# Starco Brands, Inc.: Form 10-Q for the period ended Jun 30, 2022

- Company: [Starco Brands, Inc.](/companies/stcb.md) (CIK 1539850)
- Form: 10-Q
- Filed: 2022-08-15
- Accepted by EDGAR: Aug 15, 2022, 18:51 ET
- Period: 2022-06-30
- Accession: 0001437749-22-020504
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1539850/000143774922020504/stcb20220630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1539850/000143774922020504/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Selling, general and administrative | 3 months, 2022-04-01 to 2022-06-30 | $730.5k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2022-01-01 to 2022-06-30 | $1.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | $182.8k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-01-01 to 2022-06-30 | $250.4k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $17.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-01-01 to 2022-06-30 | $31.9k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $142.4k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $183.4k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.00 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 163,220,485 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 162,832,964 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | −$602.2k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 6 months, 2022-01-01 to 2022-06-30 | $65.7k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-06-30 | $240.2k | us-gaap:Cash |
| Current assets | at 2022-06-30 | $1.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $1.6m | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $1.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $3.2m | us-gaap:Liabilities |
| Short-term borrowings | at 2022-06-30 | $0 | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2022-06-30 | −$1.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,075 characters.

### CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND OTHER FEDERAL SECURITIES LAWS, PARTICULARLY THOSE ANTICIPATING FUTURE FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, GROWTH, OPERATING STRATEGIES AND SIMILAR MATTERS, INCLUDING WITHOUT LIMITATION, STATEMENTS CONCERNING THE IMPACTS OF THE COVID-19 PANDEMIC ON OUR BUSINESS, OPERATIONS, RESULTS OF OPERATIONS, LIQUIDITY, INVESTMENTS AND FINANCIAL CONDITION. WE HAVE BASED THESE FORWARD-LOOKING STATEMENTS ON OUR CURRENT INTENT, EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, AND THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND ASSUMPTIONS ABOUT US THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “COULD,” “WOULD,” “INTEND,” “PROJECT,” “CONTEMPLATE,” “POTENTIAL,” “EXPECT,” “PLAN,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “CONTINUE,” OR THE NEGATIVE OF SUCH TERMS OR OTHER SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH A DISCREPANCY INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN OUR OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS.

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. ANY OF THE FORWARD-LOOKING STATEMENTS THAT WE MAKE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OTHER PUBLIC REPORTS AND STATEMENTS WE MAKE MAY TURN OUT TO BE INACCURATE AS A RESULT OF OUR BELIEFS AND ASSUMPTIONS WE MAKE IN CONNECTION WITH THE FACTORS SET FORTH ABOVE OR BECAUSE OF OTHER UNIDENTIFIED AND UNPREDICTABLE FACTORS. IN ADDITION, OUR BUSINESS AND FUTURE RESULTS ARE SUBJECT TO A NUMBER OF OTHER FACTORS, INCLUDING THOSE FACTORS SET FORTH IN THE “RISK FACTORS” SECTION OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") ON MAY 20, 2022. BECAUSE OF THESE AND OTHER UNCERTAINTIES, OUR ACTUAL FUTURE RESULTS MAY BE MATERIALLY DIFFERENT FROM THE RESULTS INDICATED BY THESE FORWARD-LOOKING STATEMENTS, AND YOU SHOULD NOT RELY ON SUCH STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF. THESE RISKS COULD CAUSE OUR ACTUAL RESULTS FOR 2022 AND BEYOND TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS BY OR ON BEHALF OF US, AND COULD NEGATIVELY AFFECT OUR FINANCIAL CONDITION, LIQUIDITY AND OPERATING AND STOCK PRICE PERFORMANCE.

### Our Business

Starco Brands, Inc. (formerly Insynergy Products, Inc.), which we refer to as "the Company," "our Company," "STCB," "we," "us" or "our," was incorporated in the State of Nevada on January 26, 2010. On September 7, 2017, the Company filed an Amendment to the Articles of Incorporation to change the corporate name to Starco Brands, Inc. The Board determined the change of the Company’s name was in the best interests of the Company due to changes in our current and anticipated business operations at that time. In July 2017, we entered into a licensing agreement with The Starco Group ("TSG"), located in Los Angeles, California. 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. Upon entering into the licensing agreement with TSG, we pivoted to commercializing novel consumer products manufactured by TSG.

### Executive Overview

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 that spark excitement for our consumers. Our core competency is leveraging cultural trends, building power brands, and driving awareness via innovative marketing tactics. The licensing agreement with TSG provided us 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.

The current CEO and owner of TSG, Ross Sklar, was named our CEO in August of 2017. Mr. Sklar has a long track record of commercializing technology in industrial and consumer markets. Mr. Sklar has built teams of manufacturing personnel, research and development, and sales and marketing professionals over the last 20 years and has grown TSG into a successful and diversified manufacturer supplying a wide range of products to some of the largest retailers in the United States.

We conducted extensive research and have identified a number of untapped consumer needs that we can address through our portfolio of novel technologies. We are now executing on this vision and since inception have launched four product lines.

The Breathe® Household cleaning aerosol line is an environmentally friendly line of household cleaning aerosol products. Breathe was the EPA Safer Choice Program Partner of the Year. This line is propelled by nitrogen, which makes up approximately 80% of the earth’s breathable air. Breathe was named EPA’s Safer Choice Program’s Partner of the Year and also achieved the Good Housekeeping Seal of approval.

We also launched the Breathe® Hand Sanitizer Spray in April 2020. This invention was created and patents were filed by Alim Enterprises, LLC, (“AE”) an entity owned by Mr. Sklar. Originally the technology was developed for Blue Cross Laboratories, LLC, (“BCL”) a personal care consumer products manufacturer owned by Mr. Sklar’s TSG. The product was developed as a result of supply chain collapse during the Covid-19 outbreak and increased demand for hand sanitizers. The traditional packaging components used in manufacturing hand sanitizer became very difficult to procure. BCL, located in Santa Clarita, California, is an at scale manufacturer established approximately 50 years ago with personal care products, including hand sanitizer. Due to the outbreak of Covid-19, many traditional component supply chains became overly stressed and BCL could not source enough bottles and caps. Through AE, the concept of a spray hand sanitizer was invented. AE filed patents on what it believes to be the first ever aerosol spray hand sanitizer with a 75% alcohol solution that utilizes only compressed air and nitrogen as the product’s propellant. AE and its intellectual property counsel believe the product is novel and warrants a utility patent. In February 2021, AE assigned the patent application to us as contemplated by a 2020 memorandum of understanding among AE, us and TSG.

The product is being manufactured by BOV Solutions, a division of TSG that is an at scale FDA, CFR210/211 manufacturer of aerosol and OTC products. The Breathe Hand Sanitizer Spray can only be made in an FDA facility that has at scale aerosol capabilities. The product is being sold through BOV Solutions and TSG’s existing distribution footprints in the United States. We launched the product in April 2020 via a press release in partnership with Dollar General, announcing its distribution in each of their 15,000+ stores. We have also partnered with Wegmans, HLA and J Winkler. Since then, the product is in distribution through The Home Depot, Lowes, American Pharmacy, AutoZone, The Farm Shop, Harris Teeter, UNFI, Kehe, Macy’s, Smart & Final, Weeks and others. The product comes in three sizes, 1oz., 5oz., and 9.5oz. sprays and is available directly on our website www.breathesanitizer.com and on Amazon.com and Walmart.com.

We are also the marketer of record, but not the owner of record of, Betterbilt Chemical’s Kleen Out® branded drain opener and for the Winona® Butter Flavor Popcorn Spray. We provide marketing services for these brands pursuant to the terms of agreements governing our marketing. Both products are available in Walmart stores.

In 2019, Winona Popcorn Spray entered into a co-marketing partnership with Delish (a Hearst owned media brand). The brand is now distributed throughout Walmart stores nationwide. We also launched the Winona Popcorn Spray on Amazon through our strategic partner Pattern (formally iServe), who is a shareholder in our company. Winona Popcorn Spray is also sold in H-E-B grocery stores. The Company also launched a new caramel flavor which is also distributed through Walmart and H-E-B. Sales grew significantly in 2021 and the Company expects sales to continue to grow in this space as management plans to increase the Company's sales personnel in 2022 for this product line.

On September 8, 2021, we (via our Wyoming subsidiary, Whipshots, LLC “Whipshots LLC”) entered into an Intellectual Property Purchase Agreement effective August 24, 2021, with Penguins Fly, LLC, pursuant to which the Company purchased the trademarks “Whipshotz” and “Whipshots”. The purchase price for these trademarks is payable to Penguins Fly, LLC over the course of seven years, based on a sliding scale percentage between 2% and 5% of gross revenues actually received by the Company solely from the Company’s sale of Whipshots/Whipshotz products.

On September 14, 2021, we (via our newly formed Delaware subsidiary Whipshots LLC (DE), which was subsequently renamed to Whipshots Holdings LLC “Whipshots Holdings”), entered into a License Agreement with Washpoppin Inc., a New York corporation (“Washpoppin”) pursuant to which Washpoppin licensed certain intellectual property of the recording artist professionally known as “Cardi B” to the Company for use associated with the Company’s new product line consisting of vodka-infused, whipped-cream aerosols, under the brand name “Whipshots.” We launched these products under the Whipshots™ brand in the fourth quarter of 2021 and first quarter of 2022. In addition, we entered into Distribution Agreements with various distributors pursuant to which such distributors will act as the exclusive distributors of Whipshots™ in various geographic locations.

During December 2021, we launched Whipshots at a hosted event during Art Basel in Miami. This launch event garnered over 1.7 billion earned media impressions world-wide. We launched the product via the Whip Drop program on whipshots.com, with a limited quantity of cans to be sold each day for the month of December 2021. Following the success of our online launch, we launched brick and mortar retail distribution in the first quarter of 2022 and signed a national distribution agreement with RNDC, one of the largest spirits distributors in the nation. We also announced distribution through GoPuff and BevMo. We expect to register Whipshots in all states but starting in select markets with plans to grow cautiously.

As long as we can raise capital, our plans are to launch other products in spray foods and condiments, air care, sun care, hair care, personal care, spirits and beverages over the next 48 months. Although the initial market reception of our new lines has been encouraging, we may encounter a number of hurdles that could prevent this and future product launches from achieving sustained commercial success. Financing growth and launching of new products is key and our ability to raise further capital is critical to the execution of our plans. In 2021, we pursued financing via a Regulation A offering which was qualified on December 9, 2021, and engaged The Dalmore Group to assist as the broker- dealer of record in this process, in which up to 56,818,181 shares of common stock may be sold to the public at a per share price of $1.00.

We will need to rely on sales of our common stock and other sources of financing to raise additional capital. The purchasers and manner of any share issuance will be determined according to our financial needs and the available exemptions to the registration requirements of the Securities Act. We have re-evaluated our previous plan of utilizing the services of Deutsch Marketing, and are now planning to utilize, as best as possible with limited financing, the services of other marketing and social marketing agencies and Interpublic owned marketing and public relations agencies to support our marketing strategy. We will also utilize the marketing capabilities of Hearst Media for certain product lines with its co-branding arrangements. This provides significant support for our products’ current retail and online distribution.

Our ultimate goal is to become a leading owner of power brands and third-party marketer of cutting-edge technologies in the consumer products marketplace whose success is expected to increase shareholder value. We will continue to evaluate this and other opportunities to further set our strategy for 2022 and beyond.

For more information, please visit our websites at www.starcobrands.com, www.breathecleaning.com, www.breathesanitizer.com, and www.whipshots.com.

### Results of Operation for the Three Months Ended June 30, 2022 and 2021

#### Revenues

For the three months ended June 30, 2022, the Company recorded royalty revenues of $1.2 million compared to $0.2 million for the three months ended June 30, 2021, an increase of $1.0 million and a percentage increase of 408%. This increase was largely due to sales of Whipshots™ during the period, which was not marketed during the same period last year, which consisted mainly of sales of Breath cleansing products. The royalty rate that the Company is paid varies on a per product basis of wholesale sales of our branded and non-corporate owned licensed products. Revenues are from our marketing licensing agreements with TSG and other affiliated companies for various products mentioned above.

The increase in the current period is primarily due to initial volume sales of our Whipshots™, partially offset by declines in sales of Breathe cleaning and sanitizer products. For the three months ended June 30, 2022,

#### Operating Expenses

For the three months ended June 30, 2022, compensation expense increased $59,389, or 177%, to $92,949 compared to $33,560 for the three months ended June 30, 2021. The increase is a result of increases in independent contractors and contributed services to support the launch and growth of Whipshots™.

For the three months ended June 30, 2022, the Company incurred $179,468 in professional fees compared to $99,847 for the three months ended June 30, 2021, an increase of $79,621, or 80%. Professional fees are mainly for accounting, auditing and legal services associated with our quarterly filings as a public company and advisory and valuation services. The increase is primarily due to an increase in corporate legal and audit fees.

For the three months ended June 30, 2022, the Company incurred $730,479 in marketing, general and administrative expense as compared to $58,607 for the three months ended June 30, 2021, an increase of $671,872. The increase can be attributed to an increase in spending on marketing, including initial license payments related to the promotional launch for Whipshots™.

For the three months ended June 30, 2022, the Company incurred $44,570 in Marketing, related party expenses as compared to $79,014 for the three months ended June 30, 2021, a decrease of $34,444. The decrease during the period can be attributed to our no longer classifying marketing expense from a third-party firm as related party once our EVP of marketing joined the Company full time in February 2022 and ceased being affiliated with the third-party firm.

#### Other income and expense

For the three months ended June 30, 2022, we had total other expense of $17,040 compared to other expense of $11,794 for the three months ended June 30, 2021. The increase in total other expense was due to the increase in interest expense related to an increase in our related party notes payable during the period ended June 30, 2022.

#### Net income

For the three months ended June 30, 2022, the Company recorded net income of $165,714 as compared to a net loss of $40,766 in the prior year period. Our increase in net income is primarily the result of the increase in revenues earned off of Whipshots™ offset in part by increases in marketing, compensation, and professional fees.

### Results of Operation for the Six Months Ended June 30, 2022 and 2021

#### Revenues

For the six months ended June 30, 2022, the Company recorded royalty revenues of approximately $2.2 million compared to $0.4 million for the six months ended June 30, 2021, an increase of approximately $1.0 million or 408%. The royalty rate that the Company is paid varies on a per product basis of wholesale sales of our branded and non-corporate owned licensed products. Revenues are from our marketing licensing agreements with TSG and other affiliated companies for various products mentioned above.

The increase in the current period is primarily due to initial volume sales of our Whipshots™, partially offset by declines in sales of Breathe cleaning and sanitizer products. For the six months ended June 30, 2022,

#### Operating Expenses

For the six months ended June 30, 2022, compensation expense increased $59,389, or 177%, to $219,826 compared to $77,793 for the six months ended June 30, 2021. The increase is a result of increases in independent contractors and contributed services to support the launch and growth of Whipshots™.

For the six months ended June 30, 2022, the Company incurred $237,974 in professional fees compared to $110,402 for the six months ended June 30, 2021, an increase of $79,621, or 80%. Professional fees are mainly for accounting, auditing and legal services associated with our quarterly filings as a public company and advisory and valuation services. The increase is primarily due to an increase in corporate legal and audit fees.

For the six months ended June 30, 2022, the Company incurred approximately $1.3 million in marketing, general and administrative expense as compared to $0.1 million for the six months ended June 30, 2021, an increase of approximately $1.2 million, or 864%. The increase can be attributed to an increase in spending on marketing, including initial license payments related to the promotional launch for Whipshots™.

For the six months ended June 30, 2022, the Company incurred $131,614 in Marketing, related party expenses as compared to $183,934 for the six months ended June 30, 2021, a decrease of $52,320. The decrease for the period can be attributed to our no longer classifying marketing expense from a third-party firm as related party once our EVP of marketing joined the Company full time in February 2022 and ceased being affiliated with the third-party firm.

#### Other income and expense

For the six months ended June 30, 2022, we had total other expense of $31,895 compared to other expense of $22,686 for the six months ended June 30, 2021. The increase in total other expense was primarily due to an increase in interest expense related to increases in our related party notes payable.

#### Net income

For the six months ended June 30, 2022, the Company recorded net income of $218,525 as compared to a net loss of $156,675 in the prior year period. Our increase in net income is primarily the result of the increase in revenue partially offset by the increase in expenditures related to marketing, compensation, and professional services.

### Liquidity and Capital Resources

As reflected in the accompanying unaudited condensed consolidated financial statements, we had an accumulated deficit of approximately $18.2 million, at June 30, 2022, had net income of $0.2 million and used net cash for operating activities of $0.6 million for the six months ended June 30, 2022.

Our primary uses of cash are to fund working capital, operating expenses, and debt service. Historically, we have financed our operations primarily through issuances of equity and debt securities, and to a lesser extent, through cash flows from our operations.

As of June 30, 2022, we had $0.2 million in cash, current debt obligations of $0.4 million, and long-term debt obligations of $1.6 million. We believe that our cash on-hand and cash received from operations, as well as our ability to borrow funds from our related parties, will provide sufficient financial flexibility to meet working capital requirements and to fund debt service requirements for the remainder of 2022 as well as the foreseeable future.

On January 24, 2020, STCB executed a promissory note for $100,000 with Ross Sklar, CEO. The note bears interest at 4% per annum, compounds monthly, is unsecured, and matures two years from the original date of issuance. On June 28, 2021, STCB executed an additional promissory note with Ross Sklar in the principal amount of $100,000 with the same terms as the January 24, 2020 note and a maturity date of June 28, 2023. On September 17, 2021, STCB executed a third promissory note with Ross Sklar in the principal amount of $500,000 with the same terms as the prior notes and a maturity date of September 17, 2023. On December 13, 2021, STCB executed a fourth promissory note with Ross Sklar in the principal amount of $500,000 with the same terms as the prior notes and a maturity date of December 12, 2023. On February 14, 2022, STCB executed a fifth promissory note in favor of Ross Sklar, CEO, in the principal sum of $472,500. As with the other notes between the Company and our CEO, the note bears interest at 4% per annum, is unsecured, and matures two years from the original date of issuance. This note may also convert into shares of Company common stock at the 10-day volume weighted average trading price of the Company common stock for the 10-day period prior to the issuance of the Note, which was calculated as $0.29 per share.

### Critical Accounting Estimates and Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Financial Statements.

We are subject to various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when management concludes that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.

We recognize deferred tax assets (future tax benefits) and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities represent the expected future tax return consequences of those differences, which are expected to be either deductible or taxable when the assets and liabilities are recovered or settled. Future tax benefits have been fully offset by a 100% valuation allowance as management is unable to determine that it is more likely than not that this deferred tax asset will be realized.

#### Revenue recognition

The Company and its subsidiaries earn their revenue as royalties from the licensing agreements it has with TSG, a related entity, and other related parties. The Company 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 is determined beforehand in each agreement. The Company recognizes its revenue only when sales are made by TSG or other related parties to a third party.

### Off-Balance Sheet Arrangements

We have obligations related to certain royalty arrangements where our minimum contractual obligations as of June 30, 2022, are approximately $1,100,000 and $1,650,000 for the years ending December 31, 2023 and 2024, respectively. Apart from the foregoing, we have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.

### Recent Accounting Pronouncements

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

Management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our financial statements.

## Controls and procedures

As filed, 2,214 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Interim Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. The disclosure controls and procedures ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that, as of June 30, 2022, these disclosure controls and procedures were not effective.

A material weakness, as defined in the standards established by the Sarbanes-Oxley, is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The ineffectiveness of the Company’s internal control over financial reporting was due to the following material weaknesses:

- Lack of risk assessment procedures on internal controls to detect financial reporting risks in a timely manner;
- Lack of segregation of duties; and
- Lack of sufficient formal procedures and controls to achieve complete and accurate financial reporting, including controls over the preparation and review of journal entries and account reconciliations.

### Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2022, that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 325 characters.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item. For a list of risk factors, please refer to our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on May 20, 2022.

Filed Aug 15, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-020504. Last ingested by Listed: Oct 24, 2026, 15:13 ET. No prices; not investment advice.