Starco Brands Inc

Previous wording

In July 2017, our Board of Directors entered into a licensing agreement with TSG to pursue a new strategic marketing plan involving commercializing leading edge products with the intent to sell them through brick and mortar and online retailers. We are a company whose mission is to create behavior-changing products and brands. Our core competency is inventing brands, marketing, building trends, pushing awareness and social marketing. The licensing agreement with TSG provided STCB with certain products on an exclusive and royalty-free basis and other products on a non-exclusive and royalty basis, in the categories of food, household cleaning, air care, spirits and personal care.

Current wording

In July 2017, our Board entered into a licensing agreement with TSG to pursue a new strategic marketing plan involving commercializing leading edge products with the intent to sell them through brick and mortar and online retailers. We are a company whose mission is to create behavior-changing products and brands. Our core competency is inventing brands, marketing, building trends, pushing awareness and social marketing. The licensing agreement with TSG provided STCB with certain products on an exclusive and royalty-free basis and other products on a non-exclusive and royalty basis, in the categories of food, household cleaning, air care, spirits and personal care.

Previous 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.

Current wording

For the three months ended September 30, 2024, compensation expenses increased $373,424, or 21%, to $2,185,256 from $1,811,832 for the three months ended September 30, 2023; the increase is a result of converting a portion of independent contractors to full-time employees.

Previous 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.

Current wording

For the three months ended September 30, 2024, the Company incurred $434,698 in professional fees compared to $1,380,680 for the three months ended September 30, 2024, for a decrease of $945,982, or 69%. Professional fees are mainly for contractors, accounting, auditing and legal services associated with business operations, merger activity, and our quarterly filings as a public company, and advisory and valuation services. The decrease is primarily due to reduced legal and audit-related expenses in the current year period compared to expenses related to the acquisitions of Soylent, Skylar, and AOS in the prior year period.

Previous wording

For the three months ended June 30, 2024, the Company incurred $4,520,678 in marketing, general and administrative expense as compared to $4,659,607 for the three months ended June 30, 2023 for a decrease of $138,929 or 3%, which is a nominal amount.

Current wording

For the three months ended September 30, 2024, the Company incurred $4,236,433 in marketing, general and administrative expense as compared to $4,955,578 for the three months ended September 30, 2023, for a decrease of $719,145 or 15%, which was largely driven by reduced marketing spend and a focus on operational efficiencies.

Previous 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.

Current wording

For the three months ended September 30, 2024, the Company incurred a fair value share adjustment loss of $5,105,535; such was due to an increase in the fair value of the Soylent Shareholders’ rights to potentially receive additional Starco shares, increasing from $0.235 per share as of June 30, 2024 to $0.253 per share as of September 30, 2024.

Previous 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.

Current wording

For the three months ended September 30, 2024, we had total other expense, of $681,573 compared to total other expense, net of $376,847 for the three months ended September 30, 2023. For the three months ended September 30, 2024, the Company had interest expense and other expense of $303,155 and $378,418, respectively, compared to interest expense and other expense of $255,775 and $121,072, respectively, for the three months ended September 30, 2023.

Previous 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.

Current wording

For the three months ended September 30, 2024, the Company recorded a net loss of $6,257,088 as compared to net income of $2,361,251 for the three months ended September 30, 2023. The increase in net loss is primarily due to a loss on the change in fair value of the stock payable for shares due to Soylent Stockholders, in addition to increases in expenses from the acquired businesses AOS, Skylar and Soylent.

Previous wording

Comparison of the six months ended June 30, 2024 to the six months ended June 30, 2023

Current wording

Comparison of the nine months ended September 30, 2024 to the nine months ended September 30, 2023

Previous wording

For the six months ended June 30, 2024, the Company recorded revenues of $31,061,422 compared to $28,653,071 for the six months ended June 30, 2023 for an increase of $2,408,351 or 8%; the increase in the current period was largely due to a full six months of revenue from Soylent in the current period versus only four and a half months of sales from Soylent in the prior period, as the Company acquired Soylent in February 2023.

Current wording

For the nine months ended September 30, 2024, the Company recorded revenues of $41,816,348 compared to $38,124,740 for the nine months ended September 30, 2023 for an increase of $3,691,608 or 10%; the increase in the current period was largely due to recognition of a full nine months of revenue from Soylent in the current period versus only seven and a half months of sales from Soylent in the prior period, as the Company acquired Soylent in February 2023. This increase in Soylent revenue was augmented by growth in sales of Winona.

Previous wording

For the six months ended June 30, 2024, compensation expense increased $1,537,087, or 44%, to $5,010,676 from $3,473,589 for the six months ended June 30, 2023; the increase is a result of converting a portion of independent contractors to full-time employees in the current period.

Current wording

For the nine months ended September 30, 2024, compensation expense increased $1,910,511, or 36%, to $7,195,932 from $5,285,421 for the nine months ended September 30, 2023; the increase is a result of converting a portion of independent contractors to full-time employees in the current period.

Previous wording

For the six months ended June 30, 2024, the Company incurred $2,336,910 in professional fees compared to $2,796,744 in the prior period for a decrease of $459,834, or 16%. Professional fees are mainly for contractors, accounting, auditing and legal services associated with business operations, merger activity, and our quarterly filings as a public company, and advisory and valuation services. The decrease in the six months ended June 30, 2024 as compared to the same period in 2023 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.

Current wording

For the nine months ended September 30, 2024, the Company incurred $2,771,608 in professional fees compared to $4,177,424 in the prior period for a decrease of $1,405,816, or 34%. Professional fees are mainly for contractors, accounting, auditing and legal services associated with business operations, merger activity, and our quarterly filings as a public company, and advisory and valuation services. The decrease in the nine months ended September 30, 2024 as compared to the same period in 2023 is primarily due to a decrease in expenses (contractor fees, legal, and audit fees) in the current year period compared to expenses related to the acquisitions of Soylent, Skylar, and AOS in the prior year period.

Previous 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.

Current wording

For the nine months ended September 30, 2024, the Company incurred $14,073,064 in marketing, general and administrative expense compared to $12,947,530 for the nine months ended September 30, 2023 for an increase of $1,125,714, or 9%. The increase can be attributed to the addition of the acquired businesses and an increase in spending on marketing and increased amortization expense.

Previous wording

For the six months ended June 30, 2024, the Company incurred a fair value share adjustment loss of $10,597,514. 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 $0.235 per share as of June 30, 2024.

Current wording

For the nine months ended September 30, 2024, the Company incurred a fair value share adjustment loss of $15,703,049. This was due to an increase in the fair value of the Soylent sellers’ rights to potentially receive additional Starco shares, increasing from $0.136 per share as of December 31, 2023 to $0.253 per share as of September 30, 2024.

Previous wording

For the six months ended June 30, 2024, we had total other expense of $769,487 compared to total other expense of $28,640 for the six months ended June 30, 2023. For the six months ended June 30, 2024, the Company had interest expense and other expense of $408,149 and $361,338, respectively, compared to interest expense and other income of $361,514 and $332,874, respectively, for the six months ended June 30, 2023.

Current wording

For the nine months ended September 30, 2024, we had total other expense, net of $1,451,060 compared to total other expense, net of $405,487 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the Company had interest expense and other expense of $711,304 and $739,756, respectively, compared to interest expense and other income of $617,289 and $211,802, respectively, for the nine months ended September 30, 2023.

Previous wording

For the six months ended June 30, 2024, the Company recorded a net loss of $16,022,160 compared to a net loss of $7,739,786 for the six 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.

Current wording

For the nine months ended September 30, 2024, the Company recorded a net loss of $22,090,177 compared to a net loss of $5,252,742 for the nine months ended September 30, 2023. The increase in net loss is primarily due to a loss on the change in fair value of the stock payable for shares due to Soylent Stockholders, in addition to increases in expenses from the acquired businesses AOS, Skylar and Soylent.

Previous 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.

Current wording

As reflected in the accompanying condensed consolidated financial statements, the Company has an accumulated deficit of approximately $86.1 million at September 30, 2024. Our net cash used in financing activities was $377,101 for the nine months ended September 30, 2024, due primarily to payments toward i) lines of credit, ii) a revolving loan, iii) notes payable and iv) loans from related parties of approximately $23.5 million, offset by proceeds from a revolving loan and a note payable of approximately $23.2 million. This compared to $535,974 in cash provided by financing activities for the nine months ended September 30, 2023, due primarily to approximately $0.8 million of loan advances from Ross Sklar, which was partially offset by net payments on the line of credit and repurchases of common stock totaling approximately $250,000.

Previous 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.

Current wording

Our net cash provided by operating activities was $517,879 for the nine months ended September 30, 2024. Operating expenses for the nine months ended September 30, 2024 totaling $39,743,653 include items such as marketing and administrative costs, consultant compensation, insurance, legal and other professional fees, compliance, website maintenance and loss on share fair value adjustment.

Previous wording

Each Revolving Loan advanced under the Revolving Loan Commitment bears interest at a rate per annum equal to One Month Term SOFR plus the Applicable Margin. If a Revolving Loan or any portion thereof is considered a part of the Permitted Overadvance Amount under the Loan and Security Agreement, the Applicable Margin for such loan shall be increased by an additional two percent (2.00%) per annum. Revolving Loans may be repaid at any time and reborrowed up to, but not including the Maturity Date. On the Maturity Date, the outstanding aggregate principal balance of all Revolving Loans shall be due and payable. The interest rate for the revolving loan was 10.08% as of June 30, 2024.

Current wording

Each Revolving Loan advanced under the Revolving Loan Commitment bears interest at a rate per annum equal to One Month Term SOFR plus the Applicable Margin. If a Revolving Loan or any portion thereof is considered a part of the Permitted Overadvance Amount under the Loan and Security Agreement, the Applicable Margin for such loan shall be increased by an additional two percent (2.00%) per annum. Revolving Loans may be repaid at any time and reborrowed up to, but not including the Maturity Date. On the Maturity Date, the outstanding aggregate principal balance of all Revolving Loans shall be due and payable. The interest rate for the revolving loan was 10.00% as of September 30, 2024.

Previous wording

The Loan and Security Agreement also contains customary events of default, including nonpayment of principal, interest, fees, or other amounts when due, violation of covenants, breaches of representations or warranties, cross defaults, change of control, insolvency, bankruptcy events, and material judgments. Some of these events of default allow for grace periods or are qualified by materiality concepts. Upon the occurrence of an event of default, the outstanding obligations under the Loan and Security Agreement may be accelerated and become due and payable immediately. As of June 30, 2024, the Company was in compliance with all loan covenants relating to the agreement and the available borrowing amount was approximately $6.9 million.

Current wording

The Loan and Security Agreement also contains customary events of default, including nonpayment of principal, interest, fees, or other amounts when due, violation of covenants, breaches of representations or warranties, cross defaults, change of control, insolvency, bankruptcy events, and material judgments. Some of these events of default allow for grace periods or are qualified by materiality concepts. Upon the occurrence of an event of default, the outstanding obligations under the Loan and Security Agreement may be accelerated and become due and payable immediately. As of September 30, 2024, the Company was in compliance with all loan covenants relating to the agreement and the available borrowing amount was approximately $5.8 million.

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 $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.

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 $86,100,000 at September 30, 2024, which includes the impact of its net losses of $6,527,088 and $22,090,177 for the three and nine months ended September 30, 2024, and total debt on the balance sheet of $8,808,010 as of September 30, 2024, with a small portion of the debt coming due within one year of the date of the financial statements being issued. Management evaluated the principal conditions that initially give rise to the substantial doubt and note that the historical net losses and accumulated deficit impact are justified as they are primarily made up of non-cash expenses or one-time non-recurring expenses, such as goodwill impairment, stock-based compensation expense, fair value share adjustment loss and acquisition transaction expenses. Total debt of $8,080,010 on the balance sheet as of September 30, 2024 includes $2,472,500 of notes payable to Ross Sklar (“Sklar”), who has a large minority ownership of the Company that provides incentive for Mr. Sklar to extend or refinance the notes before the notes become due, as seen historically (see Note 8). Management plans include (i) continuing to increase net cash provided by operating activities, which was $517,879 for the nine months ended September 30, 2024, while decreasing net cash provided by financing activities, and (ii) obtaining an alternative financing source to pay off all current debt outstanding and to provide additional working capital, if needed. To achieve these objectives, management has proposed and approved plans to increase top line revenue for each segment while decreasing overall expenses as a percentage of revenue, as a result of realizing synergies from the acquisitions of AOS, Skylar and Soylent, and utilizing the Company’s back-end shared service model to reduce expenses. These conditions and the ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the aforementioned uncertainties.

Previous 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.

Current wording

The increase in current assets is primarily due to increases in prepaid expenses and other current assets and inventory of approximately $1.5 million and $2.5 million, respectively, offset by a decrease in accounts receivable of approximately $0.6 million. Current liabilities stayed relatively constant, which is primarily a result of an increase in accounts payable and other payables and accrued liabilities of approximately $5.7 million and $1.0 million, respectively, offset by decreases in notes payables, lines of credit and the fair value of share adjustment account of approximately $2.0 million, $3.8 million and $1.4 million, respectively.

Previous 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.

Current wording

Net cash provided by operating activities was $517,879 for the nine months ended September 30, 2024 and was primarily due to the impact of the loss for the nine month period and an increase in prepaid expenses and other assets of $1,458,391, offset by loss on stock payable share adjustment of $15,703,049 and an increase in accounts payable, accounts payable-related parties and other payables/accrued liabilities of $7,262,562.

Previous 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.

Current wording

Net cash used in operating activities was $286,820 for the nine months ended September 30, 2023 and was primarily due to an increase in accounts receivable of $2,397,559 and inventory of $1,575,691, which was partially offset by an increase in of accounts payable of $2,512,173 and other accrued liabilities of 327,648.

Previous 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.

Current wording

Net cash used in investing activities was $286,327 for the nine months ended September 30, 2024 and was due to the purchase of property and equipment and intangibles.

Previous 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.

Current wording

Net cash used in investing activities was $183,646 for the nine months ended September 30, 2023 and was primarily due to the purchase of intangibles in the amount of approximately $233,108 and was partially offset by cash received in the acquisition of a business of $68,062.

Previous 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.

Current wording

For the nine months ended September 30, 2024, net cash used in financing activities was $377,101, which primarily includes payments toward (i) lines of credit, (ii) a revolving loan, (iii) notes payable and iv) loans from related parties of approximately $23.5 million, offset by proceeds from a revolving loan and a note payable of approximately $23.2 million.

Previous 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.

Current wording

For the nine months ended September 30, 2023, net cash provided by financing activities was $535,974, which primarily includes $800,000 of loan advances from Ross Sklar, which was partially offset by net payments on the line of credit of $136,500 and $98,550 of repurchases of common stock.

Previous wording

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

Current wording

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