Starco Brands, Inc.

Good afternoon, everyone, and thank you for participating on today's fourth quarter and full year 2023 corporate update call for Starco Brands. Today's call is being recorded. Joining us today is Starco Brands CEO, Ross Sklar, and Starco Brands Interim CFO, Kevin Zaccardi. You should have access to the company's fourth quarter earnings press release issued after the market closed today. This information is available on the Investor Relations section of Starco Brands' website at investors.starcobrands.com. Certain comments made on this call include forward-looking statements which are subject to safe harbor provisions of the Private Securities Litigation Reform Act of 1985. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to a number of assumptions, risks, and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filing, as well as earnings press release, which provide reconciliations of non-GAAP financial measures to the most direct comparable gap measures and all are available on our website. Following our prepared remarks, we'll also take questions from research analysts. Now I will turn the call over to CEO of Starco Brands, Mr. Ross Klar. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us on our inaugural earnings call to discuss our fourth quarter and full year 2023. We started commercial operations a little over two years ago and have grown from a company of one brand with basically no revenue to a portfolio of five brands with over $65 million in revenue and approximately $6 million in adjusted EBITDA recorded for our fiscal year 2023. We are projecting top and bottom line growth for 2024. We acquired three brands between September of 22 and February of 23. Each of these brands had elements that were of distressed assets that we looked for in the M&A landscape, as we believe this is where we can bring tremendous value with our understanding of turnaround and integration. One key element that is the main element they all share is that they have game-changing technologies. This is a really important part of our mission. We like to say products and technologies that are behavior-changing. That's really key for us. Each of these businesses exhibit the ability to change someone's habitual behavior, and in doing so, has a very unique competitive moat. I'll walk you through our accomplishments today in each of our segments and brands, starting with three brands that make up our Starco brand segment directly. Includes Whipshots, Winona Pure, and a brand called The Art of Sport. Whipshots is an innovation in the spirits category. It's a vodka-infused whipped cream that is non-dairy, shelf-stable, and has a ton of technology behind it. It took us over three years in the lab to create. We then partnered with entertainer and rap star Cardi B, and the brand has greatly benefited from her very large social ecosystem. This product launched the end of 2021 and became one of the fastest-growing spirits in the U.S. in 22. It has sold over 5 million cans since hitting store shelves. in February of 22. Expanded into 41 states, plus the District of Columbia, it has achieved more than 58,000 distribution points in 2023, a 125% increase in prior year, and it surpassed 230,000 cases in 2023. It's a 73% increase prior year. To put some perspective on those numbers, as an example, a tequila brand called Casa Amigos sold for about a billion dollars based on around 100,000 cases a year run rate. We did more than double that in 2023. We've also thoughtfully expanded the product line through introduction of limited time offerings, each time boosting sales in seasonal flavors, as well as three core flavors. And lastly, we launched strategic partnerships and marketing campaigns for the brands, This June, we announced a strategic partnership with AMC Theatres. In November, a large holiday marketing campaign between Cardi B and Patti LaBelle that generated over $2 billion earned media impression in the first four days. And most recently in February, a nationwide partnership with the Museum of Ice Cream to coincide with the launch of our new seasonal flavor, Strawberry. Our next brand, Winona Pure. This is an innovation in at-home movie watching. It's a zero-calorie, non-GMO popcorn seasoning spray that provides a really wonderful and game-changing sensory experience at home. We developed the product in our lab and then launched Winona Pure, starting distribution of the product in Walmart. This past year, it went from 2,500 Walmart stores to 4,200 stores. and launched in Meyers, which is about 200 grocery stores, and in HEB with another 300. What's really impressive about this distribution expansion is it was all done with very minimal marketing expenditure. Winona Pure has become a must-have product of popcorn enthusiasts and has grown through consistent and sustained repeat purchases. The success of these two that I'll call in-house brands has showcased our ability under one roof to invent and develop innovative technology in the lab, bring the manufacturer and bring it to scale, and also push out to the market and further scale its distribution vis-a-vis our relationships with retailers and innovation in media and marketing. Our next offering under the Starco Brands segment is an acquired brand, Art of Sport AOS. AOS is a premium body and skincare line designed for athletes that we acquired in September 2022. This brand was co-founded by Kobe Bryant, and we are honored to continue his goal of driving towards AOS becoming a globally recognized multi-category sports brand that inspires greatness in all of us. Since acquiring the brand, we have brought on Magic Johnson and James Harden as brand advisors. We see a ton of potential for this brand and are looking to expand this business into adjacent categories through new product offerings, technology, and also invoking our innovative marketing style, powerful brand partnerships, and more. More to come on that one over the next year. Our next segment contains the Skylar brand. Skylar is a trailblazer in clean fragrance space and was the first fragrance to be hypoallergenic and safe for sensitive skin in the beauty category. When we acquired Skylar in January of 2023, we were on track to do around $9 million in revenue, but the business was losing about $4.5 million a year. We successfully transformed the brand this year into a profitable entity and ended 2023 with revenue of close to $10.8 million and gross profit of nearly $8 million. This turnaround was driven by innovative marketing strategies optimized marketing spend, strategic headcount adjustments, and enhanced collaborations with retail giants like Amazon and Sephora to further drive sales. Partnerships with key retailers were strengthened through exclusive product launches and targeted marketing campaigns tailored to each retailer's unique customer base. One example of this brand's success with retailers was the launch of the brand's third new scent in 2023, Boardwalk Delight, sold out in Sephora in 10 days, becoming the brand's most popular introduction to date. We've revamped the marketing strategy for Skylark by strongly emphasizing digital engagement. This approach involves a comprehensive digital marketing campaign that utilizes various online platforms to reach a broader audience. We engage with key influencers in the beauty and wellness sectors to significantly enhance the brand's credibility and appeal. In addition, we made necessary reductions in headcount, streamline operations, implement process improvements, and leverage technology to automate and optimize various operational aspects. These changes led to a more agile, more efficient operation, reducing overhead costs and improving the profit margins that were already very high. And our last segment is focused on food. and contains the Soylent brand. Soylent pioneered the plant-based complete nutrition and functional food category, developing a lineup of plant-based convenient shakes, powders, and bars that contain proteins, healthy fats, functional amino acids, and essential nutrients. The better-for-you supplement and plant-based nutrition space is projected to experience significant growth, and we saw an opportunity to capitalize on that through the acquisition of Soylent in February of 2023. A month after acquiring the brand, we expanded Soylent's distribution at Meijer to offer the brand plant-based nutrition shakes in their 200-plus stores. And later in July, we expanded Soylent's retail distribution throughout Canada through a partnership with grocery wholesaler United Foods. This expansion included Soylent's first entry into brick-and-mortar retail at select grocery stores in Canada. We're very proud to report that Soylent generated over $38 million in revenue and approximately $7.5 million in gross profit for fiscal 2023. We believe four key competitive advantages allowed us to be successful at growing these businesses and, for some, turning them profitable in such a short amount of time. Those advantages are the following. One, cross-category manufacturing capabilities. We have a dedicated manufacturing partner in the Starco Group that provides us with commercial manufacturing capabilities spanning six consumer categories, alcohol, food, beverage, beauty, personal care, and OTC pharma items. It allows us to control our supply chain and not have laborious co-packer needs, which is a big advantage for the business. Two, extensive R&D capabilities. Developing Very innovative technology is at the core of our DNA, and this is where we come from. We believe we can expand our portfolio of brands through innovation, and we successfully introduced line extensions across our portfolio this past year, our acquisition year. And you can expect a lot more coming from our R&D labs and facilities. Three, we run a very disruptive marketing playbook. We understand the media landscape today experiential in nature, things that can really trigger media's excitement in this day and age. We've had close to 6 billion earned media impressions across our portfolio in 2023 alone. We understand social engagement that can come from the right partners, our partners for Whipshots, for example, Cardi B has a sizable social media, but we're close to 300 million when she posts or does a live video. The views for it are close to almost 10 Super Bowl ads. a fraction of the cost. We are very choiceful about our partnerships. We don't just believe in only pay to play. We want someone or a partnership that is going to be very authentic to our brand. We're looking for celebrities and influencers and brand partnerships where we can utilize their social footprint and ecosystem in an authentic manner that really moves the needle for all. And that's what retailers want to see as well. Fourth, diversified distribution knowledge. We have the team. We have the experience. We're across all distribution channels, including D2C, dot-com retail, brick and mortar. A lot of the brands we acquire are strictly D2C sometimes and don't have a great understanding of retail. They don't understand the merchandising, marketing, and how to work with the retailers. So that is where we have been able to come in and greatly expand, not only their D2C businesses, but also expand their distribution with retailers We have a lot of experience filling the most of the retails in the United States of any real consequence, biggest retailers. In addition, our disruptive marketing also helps increase distribution. That top of funnel marketing is very hard to achieve. Very attractive to retailers when you can show them the metrics, such as 6 billion or media impressions in one year for a brand. It gives them a very high level of confidence that the product is going to turn on shelf. In summary, We spent the last year integrating three acquisitions into our shared service model and making the necessary adjustments to consolidate Salesforce, marketing teams, supply chain, logistics teams, and admin finance so that we have a centralized hub to service our brands. Now that the structure is in place, we are going to spend the next year continuing to expand distribution of our brands, growing the product line extensions, and exploring our different brands' ability to play in other categories. also amplifying our brand through experiential marketing and, where it makes sense, introducing an influencer or a celebrity campaign. There are a tremendous amount of levers for each of these brands that we intend to pull over the next year as we grow these businesses. We see tremendous organic growth for each brand in 2024, and we will continue to keep a very keen eye on the M&A landscape and evaluate the best time to make like-minded acquisitions. I'm now going to turn it over to our interim CFO, Kevin Zaccardi. Kevin.

Thank you, Ross. Reported net revenue for the fourth quarter of 2023 was $18.9 million. And this was compared to $4 million for the fourth quarter of 22. Reported net revenue for the full year of 23 was $65.2 million compared to $7.8 million in the same period of 22. If you include the 45 days of pre-acquisition for Soylent, then our net revenue for the full year of 23 would have been $70.8 million, within our pro forma net revenue guidance of $66 to $77 million. The increase in net revenue for the fourth quarter and full year of 23 was primarily driven by the sales from the company's three strategic acquisitions, Soylent, Skylar, and AOS. as well as year-over-year increases in royalty revenues from the Whipshot business. Whipshot's royalty revenue increased in the fourth quarter of 23 by 12% to $3.6 million, and on the full year by 81% to $11.7 million. In addition, the prior year included Winona Pure revenue as a royalty-based income and transitioned over to traditional revenue and cost of goods reporting in March of 23. Growth profit for the fourth quarter of 23 improved to 6.2 million as compared to 3.6 million for the fourth quarter of 22. Growth margin for the fourth quarter of 23 was 35% compared to 89% for the fourth quarter of 22. Growth profit for the full year of 23 increased by 20.7 million to 27.8 million as compared to 7 million for the full year of 22. Growth margin for the full year of 23 was 43% compared to 90% for the same period of 22. The year-over-year decrease in margin is due to the fact that prior year revenue mostly included whip shots, which trades at a very high margin compared to the other acquired brands. Our reported net loss for the fourth quarter of 23 was $41.1 million as compared to net income of $877,000 in the fourth quarter of 22. Reported net loss for the full year of 23 was $46.4 million, as compared to reported net income of $977,000 in the same period of 22. The change from net income to net loss is mostly due to non-cash goodwill impairment loss of $29.6 million, primarily related to the soylent segment and an increase in expenses from the acquired brands. Marketing, general, and administrative expenses for the fourth quarter of 23 were $7.4 million or 39% of reported net revenue as compared to $1.1 million or 27% of reported net revenue for the fourth quarter of 22. Marketing, general, and administrative expenses for the full year of 23 were $21.6 million or 33% of reported net revenue as compared to $2.8 million or 35% of reported net revenue in the same period of 22. The increase was primarily driven by the acquisition of the acquired brands. Compensation expenses for the fourth quarter of 23 were 10.6 million compared to $779,000 in the fourth quarter of 22. And compensation expenses for the full year of 23 were 15.9 million compared to 1.2 million for the full year of 22. This increase was primarily due to stock-based compensation increasing by $9.8 million in the fiscal year of 23 compared to the prior year due to equity provided to a non-controlling interest in Whipshots. Professional fees for the fourth quarter of 23 were $1.7 million compared to $700,000 in the same period last year. And professional fees for the full year of 23 were $5.9 million compared to $1.8 million for the full year of 22. The increase was primarily driven by the addition of our acquired brands and associated costs. For the fourth quarter of 23, our EBITDA was $2.1 million compared to $1.2 million in the same period last year. For the full year of 23, our adjusted EBITDA was $6.2 million compared to $1.6 million in the prior year. If you include the 45 days of pre-acquisition for Soylent, then our adjusted EBITDA for the full year of 23 would have been $7.2 million, which is within our pro forma adjusted EBITDA guidance of $7 to $9 million. Now, I'll go into more detail on the full year performance of each of our segments, beginning with Starco Brands. In Starco Brands, the segment, as we alluded to before, includes Art of Sport, Whip Shots, and Winona for fiscal years 23 and 22. The Starco brand segment reported net revenue for the fiscal year was $16.3 million compared to $7.8 million for the full year of 22. This increase was driven by new distribution and increased velocity growth for both Whipshots and Winona Pure. The segment growth profit was $12.4 million for the full year of 23 compared to $7 million for the full year of 22. Reported net revenue for the Schuyler segment was 10.7 million, and gross profit was 7.9 million for fiscal year 23. We do not report results for Schuyler for the full year of 22, as Schuyler was not yet a subsidiary of the company, and we completed the acquisition of Schuyler on December 29th of 22. Reported net revenue for the Soylent segment was 38.2 million, and gross profit was 7.5 million for the fiscal year of 23. And once again, we do not report the results for Soylent for the full year of 22, as Soylent was not yet a subsidiary of the company and completed the acquisition of Soylent on February 15th of 23. Now, moving to our balance sheet, as of December 31st of 23, we had approximately $1.8 million in cash and approximately $10.7 million of inventory on our balance sheet. compared to $1.5 million in cash and $3 million of inventory as of December 31st of 22. Now I'll turn the call back to Ross to discuss our fiscal year 24 outlook and closing remarks.

Thank you, Kevin. For fiscal year 2024, we are projecting between $78 million and $82 million in reported net revenue. It represents a 19% to 26% growth compared to reported net fiscal year 2023. These numbers will be dependent upon timing of retail rollouts. And for adjusted EBITDA, we were projected between 8 and 10 million, or roughly 10% to 12% of reported net revenue, representing 29 to 61% growth compared to fiscal year 2023. These numbers can be impacted by discretionary marketing spend and decision on how we support our brands rolling into retail.

To conclude,

We are very proud of our results this past year and our projections for 2024. We have the infrastructure in place to build a very large business with the goal of becoming a several billion dollar CPG vertically integrated company. We believe we have built a shared service platform that proved its ability this past year to efficiently and profitably house multiple brands at scale, either through like-minded acquisitions or using our innovative technology capabilities to create new brands. And we have an award-winning brand-building playbook that we've successfully tested over the past year with our portfolio of brands garnering impressive returns on media spend, increasing distribution by growing the number of retail partners, and extending penetration with retailers and bringing innovative product extensions to market. There is still a lot of white space for each of our brands that we intend to explore as we continue to expand our distribution product lines. as well as luck to expand into adjacent categories in order to substantially grow these businesses. The future is very bright for Starco Brands as we continue our path toward creating a 21st century consumer products powerhouse. Thank you for your time today. You're interested in Starco Brands. And with that, I'd like to open it up to any questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Thank you. Our first question is from Eric Better with SCC Research.

Please proceed with your question.

Good afternoon.

Let's talk about the distribution challenge. You've done an impressive job with expanding out the brands into some of the key grocery store lines. Is there opportunities for other potential areas like drugstores or the clubs or other places for these products? How do you look upon where the expansion potential might be? by those categories goes?

Yeah, it's very much, you know, business division dependent. You know, obviously we play consumer broadly, but, you know, the categories that we touch in, depending on where they are, will have their own set of kind of, you know, where distribution is today and then looking for the white space. Like, for instance, you know, when we think about, say, Soylent, for instance, you know, that's got very wide distribution opportunities. You know, today we're you know, significantly growing the business in mass. But, you know, we're also starting in the club sector. So things like the Costco's and the Sam's and the BJ's, that's a very large, large sector. If you think about, you know, kind of rings of a tree where there's a priority, right? So, you know, mass in adult nutrition is a very large opportunity. also into the sports category within that store format as a very large opportunity. You move into club, you move into drug. We've got a lot of available distribution space to go after for that brand. And, you know, when we think about, you know, let's say Skylar, right? This is prestige beauty. So today, you know, is in Sephora and sort of a, you know, Sephora darling in safe hypoallergenic fragrances. But there's tremendous opportunity as that business scales to look at other adjacent potential competitive retailers as the business scales. And there's also a lot of white spaces we look internationally, whether it's into Canada or even into Mexico. So each business has very specific areas where they can win. But with all of our business units, the distribution penetration is pretty low today.

Okay. And when you look at expansion opportunities in terms of categories, how do you maximize that with your cross-manufacturing capabilities? I know you inherited probably some contracts when you bought these companies, and I'm assuming you're moving some of those off into your own cross-manufacturing. And then how do you look upon that as the ability to drive higher margins going forward as that becomes a bigger part of the business?

Vertical integration is a really big deal. You are not beholden to a random co-packer's MOQs. You don't have a concern about innovation and brain drain. You're not concerned about somebody else's scheduling when you need to have product a certain time frame. you can rely on this manufacturing base to assist in sort of financing inventory. So there's all these benefits of being able to do that. And so as we look at our current acquired companies and also ones in the future, we play in a very specific arena. Our core competency from a formulary standpoint, manufacturing standpoint, and distribution standpoint is really personal care, OTC, beauty, and then food, beverage, and spirits. That's really our playground.

Okay. And in terms of your guide, what are you incorporating there in terms of further acquisitions? Are you putting any acquisitions into your guide? And you mentioned about Art of Sport, which is kind of going to be kind of re-rolling out this year. What is your thoughts on both of those as they get incorporated into your guidance?

The guidance currently does not include any potential acquisitions. So if one were to happen, if one were to be executed this year, that would be above or outside of guidance that is stated here. AOS, yes, that's gone through a complete turnaround. We effectively, over the last 60 days, have done a soft relaunch on Amazon with new packaging, new products. And the way that we're managing the rollout is effectively almost every 90 days, we'll be standing up the rest of the product line throughout 2024 on digital and DTC basis. And that is going to really allow us to launch the product line in a more formal fashion, And you can look for, you know, further announcements and other collaborations down the road for that business.

Okay. And final question. In terms of two things, one is what is the debt on the balance sheet right now? And secondly, what is the thought process here in terms of debt versus equity to finance acquisitions and finance expansion? Thank you.

Yeah, the debt on the balance sheet today is an operating line of credit that's got $5 million of availability, and I think $3 million is being used. And then there's a balance sheet debt, which was effectively startup capital at the very beginning of a $4.5 million term debt. So the business is relatively unlevered today. You know, we've We've thought about debt and equity pretty seriously, as we've said, and scaled this business quite quickly. Pretty deliberate being a public company from day one and building value in our currency to assist with M&A. To get us to here, we've wanted to be relatively risk-off when it comes to leverage, considering also where interest rates are, etc. As we go forward, we're going to make strategic decisions of where to use you know, leverage and equity that may be further, you know, diluted. So, you know, we're thinking about acquisitions that need to be holistically accretive to even on cashflow, but those will be game time decisions as we, you know, look to the M&A market.

That's correct. Just to add a little bit to that. So total debt as of 1231 is $8.4 million combined with the line of credit with City National. And, you know, we've focused on paying down some of that debt in the short term. So, yeah.

Great. Congratulations, and good luck on 24.

Thanks so much.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad.

There are no further questions at this time.

I'd like to hand the floor back over to Ross Klar for any closing comments.

That's great. Thanks, everyone, for listening, and we will be back in touch next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.