The following information should be read in conjunction with our financial
statements and related notes thereto included in Part I, Item 1, above. We also
urge you to review and consider our disclosures describing various risks that
may affect our business, which are set forth under the heading "Risk Factors,"
below.
Forward Looking Statements
Certain matters discussed herein are forward-looking statements. Such
forward-looking statements contained in this Form 10-Q involve risks and
uncertainties, including statements as to:
? our future strategic plans;
? our future operating results;
? our business prospects;
? our contractual arrangements and relationships with third parties;
? the dependence of our future success on the general economy;
? our possibility of not successfully raising future financings; and
? the adequacy of our cash resources and working capital.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as we "believe," "anticipate,"
"expect," "estimate" or words of similar meaning. Similarly, statements that
describe our future plans, objectives or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties which are described in close proximity to such statements and
which could cause actual results to differ materially from those anticipated.
Shareholders, potential investors and other readers are urged to consider these
factors in evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements. The forward-looking
statements included herein are only made as of the date of this Form 10-Q, and
we undertake no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances.
Executive Overview
In July 2017, our Board of Directors entered into a licensing agreement with The
Starco Group ("TSG"), located in Los Angeles, California, to pursue a new
strategic marketing plan involving commercializing leading edge products with
the intent to sell them through brick and mortar retailers as well as through
online retailers. Management believes the Company will realize modest earnings
from royalties in the short term with a stronger positive outlook over the next
12 months as the Company launches additional products and implements stronger
pull through marketing efforts.
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 exclusive and royalty-free basis and
other products on a non-exclusive and royalty basis; in the following
categories: food, household cleaning, air care, spirits and personal care. TSG
is predominantly an aerosol and liquid fill private label and branded
manufacturer with manufacturing assets in the following verticals: DIY/Hardware,
paints, coatings and adhesives, household, air care, disinfectants, automotive,
motorcycle, arts & crafts, personal care cosmetics, personal care FDA, sun care,
food, cooking oils, beverage, spirits and wine.
The current CEO and owner of TSG, Ross Sklar, was named the CEO of STCB 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, R&D 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.
STCB conducted extensive research and has identified specific channels to
penetrate with its portfolio of novel technologies. STCB intends to raise
capital to assist in launching and marketing these products through debt and
equity financing. STCB is now executing on this vision and is in market with
four product lines, including the Breathe® Household cleaning aerosol line.
Breathe is an environmentally friendly line of household cleaning aerosol
products. It is the world's first aerosol household cleaning line to be approved
by the EPA's Safer Choice program. This product line is biodegradable and is
propelled by nitrogen, which makes up approximately 80% of the earth's
breathable air. Breathe was named Partner of the Year by the EPA's Safer Choice
Program for 2018, a tremendous honor. Breathe also achieved the Good
Housekeeping Seal of approval.
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The Breathe line is predominantly in 300 to 400 stores serviced through United
Natural Foods, Inc. ("UNFI") as well as in almost 500 Home Depots through a
distributor called Central Garden Excel ("Central"), one of the largest
distributors to the DIY/Hardware retail channel. Central will be handling all
of STCB's distribution for the Breathe household cleaning aerosol line to Home
Depot. The Breathe Hand Sanitizer Spray was recently named the exclusive hand
sanitizer spray at all Home Depots, and the 1oz size is now at every check out.
The Breathe line is available on Amazon and Walmart.com and also available at
Lowes.
STCB 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 chains
collapsing 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 is an at scale manufacturer that
started approximately 50 years ago in Santa Clarita, California 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 Mr. Sklar's AE, the concept of a spray
hand sanitizer was invented. AE filed patents on 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 STCB as contemplated by a 2020 memorandum of
understanding between the two companies 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. STCB launched the product
in April 2020 via a Press Release in partnership with Dollar General, announcing
its distribution in all of their 15,000+ stores. STCB has 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
STCB's website www.breathesanitizer.com and on Amazon.com and Walmart.com.
STCB is also the marketer of record, but not the owner of, Betterbilt Chemical's
Kleen Out® branded drain opener and for the Winona® Butter Flavor Popcorn Spray.
STCB provides marketing services to these brands as per the terms of the
agreement. Both products are available in all Walmart stores. Through STCB's
relationship with TSG and their marketing partner Deutsch Marketing,
STCB launched a new label in June 2019 for Winona Popcorn Spray throughout all
Walmart stores. STCB also launched the Winona Popcorn Spray on Amazon through
our strategic partner Pattern (formally iServe), who is a shareholder in STCB.
Winona Popcorn Spray is also sold in H-E-B grocery stores, and the Company
expects sales to continue to grow in this space.
On September 8, 2021, STCB (via its wholly-owned subsidiary, Whipshots-WY)
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, STCB (via newly formed subsidiary Whipshots-DE), 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
alcohol-infused, whipped-cream aerosols, under the brand name "Whipshots." The
Company intends to launch these products under the Whipshots™ brand in the
fourth quarter of 2021.
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In addition, as long as the Company can raise capital, the Company plans to
launch other products in spray condiments, air care, sun care, hair care,
personal care, spirits and beverages over the next 48 months. Although the
initial market reception to our new lines has been encouraging, the Company 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 the Company's ability to raise further
capital is critical.
We will need to rely on sales of our common stock in order to raise additional
capital. The purchasers and manner of issuance will be determined according to
our financial needs and the available exemptions to the registration
requirements of the Securities Act of 1933. The Company is planning to utilize,
as best as possible with limited financing, the services of Deutsch Marketing in
order to help support the Company's plan. The Company will also utilize the
marketing capabilities of Hearst Media with its co-branding arrangement on some
of its products. This provides significant support for its current retail and
online distribution.
The Company continues to pursue financing opportunities and plans to raise
capital via a Regulation A offering in fourth quarter of 2021. The Company has
engaged The Dalmore Group to assist as the broker dealer of record in this
process.
The Company's ultimate goal is to become a leading brand owner and third-party
marketer of cutting edge technologies in the consumer products marketplace whose
success is expected to increase shareholder value. The Company will continue
to evaluate this and other opportunities to further set its 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 September 30, 2021 and 2020
Revenues
For the three months ended September 30, 2021, the Company recorded royalty
revenues of $109,503 compared to $767,808 for the three months ended September
30, 2020, a decrease of $658,305, a percentage decrease of 86%. 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 decrease in the current period is primarily due to reductions in sales of
our Breathe Hand Sanitizer (launched in 2020) and cleaning sprays, partially
offset by growth in sales of Kleen-out and Winona Popcorn Spray. For the three
months ended September 30, 2021, Breathe cleaning and sanitizer products
accounted for approximately 15% of total royalty revenue, compared to the three
months ended September 30, 2020 where Breathe cleaning and sanitizer products
accounted for approximately 90% of total royalty revenue.
We believe that the decrease in our revenues for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 is in
part due to COVID-19. In 2020, especially in the early stages of the COVID-19
pandemic, demand for consumer goods, and in particular sanitizers, skyrocketed.
During the three months ended June 30, 2020, we saw demand increase for our
Winona Popcorn Spray, Breathe cleaning products and Breathe Hand Sanitizer. As
the initial panic and hoarding of cleaning supplies dwindled during 2021, and
the increasing availability of vaccines became widespread, many retailers in the
US evaluated their inventories and determined that they had, for many product
categories, and in particular sanitization supplies, had too much stock due to a
reduction in consumer frenzy over those products. As a result, the Company
experienced a slowdown in demand for both our Breathe cleaning products and
Breathe Hand Sanitizer.
Operating Expenses
For the three months ended September 30, 2021, compensation expense decreased
$22,803, or 75%, to $11,673 compared to $47,113 for the three months ended
September 30, 2020. The decrease is a result of reductions in the number of paid
directors and officers.
For the three months ended September 30, 2021, the Company incurred $57,480 in
professional fees compared to $34,677 for the three months ended September 30,
2020, an increase of $22,803, or 66%. 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 legal and audit fees.
For the three months ended September 30, 2021, the Company incurred $430,176 in
marketing, general and administrative expense as compared to $222,334 for the
three months ended September 30, 2020, an increase of $207,842, or 94%. The
increase can be attributed to an increase in spending on marketing including
initial license payments related to the promotional launch for Whipshots™.
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Other income and expense
For the three months ended September 30, 2021, we had total other expense of
$2,987 compared to other expense of $1,768 for the three months ended September
30, 2020. The increase in total other expense was largely a result of office sub
lease income and gain on forgiveness of debt in the three months ended September
30, 2020 which did not reoccur in the corresponding period for 2021.
Net loss
For the three months ended September 30, 2021, the Company recorded a net loss
of $392,813 as compared to a net gain of $461,916 in the prior year. Our
increase in net loss is primarily the result of the decline in revenue in
addition to increased marketing and professional spending. The net gain in the
prior year was a result of our increase in revenue attributed to the Breathe
Hand Sanitizer Spray, growth in the Breathe Household Cleaning line and growth
with the Winona Popcorn Spray.
Results of Operation for the Nine Months Ended September 30, 2021 and 2020
Revenues
For the nine months ended September 30, 2021, the Company recorded royalty
revenues of $484,073 compared to $1,120,072 for the nine months ended September
30, 2020, a decrease of $635,999, a percentage decrease of 58%.
As stated above, we believe that our results of operations for the nine months
ended September 30, 2021 and September 30, 2020 were in part affected by
COVID-19. In 2020, especially in the early stages of the COVID-19 pandemic,
demand for consumer goods, and in particular sanitizers skyrocketed. During the
nine months ended September 30, 2020, Starco Brands saw demand increase for our
Winona Popcorn Spray, as well as its Breathe cleaning and sanitization products.
During the nine months ended September 30, 2021, the increasing availability of
vaccines became widespread and many retailers in the US evaluated their
inventories, determining that they had, for many product categories, and in
particular sanitization supplies, had too much stock due to a reduction in
consumer frenzy over those products. As a result, the Company experienced a
slowdown in demand for both our Breathe cleaning products and Breathe Hand
Sanitizer - however, we continued to see strong sales of our Winona Popcorn
Spray.
Operating Expenses
For the nine months ended September 30, 2021, compensation expense decreased
$49,370, or 36% to $89,466 compared to $138,836 for the nine months ended
September 30, 2020. This decrease was a result of reductions in the number of
paid directors and officers.
For the nine months ended September 30, 2021, the Company incurred $167,882 in
professional fees compared to $63,956 in the prior period, an increase of
$103,926, or 163%. 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
legal fees, including fees associated with the Company's proposed Regulation A
offering in the fourth quarter of 2021.
For the nine months ended September 30, 2021, the Company incurred $750,540 in
marketing, general and administrative expense as compared to $328,833 for the
nine months ended September 30, 2020, an increase of $421,707, or 129%. The
increase can be attributed to an increase in spending on marketing.
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Other income and expense
For the nine months ended September 30, 2021, we had total other expense of
$25,673 compared to $5,027 for the nine months ended September 30, 2020. The
increase in total other expense was largely a result of office sub lease income
and gain on forgiveness of debt in the nine months ended September 30, 2020
which did not reoccur in the corresponding period for 2021.
Net loss
For the nine months ended September 30, 2021, the Company recorded a net loss of
$549,488 as compared to a net gain of $583,420 in the prior year. Our increase
in net loss is primarily the result of the decline in revenue in addition to
increased marketing and professional spending.
Liquidity and Capital Resources
As reflected in the accompanying unaudited condensed consolidated financial
statements, the Company had an accumulated deficit of $16,686,508 at September
30, 2021, primarily due to the issuance of stock for services when the Company
reorganized in 2017 and 2018, had a net loss of $549,488 and used net cash for
operating activities of $685,899 for the nine months ended September 30, 2021.
We generated $491,498 from financing activities during the nine months ended
September 30, 2021, compared to $128,508 provided by financing activities during
the nine months ended September 30, 2020.
In the comparative period in 2020, the Company generated net income of $583,420
as compared to a net operating loss of $549,488 in 2021. Operating expenses
included items such as compensation for two out of the four Board Members,
marketing expenses, administrative costs, insurance, legal and other
professional fees, compliance and website maintenance. No cash compensation has
ever been paid to Ross Sklar, the CEO and Chairman of the Board.
On January 24, 2020, the Company 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, the Company 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, the Company
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.
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.
The Company applies the following five-step model in order to determine this
amount: (i) identification of the promised goods in the contract; (ii)
determination of whether the promised goods are performance obligations,
including whether they are distinct in the context of the contract; (iii)
measurement of the transaction price, including the constraint on variable
consideration; (iv) allocation of the transaction price to the performance
obligations; and (v) recognition of revenue when (or as) the Company satisfies
each performance obligation.
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Off-Balance Sheet Arrangements
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
The Company has implemented all new accounting pronouncements that are in
effect. These pronouncements did not have any material impact on the financial
statements unless otherwise disclosed, and the Company does not believe that
there are any other new accounting pronouncements that have been issued that
might have a material impact on its financial position or results of operations.
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STARCO BRANDS, INC. 
