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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, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-54892

 

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   90402
(Address of principal executive offices)   (Zip Code)

 

(323) 266-7111

(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
Class A Common Stock   STCB   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 ☐ 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 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, 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 ☐
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 stock, as of the last practicable date: As of November 13, 2023, there were 469,631,464 shares of the registrant’s Class A common stock and zero 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

 

    Page
PART I. FINANCIAL INFORMATION 3
     
ITEM 1. Financial Statements 3
     
  Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 3
     
  Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022 4
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022 5
     
  Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2023 and 2022 6
     
  Notes to Unaudited Condensed Consolidated Financial Statements 7
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 41
     
ITEM 4. Controls and Procedures 41
     
PART II. OTHER INFORMATION 42
     
ITEM 1. Legal Proceedings 42
     
ITEM 1A. Risk Factors 42
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
     
ITEM 3. Defaults Upon Senior Securities 42
     
ITEM 4. Mine Safety Disclosures 43
     
ITEM 5. Other Information 43
     
ITEM 6. Exhibits 43
     
SIGNATURES 45

 

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   1,545,879    1,480,371 
Accounts receivable, net, $2,625,713 and $2,107,015 from related party, respectively   10,570,541    2,555,525 
Prepaid expenses and other assets   1,848,888    902,090 
Inventory   19,228,288    3,033,653 
Total Current Assets   33,193,596    7,971,639 
           
Property and equipment, net   40,323    25,873 
Operating lease right-of-use assets   -    61,353 
Intangibles, net   31,950,516    198,403 
Goodwill   58,081,660    32,836,563 
Note receivable, related party   -    95,640 
           
Total Assets   123,266,095    41,189,471 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities:          
Accounts payable   12,318,815    3,245,573 
Other payables and accrued liabilities   2,133,861    1,135,803 
Accrued interest, $5,681 and $6,960 from related party, respectively   42,134    6,960 
Fair value of potential Share Adjustment   39,894,720    - 
Treasury stock payable, current   98,550    131,400 
Notes payable, $472,500 and $2,475,033 from related party, respectively   587,840    3,109,535 
Line of Credit   4,663,500    - 
Lease liability   -    61,605 
Total Current Liabilities   59,739,420    7,690,876 
           
           
Treasury stock payable, net of current portion   -    65,700 
Loans payable, net of current portion, $4,000,000 and $572,500 from related party, respectively   4,000,000    572,500 
Total Liabilities   63,739,420    8,329,076 
           
Commitments and Contingencies   -    - 
           
Stockholders’ Equity:          
Preferred stock, $.001 par value; 40,000,000 shares authorized; no shares issued and outstanding, at September 30, 2023 and December 31, 2022, respectively   -    - 
Class A common stock, $.001 par value; 1,700,000,000 shares authorized; 469,631,464 and 291,433,430 shares issued and outstanding, at September 30, 2023 and December 31, 2022, respectively   469,631    291,433 
Class B common stock, $.001 par value; 300,000,000 shares authorized no shares issued and outstanding, at September 30, 2023 and December 31, 2022, respectively   -    - 
Additional paid in capital   72,770,376    43,332,886 
Treasury stock at cost   (394,200)   (394,200)
Equity consideration payable   9,417,847    7,114,513 
Accumulated deficit   (22,990,975)   (17,578,219)
Total Starco Brands’ Stockholders’ Equity   59,272,679    32,766,413 
           
Non-controlling interest   253,996    93,982 
Total Stockholders’ Equity   59,526,675    32,860,395 
           
Total Liabilities and Stockholders’ Equity   123,266,095    41,189,471 

 

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)

 

   September 30, 2023   September 30, 2022   September 30, 2023   September 30, 2022 
   For the Three Months Ended   For the Nine Months Ended 
   September 30, 2023   September 30, 2022   September 30, 2023   September 30, 2022 
                 
Revenue, $2,463,542 and $8,201,377 from related parties, for the three and nine months ended September 30, 2023, respectively, $1,441,361 and $3,594,854 from related parties for the three and nine months ended September 30, 2022, net  $17,673,046   $1,658,253   $46,326,117   $3,811,746 
                     
Cost of goods sold   9,364,322    343,994    24,710,535    343,994 
                     
Gross profit  $8,308,724   $1,314,259   $21,615,582   $3,467,752 
                     
Operating Expenses:                    
Compensation expense  $1,811,832   $176,148   $5,285,421   $395,974 
Professional fees   1,380,680    884,558    4,177,424    1,122,532 
Marketing, general and administrative   5,522,525    364,331    14,248,632    1,677,991 
Marketing, related party   -    -    -    131,614 
Fair value share adjustment loss (gain)   (3,144,411)   -    2,751,360    - 
Total operating expenses   5,570,626    1,425,037    26,462,837    3,328,111 
                     
Income (loss) from operations   2,738,098    (110,778)   (4,847,255)   139,641 
                     
Other Expense (Income):                    
Interest expense    255,775    15,232    617,289    47,127 
Other expense (income)   121,072    (8,161)   (211,802)   (8,161)
Total other expense (income)   376,847    7,071    405,487    38,966 
                     
Income (loss) before provision for income taxes  $2,361,251   $(117,849)  $(5,252,742)  $100,675 
Provision for income taxes   -    -    -    - 
                     
Net income (loss)  $2,361,251   $(117,849)  $(5,252,742)  $100,675 
Net income (loss) attributable to non-controlling interest   34,221    32,693   160,014   $67,856
                     
Net income (loss) attributable to Starco Brands  $2,327,030   $(150,542)  $(5,412,756)  $32,819 
                     
Income (loss) per share, basic  $0.00   $(0.00)  $(0.01)  $0.00 
Income (loss) per share, diluted  $0.00   $(0.00)  $(0.01)  $0.00 
                     
Weighted Average Shares Outstanding – Basic   469,550,215    172,236,263    439,484,590    163,557,744 
Weighted Average Shares Outstanding – Diluted   873,264,758    172,236,263    439,484,590    163,885,661 

 

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)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Stock   Deficit   Interest   Payable   (Deficit) 
   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      -          -    159,140,665   $159,141        -   $       -    15,950,403    (394,200)   (18,388,186)   (73,909)   -   $(2,746,751)
                                                             
Estimated fair value of contributed services and stock-based compensation   -    -    -    -    -    -    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    -    -    263,641    -    -    -    -    263,857 
                                                             
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    -    -    600,000    -    -    -    -    600,729 
                                                             
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 payable 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 
                                                             
Balance at December 31, 2022   -    -    291,433,430    291,433    -    -    43,332,886    (394,200)   (17,578,219)   93,982    7,114,513    32,860,395 
                                                             
Estimated fair value of contributed services and stock-based compensation   -    -    81,249    81    -    -    480,718    -    -    -    -    480,799 
                                                             
Issuance of shares from Soylent acquisition   -    -    177,954,287    177,955    -    -    26,515,189    -    -    -    -    26,693,144 
                                                             
Equity payable from Soylent acquisition   -    -    -    -    -    -    -    -    -    -    2,785,714    2,785,714 
                                                             
Skylar purchase price acquisition adjustments   -    -    -    -    -    -    -    -    -    -    (482,380)   (482,380)
                                                             
Net income   -    -    -    -    -    -    -    -    (1,721,546)   58,416    -    (1,663,130)
                                                             
Balance at March 31, 2023   -   $-    469,468,966   $469,469    -   $-   $70,328,793   $(394,200)  $(19,299,765)  $152,398   $9,417,847   $60,674,542 
                                                             
Estimated fair value of contributed services and stock-based compensation   -    -    81,249    81    -    -    538,957    -    -    -    -    539,038 
                                                             
Soylent acquisition measurement period adjustment   -    -    -    -    -    -    (38,041)   -    -    -    -    (38,041)
                                                             
Net income   -    -    -    -    -    -    -    -    (6,018,240)   67,377    -    (5,950,863)
                                                             
Balance at June 30, 2023   -   $-    469,550,215   $469,550.00    -   $-   $70,829,709   $(394,200)  $(25,318,005)  $219,775   $9,417,847   $55,224,676 
                                                             
Estimated fair value of contributed services and stock-based compensation   -    -    81,249   $81    -    -    477,319    -    -    -    -    477,400 
                                                             
Soylent acquisition measurement period adjustment   -    -    -    -    -    -    1,463,348    -    -    -    -    1,463,348 
                                                             
Net income   -    -    -    -    -    -    -    -    2,327,030    34,221    -    2,361,251 
                                                             
Balance at September 30, 2023   -   $-    469,631,464   $469,631    -   $-   $72,770,376   $(394,200)  $(22,990,975)  $253,996   $9,417,847   $59,526,675 

 

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)

 

   September 30, 2023   September 30, 2022 
   For the Nine Months Ended 
   September 30, 2023   September 30, 2022 
Cash Flows From Operating Activities:          
Net (loss) income  $(5,252,742)  $100,675 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Contributed services   45,450    384,076 
Stock based compensation   1,440,175    136,940 
Depreciation   12,718   4,202 
Amortization of intangible assets   1,728,995    6,013 
Amortization of debt discount   70,751    - 
Loss on stock payable share adjustment   2,751,360    - 
Changes in operating assets and liabilities:          
Accounts receivable, related party   (70,188)   (1,186,398)
Accounts receivable   (2,327,559)   57,800 
Prepaid expenses and other assets   98,634    662,756 
Inventory   (1,630,204)   (54,513)
Operating lease right of use asset   61,353    - 
Accounts payable   2,512,173    (174,733)
Other payables and accrued liabilities, related party   (1,279)   (21,745)
Other payables and accrued liabilities   335,148    (548,607)
Operating lease liability   (61,605)   - 
           
Net Cash Used In Operating Activities   (286,820)   (633,533)
           
Cash Flows From Investing Activities:          
Cash acquired in Acquisition of Business, net of cash paid   68,062    193,670 
Purchases of intangibles   (233,108)   - 
Purchases of property & equipment   (18,600)   - 
           
Net Cash (Used In) Provided by Investing Activities   (183,646)   193,670 
           
Cash Flows From Financing Activities:          
Advances / loans from related parties   800,000    480,906 
Issuance of common stock for business acquisition   (177,954)   - 
Proceeds from notes payable   115,340    92,334 
Proceeds from notes receivable   95,640    - 
Payments to notes payable   (62,002)   (53,822)
Proceeds from Line of Credit   1,220,000    - 
Payment to Line of Credit   (1,356,500)   - 
Proceeds from issuance of common stock   -    150,494 
Repurchase of common stock   (98,550)   (98,550)
           
Net Cash Provided By Financing Activities   535,974    571,362 
           
Net Increase In Cash   65,508    131,499 
           
Cash - Beginning of Period   1,480,371    338,863 
           
Cash - End of Period  $1,545,879   $470,362 
           
Supplemental Cash Flow Information:          
Cash paid for:          
Interest paid  $460,029   $55,584 
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 acquisitions  $28,118,450   $13,557,191 
Estimated fair value of shares payable to be issued for acquisitions  $39,929,075   $- 
Debt discount on notes payable issued with warrants  $18,282   $- 

 

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 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.

 

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 53.47% of the Company’s outstanding common stock adopted the Amended and Restated Articles. On February 9, 2023, the Company filed the Amended and Restated Articles, which, among other things, (i) increased the authorized shares of common stock, par value $0.001 per share, from 300,000,000 shares (the “Old Common Stock”) to 2,000,000,000 shares, (ii) established two classes of Common Stock, consisting of (y) 1,700,000,000 shares of Class A common stock, par value $0.001 per share (“Class A common stock”), and (z) 300,000,000 shares of Class B common stock, par value $0.001 per share and (iii) reclassified all issued, outstanding or authorized Old Common Stock of the Company into Class A common stock on a one-for-one basis. As a result, following the filing of the Amended and Restated Articles with the Nevada Secretary of State, the Company’s prior “common stock” was renamed Class A common stock on its trading symbol.

 

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 $23.0 million at September 30, 2023 including the impact of its net loss of approximately $5.3 million for the nine months ended September 30, 2023. Net cash used in operating activities was $0.3 million for the nine months ended September 30, 2023. The Company’s ability to continue with this trend is unknown. On August 8, 2023, the Company restructured and consolidated $4.0 million of notes payable to Ross Sklar into a single maturity date and interest rate. All incorporated notes were restructured into the Consolidated Secured Promissory Note with interest-only payments through December 31, 2024 and at that time the $4.0 million will be due in full (refer to Note 8). The Company’s ability to raise additional capital through the future issuances of common stock and/or debt financing is unknown. 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 within one year after the date the financial statements are issued. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these uncertainties.

 

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 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, 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 no cash equivalents as of September 30, 2023 or December 31, 2022.

 

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 $358,318 and zero as of September 30, 2023 and December 31, 2022.

 

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:

  

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)

 
       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  $39,894,720   $      -   $         -   $39,894,720 
Total Liabilities  $39,894,720   $-   $-   $39,894,720 

 

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 $2,000 or greater are capitalized. 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 assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations.

 

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.

 

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 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.

 

The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to the Company’s net loss position even though the exercise price could be less than the average market price of the common stock:

 

   2023   2022 
  

Three Months Ended

September 30,

 
   2023   2022 
Warrants   39,350,000    - 
Potential shares issuable under acquisition Share Adjustments   325,785,637    - 
Total   365,135,637    - 

 

    2023     2022  
   

Nine Months Ended

September 30,

 
    2023     2022  
Warrants     -       35,700,000  
Unvested compensation shares     -       352,087  
Total     -       36,404,174  

 

11

 

 

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 10-16 years.

 

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 $275,000, $1,670,000 and $20,000 for the years ending December 31, 2023, 2024, and 2025, respectively.

 

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 2 years, for approximately 1,372 square feet of office space located in West Hollywood, California. The lease expired in September 2023 and had a monthly base rental of $7,564 which increased 4% each year. At the end of the lease term in September 2023, the Company did not renew the lease. In March 2022, AOS entered into a sublease, whereby, the sublessor took 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 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.

 

No impairment losses related to goodwill were recognized for the nine months ended September 30, 2023 and 2022. As of September 30, 2023 and December 31, 2022 goodwill was $58,081,660 and $32,836,563, respectively.

 

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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:

 

   Starco Brands   Skylar   Soylent1   Total 
   Nine Months Ended September 30, 2023 
   Starco Brands   Skylar   Soylent1   Total 
Gross revenues  $11,326,255   $7,438,654   $27,561,208   $46,326,117 
Cost of revenues   2,561,347    1,837,379    20,311,809    24,710,535 
Gross profit  $8,764,908   $5,601,275   $7,249,399   $21,615,582 

 

   Starco Brands2   Skylar3   Soylent4   Total 
   Nine Months Ended September 30, 2022 
   Starco Brands2   Skylar3   Soylent4   Total 
Gross revenues  $3,811,746   $       -   $       -   $3,811,746 
Cost of revenues   343,994    -    -    343,994 
Gross profit  $3,467,752   $-   $-   $3,467,752 

 

1   The Company does not include results for Soylent prior to the date of acquisition, February 15, 2023, as Soylent was not yet a subsidiary of the Company.
     
2   The Company does not include results for AOS within the Starco Brands segment prior to the date of acquisition, September 12, 2022, as AOS was not yet a subsidiary of the Company.
     
3   The Company does not report results for Skylar prior to the date of acquisition, December 29, 2022, as Skylar was not yet a subsidiary of the Company.
     
4   The Company does not report results for Soylent prior to the date of acquisition, February 15, 2023, as Soylent was not yet a subsidiary of the Company.

 

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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 $0.19 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 61,400,000 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”), 5,000,000 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 5,000,000 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, 5,000,000 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 $0.0982 per share.

 

The 5,000,000 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 5,000,000 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 5,000,000 earnout shares will be issued as sales metrics were not met. The 5,000,000 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 $1,821 in cash to non-accredited investors. Additionally, the Company has held back $6,137 in cash, the equivalent of 62,499 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  $12,608,560 
      
Assets acquired:     
Cash and cash equivalents   200,661 
Accounts receivable   153,764 
Prepaid and other assets   167,565 
Inventory   656,448 
PP&E, net   16,622 
Intangibles   17,309 
Right of use asset   85,502 
Total assets acquired   1,297,871 
      
Liabilities assumed:     
Accrued liabilities   562,919 
Accounts payable   128,724 
Right of use liability   87,539 
Total liabilities assumed   779,182 
      
Net assets acquired   518,689 
      
Goodwill  $12,089,871 

 

1   Consideration consists of the following: $1,821 cash paid to sellers at the acquisition date, $11,654,452 of shares transferred to sellers at the acquisition date, $4,147 of cash to be paid to sellers, $1,990 of cash holdback to be paid to sellers at the end of the holdback period and $946,149 of equity holdback to be paid to sellers at the end of the holdback period, which is 18-month holdback period from the date of the AOS Acquisition.

 

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

 

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 $2,000,000 in cash to settle debt and the Company’s common stock (now Class A common stock) was issued at $0.20 per share, which amount was equal to the fair value of the stock on the acquisition date. As consideration for the Skylar Acquisition, the Company reserved an aggregate of 68,622,219 restricted shares of Class A common stock to issue to the Skylar stockholders (such stockholders as of immediately prior to the closing of the Second Merger, the “Skylar Stockholders”), 19,268,162 restricted shares of Class A common stock may be issued to the Skylar 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 Skylar Stockholders. An additional 11,573,660 restricted shares of Class A common stock may be issued to Skylar Stockholders contingent upon Skylar meeting certain future sales metrics. Further, in the event that the Skylar Stockholders have any indemnity claims against the Company or Second 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, 19,268,162 additional shares of Class A common stock. Notwithstanding the foregoing, under the terms of the Merger Agreement, any Skylar Stockholder that is not an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act, will receive cash in lieu of shares of Company common stock at a value equal to $0.17 per share.

 

16

 

 

The 19,268,162 additional restricted shares of Class A common stock to be issued after an 18-month indemnification period and the 11,573,660 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 $27,273 in cash to non-accredited investors.

 

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  $21,417,681 
      
Assets acquired:     
Cash and cash equivalents   339,679 
Accounts receivable   381,762 
Prepaid and other assets   701,566 
Inventory   2,508,287 
PP&E, net   25,942 
Intangibles   161,693 
Customer relationships2   2,091,000 
Trade names and trademarks3   6,557,000 
Total assets acquired   12,766,929 
      
Liabilities assumed:     
Accrued liabilities   540,036 
Accounts payable   2,425,524 
Total liabilities assumed   2,965,560 
      
Net assets acquired   9,801,369 
      
Goodwill  $11,616,312 

 

1   Consideration consists of the following: $2,039,345 cash paid to sellers at the acquisition date, $13,120,924 of shares transferred to sellers at the acquisition date, $571,428 of shares transferred to pay sellers expenses, $2,314,732 of equity holdback to be paid to sellers at the end of the holdback period and $3,371,252 of contingent shares payable.
2   Based on the valuation of the Skylar Acquisition, customer relationships, a new intangible asset was identified, and given a fair value of $2,091,000. The customer relationships intangible asset will be amortized over a period of 10 years.
3   Based on the valuation of the Skylar Acquisition, trade names and trademarks, a new intangible asset was identified, and given a fair value of $6,557,000. The trade names and trademarks intangible asset will be amortized over a period of