A scab stache is formed when a person picks, pops, or re-opens a wound on and/or above the upperlip. This wound is usually present due to the individual having cold sores.
Tony says "Hey man, whats wrong with your lip, you look like your wearing a Hitler mustache?"
Armando states "Oh, it just a cold sore I opened up, its a scab stache!"
Tony states "I told you, you shouldn't have cheated on your wife!"