Starco Brands Inc

Previous wording

For more information and to view our products, you may visit our websites at www.starcobrands.com, www.breathecleaning.com, www.breathesanitizer.com, www.whipshots.com, www.bingeworthyflavor.com, www.artofsport.com, www.skylar.com and www.soylent.com. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Quarterly Report.

Current wording

For more information and to view our products, you may visit our websites at www.starcobrands.com, www.whipshots.com, www.bingeworthyflavor.com, www.artofsport.com, www.skylar.com and www.soylent.com. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Quarterly Report.

Previous wording

For the three months ended March 31, 2024, compensation expense increased $1,149,111, or 81% to $2,574,728 compared to $1,425,617 for the three months ended March 31, 2023. The increase is a result of increases in warrant-based expense on independent contractors and the addition of compensation costs from the acquisitions of AOS, Skylar and Soylent.

Current wording

For the three months ended June 30, 2024, compensation expenses increased $387,976, or 19%, to $2,435,948 from $2,047,972 for the three months ended June 30, 2023; the increase is a result of converting a portion of independent contractors to full-time employees.

Previous wording

For the three months ended March 31, 2024, the Company incurred $1,196,118 in professional fees compared to $1,399,302 in the prior period, a decrease of $203,184, or 15%. Professional fees are mainly for contractors, accounting, auditing and legal services associated with business operations, merger activity, and our quarterly filings as a public company, and advisory and valuation services. The increase in the current period ended March 31, 2024 2023 is primarily due to an increase in contractor fees, banking, legal, and audit fees related to the acquired businesses Soylent, Skylar, and AOS.

Current wording

For the three months ended June 30, 2024, the Company incurred $1,140,792 in professional fees compared to $1,397,442 in the prior period for a decrease of $256,650, or 18%. Professional fees are mainly for contractors, accounting, auditing and legal services associated with business operations, merger activity, and our quarterly filings as a public company, and advisory and valuation services. The decrease is primarily due to a decrease in expenses (contractor fees, banking, legal, and audit fees) related to the acquisition of Soylent, Skylar, and AOS in the current period than in the prior year period.

Previous wording

For the three months ended March 31, 2024, the Company incurred a fair value share adjustment loss of $1,921,949. This was due to an increase in the fair value of the Soylent sellers’ rights to potentially receive additional Starco shares, increasing from $0.136 per share as of December 31, 2023 to $0.204 per share as of March 31, 2024.

Current wording

For the three months ended June 30, 2024, the Company incurred a fair value share adjustment loss of $8,675,565; such was due to an increase in the fair value of the Soylent sellers’ rights to potentially receive additional Starco shares, increasing from $0.204 per share as of March 31, 2024 to $0.235 per share as of June 30, 2024.

Previous wording

For the three months ended March 31, 2024, we had total other expense of $275,952 compared to total other expense of $30,442 for the three months ended March 31, 2023. For the three months ended March 31, 2024, the Company had interest expense of $199,173 compared to interest expense of $97,313 for the three months ended March 31, 2023. For the three months ended March 31, 2024, the Company had other expense of $76,779 compared to $66,871 of other income for the three months ended March 31, 2023.

Current wording

For the three months ended June 30, 2024, we had total other expense of $493,535 compared to total other income of $1,802 for the three months ended June 30, 2023. For the three months ended June 30, 2024, the Company had interest expense and other expense of $208,976 and $284,559, respectively, compared to interest expense and other income of $264,201 and $266,003, respectively, for the three months ended June 30, 2023.

Previous wording

For the three months ended March 31, 2024, the Company recorded net loss of $4,462,678 as compared to a net loss of $1,721,546 for the three months ended March 31, 2023. The increase in net loss to net income is primarily due to a loss on the change in fair value of the stock payable for shares due to Soylent Stockholders, in addition to increases in expenses from the acquired businesses AOS, Skylar and Soylent.

Current wording

For the three months ended June 30, 2024, the Company recorded net loss of $11,559,482 as compared to a net loss of $6,018,240 for the three months ended June 30, 2023. The increase in net loss is primarily due to a loss on the change in fair value of the stock payable for shares due to Soylent Stockholders, in addition to increases in expenses from the acquired businesses AOS, Skylar and Soylent.

Previous wording

For the three months ended March 31, 2024 the Company incurred $5,315,953 in marketing, general and administrative expense as compared to $3,332,165 for the three months ended March 31, 2023, an increase of $1,983,788, or 60%. The increase can be attributed to addition of the acquired businesses and an increase in spending on marketing and increased amortization expense.

Current wording

For the six months ended June 30, 2024, the Company incurred $9,836,631 in marketing, general and administrative expense compared to $7,991,772 for the six months ended June 30, 2023 for an increase of $1,844,859, or 23%. The increase can be attributed to the addition of the acquired businesses and an increase in spending on marketing and increased amortization expense.

Previous wording

As reflected in the accompanying condensed consolidated financial statements, the Company has an accumulated deficit of $68.2 million at March 31, 2024. Our net cash used in financing activities was $763,219 for the three months ended March 31 2024, due primarily to payments on the line of credit and notes payable of approximately $876,000, offset by proceeds from notes payable of approximately $113,000. This compared to net cash used in financing activities of $395,126, for the three months ended March 31, 2023, due primarily to $1.2 million of repayments of notes payable and $800,000 of loan advances from Sklar.

Current wording

As reflected in the accompanying condensed consolidated financial statements, the Company has an accumulated deficit of approximately $80.0 million at June 30, 2024. Our net cash provided by financing activities was $206,614 for the six months ended June 30, 2024, due primarily to proceeds from a revolving loan and note payable of approximately $6,200,000, offset by payments toward lines of credit and notes payable of approximately $5,800,000. This compared to net cash provided by financing activities of $311,438 for the six months ended June 30, 2023, due primarily to proceeds from lines of credit and advances from related parties of approximately $1.8 million, offset by repayments on lines of credit of approximately $1.4 million.

Previous wording

Our net cash provided by operating activities was $822,453 for the three months ended March 31, 2024. Operating expenses for the three months ended March 31, 2024 totaling $11,202,903 include items such as marketing and administrative costs, consultant compensation, insurance, legal and other professional fees, compliance, website maintenance and loss on share fair value adjustment.

Current wording

Our net cash provided by operating activities was $124,729 for the six months ended June 30, 2024. Operating expenses for the six months ended June 30, 2024 totaling $27,781,731 include items such as marketing and administrative costs, consultant compensation, insurance, legal and other professional fees, compliance, website maintenance and loss on share fair value adjustment.

Previous wording

On August 11, 2023, we issued to Sklar a consolidated secured promissory note (the “Consolidated Secured Promissory Note”) in the principal sum of $4,000,000, with a maturity date of December 31, 2024. The Consolidated Secured Promissory Note carries a floating interest rate comprised of the Wall Street Journal Prime Rate (re-assessed on the first date of each month (plus 2%), and is secured by an amended and restated consolidated security agreement (the “Amended and Restated Consolidated Security Agreement”), by and between the Company and Sklar, dated August 11, 2023, The Consolidated Secured Promissory Note consolidated the outstanding loan obligations of the Company to Sklar evidenced pursuant to (i) the January 24, 2020 Amended Note, (ii) the June 28, 2021 Note, (iii) the September 17, 2021 Note, (iv) the December 13, 2021 Note, (v) the December 29, 2022 Note, and (vi) the March 3, 2023 Note. The Amended and Restated Consolidated Security Agreement merged and integrated the December 29, 2022 Security Agreement and the March 3, 2023 Security Agreement, and provides a security interest in the Collateral (as defined in the Amended and Restated Consolidated Security Agreement) to secure the repayment of all principal, interest, costs, expenses and other amounts then or thereafter due under the Consolidated Secured Promissory Note until by the maturity date. Sklar was authorized to file financing statements to perfect the security interest in the Collateral without authentication by the Company. The following table represents Prior Notes that were part of the restructuring and related prior and updated terms (under the Consolidated Secured Promissory Note):

Current wording

On August 11, 2023, the Company issued to Sklar a consolidated secured promissory note (the “Consolidated Secured Promissory Note”) in the principal sum of $4,000,000, with a maturity date of December 31, 2024. The Consolidated Secured Promissory Note carries a floating interest rate comprised of the Wall Street Journal Prime Rate (re-assessed on the first date of each month (plus 2%), and is secured by an amended and restated consolidated security agreement (the “Amended and Restated Consolidated Security Agreement”), by and between the Company and Sklar, dated August 11, 2023, The Consolidated Secured Promissory Note consolidated the outstanding loan obligations of the Company to Sklar evidenced pursuant to (i) the January 24, 2020 Amended Note, (ii) the June 28, 2021 Note, (iii) the September 17, 2021 Note, (iv) the December 13, 2021 Note, (v) the December 29, 2022 Note, and (vi) the March 3, 2023 Note, as summarized in the table below. The Amended and Restated Consolidated Security Agreement merged and integrated the December 29, 2022 Security Agreement and the March 3, 2023 Security Agreement, and provides a security interest in the Collateral (as defined in the Amended and Restated Consolidated Security Agreement) to secure the repayment of all principal, interest, costs, expenses and other amounts then or thereafter due under the Consolidated Secured Promissory Note until by the maturity date. Sklar was authorized to file financing statements to perfect the security interest in the Collateral without authentication by the Company. The following table represents Prior Notes that were part of the restructuring and related prior and updated terms (under the Consolidated Secured Promissory Note):

Previous wording

On May 10, 2024, the Company and Sklar entered into an amendment to the February 14, 2022 Note to extend the maturity date of the February 14, 2022 Note to December 31, 2024.

Current wording

The Company also issued a February 14, 2022 Note to Sklar in the principal amount of $472,500 that was not included in the note consolidation. On May 10, 2024, the Company and Sklar entered into an amendment to the February 14, 2022 Note to extend the maturity date of the February 14, 2022 Note to December 31, 2024. The February 14, 2022 Note bore interest at 4% per annum, was unsecured, and was to mature two years from the original date of issuance. This note may also convert into shares of Company common stock at the 10-day volume weighted average trading price of the Company common stock for the 10-day period prior to the issuance of the Note, which was calculated as $0.29 per share. The February 14, 2022 Note has been repaid in full and the Company has no further obligations under such note.

Previous wording

The unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company identified that a substantial doubt exists related to the Company’s ability to meet its obligations as they become due within one year of the date of the financial statements being issued. Principal conditions that gave rise to this substantial doubt include historical net losses as indicated by the Company’s accumulated deficit of approximately $68,000,000 at March 31, 2024, which includes the impact of its net loss of $4,270,556 for the three months ended March 31, 2024, and total debt on the balance sheet of $7,631,247 as of March 31, 2024, with all debt coming due within one year of the date of the financial statements being issued. Management evaluated the principal conditions that initially give rise to the substantial doubt and note that the historical net losses and accumulated deficit impact are justified as they are primarily made up of non-cash expenses or one-time non-recurring expenses, such as goodwill impairment, stock-based compensation expense, fair value share adjustment loss and acquisition transaction expenses. Total debt of $7,631,247 on the balance sheet as of March 31, 2024 includes $4,472,500 of notes payable to Ross Sklar (“Sklar”), who has a large minority ownership of the Company that provides incentive for Mr. Sklar to extend or refinance the notes before the notes become due, as seen historically (see Note 8). Management plans include (i) continuing to increase net cash provided by operating activities, which was $822,453 for the three months ended March 31, 2024, while decreasing net cash provided by financing activities, and (ii) obtaining an alternative financing source to pay off all current debt outstanding and to provide additional working capital, if needed. To achieve these objectives, management has proposed and approved plans to increase top line revenue for each segment while decreasing overall expenses as a percentage of revenue, as a result of realizing synergies from the acquisitions of AOS, Skylar and Soylent, and utilizing the Company’s back-end shared service model to reduce expenses. The Company is in ongoing negotiations to obtain additional financing to repay historical debt and provide additional working capital. These conditions and the ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the aforementioned uncertainties.

Current wording

The unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company identified that a substantial doubt exists related to the Company’s ability to meet its obligations as they become due within one year of the date of the financial statements being issued. Principal conditions that gave rise to this substantial doubt include historical net losses as indicated by the Company’s accumulated deficit of approximately $80,000,000 at June 30, 2024, which includes the impact of its net losses of $11,068,998 and $15,063,602 for the three and six months ended June 30, 2024, and total debt on the balance sheet of $8,616,764 as of June 30, 2024, with a small portion of the debt coming due within one year of the date of the financial statements being issued. Management evaluated the principal conditions that initially give rise to the substantial doubt and note that the historical net losses and accumulated deficit impact are justified as they are primarily made up of non-cash expenses or one-time non-recurring expenses, such as goodwill impairment, stock-based compensation expense, fair value share adjustment loss and acquisition transaction expenses. Total debt of $8,616,764 on the balance sheet as of June 30, 2024 includes $2,472,500 of notes payable to Ross Sklar (“Sklar”), who has a large minority ownership of the Company that provides incentive for Mr. Sklar to extend or refinance the notes before the notes become due, as seen historically (see Note 8). Management plans include (i) continuing to increase net cash provided by operating activities, which was $124,729 for the six months ended June 30, 2024, while decreasing net cash provided by financing activities, and (ii) obtaining an alternative financing source to pay off all current debt outstanding and to provide additional working capital, if needed. To achieve these objectives, management has proposed and approved plans to increase top line revenue for each segment while decreasing overall expenses as a percentage of revenue, as a result of realizing synergies from the acquisitions of AOS, Skylar and Soylent, and utilizing the Company’s back-end shared service model to reduce expenses. These conditions and the ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the aforementioned uncertainties.

Previous wording

The decrease in current assets is primarily due to the decrease in accounts receivable of $1,978,504 and a decrease in prepaid expenses and other assets of $590,876. The decrease in current liabilities is primarily a result of the decrease in the fair value of share adjustment of $16,178,002.

Current wording

The increase in current assets is primarily due to a decrease in accounts receivable of approximately $0.6 million and an increase in inventory of approximately $2.5 million. The decrease in current liabilities is primarily a result of an increase in accounts payable of approximately $4.0 million, offset by decreases in notes payables, lines of credit and the fair value of share adjustment account of approximately $2.0 million, $3.8 million and $6.5 million, respectively.

Previous wording

Net cash provided by operating activities was $822,453 for the three months ended March 31, 2024 and was primarily due to the loss on stock payable share adjustment of $1,921,949, a decrease in accounts receivable of $1,769,887, an increase in accounts payable of $827,692, and a decrease in prepaid expenses and other assets of $590,876, which was partially offset by an increase in inventory of $585,128 and a decrease in other payables and accrued liabilities of $824,939.

Current wording

Net cash provided by operating activities was $101,258 for the six months ended June 30, 2024 and was primarily due to the impact of the loss for the six month period, offset by loss on stock payable share adjustment of $10,597,514, an increase in accounts payable and other payables/accrued liabilities of $4,931,205 and a decrease in accounts receivable of $580,189.

Previous wording

Net cash used in operating activities was $121,811 for the three months ended March 31, 2023 was primarily due to an increase of inventory of $2,005,702, which was partially offset by a decrease of accounts payable of $1,891,071.

Current wording

Net cash provided by operating activities was $48,995 for the six months ended June 30, 2023 and was primarily due to an increase of accounts payable of $4,951,190, which was partially offset by an increase of inventory of $4,869,563.

Previous wording

Net cash used in investing activities was $53,499 for the three months ended March 31, 2024 and was due to the purchase of property and equipment and intangibles.

Current wording

Net cash used in investing activities was $82,049 for the six months ended June 30, 2024 and was due to the purchase of property and equipment and intangibles.

Previous wording

Net cash provided by investing activities was $133,803 for the three months ended March 31, 2023 and was primarily due to cash paid in acquisition of business, net of $172,423 and was partially offset by the purchase of intangibles in the amount of $38,620.

Current wording

Net cash used in investing activities was $49,508 for the six months ended June 30, 2023 and was primarily due to the purchase of intangibles in the amount of approximately $183,887 and was partially offset by cash received in the acquisition of a business of $134,379.

Previous wording

For the three months ended March 31, 2024 net cash used in financing activities was $763,219, which primarily includes payments of $876,357 on the line of credit and notes payable, which was partially offset by proceeds of $113,138 from notes payable.

Current wording

For the six months ended June 30, 2024 net cash provided by financing activities was $206,614, which primarily includes payments of approximately $5.8 million on the line of credit and notes payable, which was offset by proceeds of approximately $6.2 million from notes payable and a credit revolver.

Previous wording

For the year three months ended March 31, 2023 net cash used by financing activities was $395,126, which primarily includes $1,162,276 of repayments on notes payable and $800,000 from advances from related parties.

Current wording

For the six months ended June 30, 2023 net cash provided by financing activities was $311,438, which primarily includes $1,700,000 from advances on the line of credit and related parties partially offset by $1,418,502 of repayments on the line of credit and notes payable.

Previous wording

Our Condensed Consolidated Financial Statements have been prepared in conformity with US GAAP. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs, expense and related disclosures. These estimates and assumptions are often based on historical experience and judgements that we believe to be reasonable under the circumstances at the time made. However, all such estimates and assumptions are inherently uncertain and unpredictable, and actual results may differ. It is possible that other professionals, applying their own judgement to the same facts and circumstances, could develop and support alternative estimates and assumptions that could result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis.

Current wording

Our Condensed Consolidated Financial Statements have been prepared in conformity with US GAAP. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs, expenses and related disclosures. These estimates and assumptions are often based on historical experience and judgements that we believe to be reasonable under the circumstances at the time made. However, all such estimates and assumptions are inherently uncertain and unpredictable, and actual results may differ. It is possible that other professionals, applying their own judgement to the same facts and circumstances, could develop and support alternative estimates and assumptions that could result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis.

Previous wording

No impairment losses related to goodwill were recognized for the three months ended March 31, 2024 and 2023.

Current wording

No impairment losses related to goodwill were recognized for the six months ended June 30, 2024 and 2023.

Previous wording

We review intangible assets, property, equipment and software with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted cash flows that the asset or asset group is expected to generate. If assets are determined to be impaired, the impairment loss to be recognized equals the amount by which the carrying value of the asset or group of assets exceeds its fair value. Significant estimates include but are not limited to future expected cash flows, replacement cost and discount rates. There were no impairment losses related to long-lived assets for the three months ended March 31, 2024 and 2023.

Current wording

We review intangible assets, property, equipment and software with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted cash flows that the asset or asset group is expected to generate. If assets are determined to be impaired, the impairment loss to be recognized equals the amount by which the carrying value of the asset or group of assets exceeds its fair value. Significant estimates include but are not limited to future expected cash flows, replacement cost and discount rates. There were no impairment losses related to long-lived assets for the six months ended June 30, 2024 and 2023.