquisition consisted of Merger Sub merging with and into AOS, with AOS being the surviving corporation. AOS is a wholly-owned subsidiary of STCB.
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 condensed 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 directors 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 has an 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, 2023 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, 2022. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.
Use of Estimates
The preparation of 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, 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, and our relationships with, and the economic status of, our partners and customers. The allowance for uncollectible
amounts 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, 2023 and December 31, 2022.
| 9 |
The following table summarized the financial instruments of the Company at fair value based on the valuation approach applied to each class of security as of September 30, 2023:
| Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Carrying Value at September 30, 2023 | 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.
Property and Equipment, net
Property
and equipment is 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 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 at shipment to the retailer. Revenue from eCommerce sales, including Amazon Fulfillment 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.
Whipshots, a 96% owned subsidiary, earns its revenues through the sale of vodka infused whipped cream. Revenue from retail sales is recognized at shipment to the retailer. Revenue from eCommerce sales, is recognized upon shipment of merchandise.
The Company applies the following five-step model in order to determine this amount: (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.
| 10 |
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.
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 options 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, 2023.
Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Warrants | ||||||||
| Potential shares issuable under acquisition Share Adjustments | ||||||||
| Total | ||||||||
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Nine Months Ended September 30, |
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| 2023 | 2022 | |||||||
| Warrants | ||||||||
| Unvested compensation shares | ||||||||
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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 three and nine months ended September 30, 2023 and 2022, 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.
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, 2023 are approximately $
| 12 |
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
In accordance with ASC 842, Leases, the Company recognized a 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, 2023. 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 three or nine months ended September 30, 2023 and 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.
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 a reporting units’ fair value of goodwill is less than its carrying value.
| 13 |
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, 2023 | ||||||||||||||||
| Starco Brands | Skylar | Soylent1 | Total | |||||||||||||
| Gross revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||
| Starco Brands2 | Skylar3 | Soylent4 | Total | |||||||||||||
| Gross revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| 1 | ||
| 2 | ||
| 3 | ||
| 4 |
| 14 |
NOTE 5 – ACQUISITIONS
AOS 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 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 issued at $ per share, which amount was equal to the fair value of the stock on the acquisition date. As consideration for the Merger, the Company reserved an aggregate of restricted shares of Company common stock (now Class A common stock) to issue to the AOS stockholders (such stockholders as of immediately prior to the closing of the Merger, the “AOS Stockholders”), restricted shares of Class A 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 restricted shares of Class A 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 Class A common stock, which shall not exceed, in the aggregate, additional shares of Class A 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 Class A common stock at a value equal to $ per share.
The additional restricted shares of Class A common stock to be issued after an 18-month indemnification period are deemed to be part of the consideration paid for the acquisition. The earnout shares of Class A common stock to be issued are not deemed to be part of the consideration paid for the acquisition as management determined none of the earnout shares will be issued as sales metrics were not met. The additional shares of Class A 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, 2023, the Company has paid $
| 15 |
The AOS Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The preliminary fair values of the acquired assets and liabilities as of the acquisition date were:
| Consideration1 | $ | |||
| Assets acquired: | ||||
| Cash and cash equivalents | ||||
| Accounts receivable | ||||
| Prepaid and other assets | ||||
| Inventory | ||||
| PP&E, net | ||||
| Intangibles | ||||
| Right of use asset | ||||
| Total assets acquired | ||||
| Liabilities assumed: | ||||
| Accrued liabilities | ||||
| Accounts payable | ||||
| Right of use liability | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ||||
| Goodwill | $ |
| 1 |
The purchase price allocation is based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed from a final third-party valuation of the AOS Acquisition. The above purchase price allocation is final and not subject to further change.
The
Company incurred approximately $
Skylar 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. Skylar is a maker of fragrances that are hypoallergenic and safe for
sensitive skin. Starco Brands acquired Skylar as STCB is always looking for technologies and brands that have the ability to scale
and change behavior. In the world of fragrances, there are no other brands that have successfully built clean, beautiful, premium
incredibly well-scented and recyclable fragrance brands for consumers. Starco Brands, through its relationship with TSG and other
strong partners, the Company has access to intellectual property that will allow Skylar to vertically integrate manufacturing and
expand, positioning Skylar to be the future of fragrance. The Skylar Acquisition was completed through a cash and stock deal, where
the Company paid $
| 16 |
The additional restricted shares of Class A common stock to be issued after an 18-month indemnification period and the earnout shares of Class A common stock to be issued if certain future sales metrics are met, are deemed to be part of the consideration paid for the acquisition.
As
of September 30, 2023, the Company has paid $
The Skylar Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The preliminary fair values of the acquired assets and liabilities as of the acquisition date were:
| Consideration1 | $ | |||
| Assets acquired: | ||||
| Cash and cash equivalents | ||||
| Accounts receivable | ||||
| Prepaid and other assets | ||||
| Inventory | ||||
| PP&E, net | ||||
| Intangibles | ||||
| Customer relationships2 | ||||
| Trade names and trademarks3 | ||||
| Total assets acquired | ||||
| Liabilities assumed: | ||||
| Accrued liabilities | ||||
| Accounts payable | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ||||
| Goodwill | $ |
| 1 | ||
| 2 | ||
| 3 |
The purchase price allocation is based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed from a final valuation of the Skylar Acquisition. 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.
The
Company incurred approximately $
| 17 |
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 $
The Soylent Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The preliminary fair values of the acquired assets and liabilities as of the acquisition date were:
| Consideration1 | $ | |||
| Assets acquired: | ||||
| Cash and cash equivalents | ||||
| Accounts receivable | ||||
| Prepaid and other assets | ||||
| Inventory | ||||
| PP&E, net2 | ||||
| Intangibles3 | ||||
| Total assets acquired | ||||
| Liabilities assumed: |