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, 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 begins to implement a stronger media and social strategy.
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Starco Brands, Inc. is a company whose mission is to create behavior-changing
products and brands. Our core competency is inventing brands and marketing, and
building relationships with marketing agencies and large media companies to
assist in pushing the Companies products.. The licensing agreement with The
Starco Group provided Starco Brands 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. The Starco Group 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 of The Starco Group, Ross Sklar, was named the CEO of Starco
Brands 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 The Starco Group into a successful and diversified
manufacturer supplying a wide range of products to some of the largest retailers
in the United States.
The Company has conducted research and has identified specific channels to
penetrate with its new portfolio of novel technologies. The Company intends to
raise capital to assist in launching and marketing these products through debt
and equity financing. The Company has begun to execute this vision and has
launched the first product line called 'Breathe ®', through our manufacturing
partner, The Starco Group ("TSG"). 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.
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 the Company's distribution for the Breathe household cleaning aerosol line to
Home Depot and are currently presenting to others that are considered to be
competitive players to Home Depot. The Company has also begun to implement its
online sales strategy and Breathe is now available on Amazon. Breathe is
currently being presented to a few other national retailers in the United
States.
The Company has also recently launched the Breathe Hand Sanitizer Spray in April
2020. This invention was created and patents were filed by Alim Enterprises,
LLC, ("AE") an arm's length 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 The Starco Group. 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 Coronavirus 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 75% alcohol
solution that utilizes only compressed air and nitrogen as the products
propellant. AE and its intellectual property counsel believe the product is
novel and warrants a utility patent.
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The product is being manufactured by BOV Solutions, a division of The Starco
Group 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 The Starco Group's existing distribution footprints in the United
States. The Company launched the product on April 20, 2020 via a Press Release
and did so in partnership with Dollar General to be distributed in all their
15,000 stores. The Company has also partnered with Wegmans, HLA and J Winkler.
Since then the Company is now distributing the product to The Home Depot,
Lowes, American Pharmacy, AutoZone, The Farm Shop, Harris Teeter, UNFI, Kehe,
Macys, Smart & Final, Weeks and a few others. The product comes in three sizes,
1oz., 5oz., and 9.5oz. sprays and is available directly on the Company's website
www.breathesanitizer.com and on Amazon and Walmart.com.
The Company 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. The Company provides marketing services to these brands when
needed as per the terms of the agreement. Both products are available in all
Walmart stores. Through the Company's relationship with TSG and their marketing
partner Deutsch Marketing, the Company launched a new label in June 2019 for
Winona Popcorn Spray throughout all Walmart stores. The Company also launched
the Winona Popcorn Spray on Amazon through our strategic partner Pattern
(formally iServe), who is a shareholder in Starco Brands, Inc. The Company
expects sales to continue to grow in this space.
In addition, as long as the Company can continue to raise capital the Company
plans to launch other products in spray condiments, air care, suncare, hair
care, , personal care, spirits and beverages over the next 60 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 marketing plan. The Company also engaged
with a marketing agency called The Woo. The Woo has core competencies in web
design, developing social marketing assets and video production. The Company has
also partnered with a global media firm called Hearst Media to assist with
marketing products on a larger level across a variety of owned media platforms.
The concept of the deal with Hearst is that the Company will partner with an
applicable brand owned by Hearst that will be cobranded with a Starco Brands
product. The first deal that was executed was the Breathe household cleaning
line and the hand sanitizer line that was approved for the Good Housekeeping
Seal of approval and now the packaging and all marketing showcases the seal.
The brand is then marketed across the Hearst platform and over the last 60 days
has been showcased in Women's Health, Men's Health, Prevention Magazine, Good
Housekeeping and others.
Hearst contributes approximately 2 million dollars in media space for a 2%
royalty participation on the Breathe product sales. This highly strategic deal
allows Starco Brands to exploit one of the largest and most appropriate media
landscapes for Breathe without the use of any upfront capital. The Company
plans to replicate this deal with Winona Popcorn Spray and other products Starco
Brands will be coming out with.
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The Company is also planning on launching new products over the next year that
are viewed as disruptive in their market and leading edge, again as long as
their financing plans come to fruition. The Company has now contracted with, a
top securities marketing firm and is interviewing broker dealers to assist 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 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 2021
and beyond.
For more information please visit our website at www.starcobrands.com,
www.breathecleaning.com, www.breathesanitizer.com.
Results of Operation for the Three Months Ended June 30, 2020 and 2019
Revenues
For the three months ended June 30, 2020, the Company recorded royalty revenues
of $296,590 compared to $117,486 for the three months ended June 30, 2019, an
increase of $179,104 or 152.4%. The royalty rate that Starco Brands is paid
varies on a per product basis of wholesale sales of our branded and
non-corporate owned licensed products, which are sold by our manufacturing
partner, The Starco Group, revenues are from our marketing licensing agreements
with The Starco Group, for various products mentioned above. The increase in the
current period is due to an increase of sales of our Breathe household cleaning
line and Winona Popcorn Spray, and to the launching and scaling of the new
Breathe hand sanitizer spray.
Operating Expenses
For the three months ended June 30, 2020, compensation expense to Sandy Lang,
Marty Goldrod and Rachel Boulds, the only people compensated in the Company,
decreased $1,030, or 2.2% to $45,200 compared to $46,230 for the three months
ended June 30, 2019.
For the three months ended June 30, 2020, the Company incurred $27,473 in
professional fees compared to $8,686 in the prior period, an increase of
$18,787, or 216.3%. 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
audit fees.
For the three months ended June 30, 2020, the Company incurred $68,852 in
general and administrative expense as compared to $65,858 for the three months
ended June 30, 2019, an increase of $2,994, or 4.5%. The increase can be
attributed to a slight increase of spending on marketing.
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Other income and expense
For the three months ended June 30, 2020, we had total other income of $544
compared to $16,881 for the three months ended June 30, 2019. For the three
months ended June 30, 2020, we had other income from sub leasing our office
space of $3,500, interest expense of $6,256 and a gain on forgiveness of debt of
$3,300. For the three months ended June 30, 2019, we had other income of $5,250,
interest expense of $7,803 and a gain on forgiveness of debt of $19,434.
Net loss
For the three months ended June 30, 2020, the Company recorded net income of
$155,609 as compared to net income of $13,593 in the prior year. Our increase in
net income is attributed to our increase in royalty revenue from our new Breathe
hand sanitizer product.
Results of Operation for the Six Months Ended June 30, 2020 and 2019
Revenues
For the six months ended June 30, 2020, the Company recorded royalty revenues of
$352,264 compared to $178,749 for the six months ended June 30, 2019, an
increase of $173,515 or 97%. The royalty rate that Starco Brands is paid varies
on a per product basis of wholesale sales of our branded and non-corporate owned
licensed products, which are sold by our manufacturing partner, The Starco
Group, revenues are from our marketing licensing agreements with The Starco
Group, for various products mentioned above.
Operating Expenses
For the six months ended June 30, 2020 compensation expense to Sandy Lang, Marty
Goldrod and Rachel Boulds, the only people compensated in the Company, decreased
$1,227, or 1.3% to $91,723 compared to $92,950 for the six months ended June 30,
2019.
For the six months ended June 30, 2020, the Company incurred $29,279 in
professional fees compared to $30,443 in the prior period, a decrease of $1,164,
or 3.8%. Professional fees are mainly for accounting, auditing and legal
services associated with our quarterly filings as a public company and advisory
and valuation services.
For the six months ended June 30, 2020, the Company incurred $106,499 in general
and administrative expense as compared to $101,154 for the six months ended June
30, 2019, an increase of $5,345, or 5.3%. The increase can be attributed to a
slight increase of spending on marketing.
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Other income and expense
For the six months ended June 30, 2020, we had total other expense of $3,259
compared to total other income of $14,100 for the six months ended June 30,
2019. For the six months ended June 30, 2020, we had other income from sub
leasing our office space of $8,750, interest expense of $15,309 and a gain on
forgiveness of debt of $3,300. For the six months ended June 30, 2019, we had
other income of $10,500, interest expense of $15,834 and a gain on forgiveness
of debt of $19,434.
Net loss
For the six months ended June 30, 2020, the Company recorded net income of
$121,504 as compared to a net loss of $31,698 in the prior year. Our increase
from a net loss to net income is attributed to our increase in royalty revenue
from our new Breathe hand sanitizer product.
Liquidity and Capital Resources
As reflected in the accompanying financial statements, the Company has an
accumulated deficit of $16,558,802 at June 30, 2020, due to providing stock for
services when the Company reorganized in 2017/18, and had net income of $121,504
and net cash used in operating activities of $71,744 for the six months ended
June 30, 2020.
We netted $77,520 from financing activities for the six months ended June 30,
2020, due to a $100,000 loan from our CEO, compared to $4,821 used for the six
months ended June 30, 2019.
We currently require cash of about $25,000 a month for operating expenses. For
the first time the Company is past its break-even point. Operating expenses
include items such as Board Member compensation, administrative costs,
insurance, legal and other professional fees, compliance and website
maintenance. No cash compensation has ever been paid to the CEO Ross Sklar.
We have an outstanding loan of approximately $300,000 from Sandy Lang that
requires monthly interest payments of $2,545. This was used to pay the monthly
compensation of Sandy Lang and Marty Goldrod and some administrative costs.
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, compounded monthly, is
unsecured and matures in two years.
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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 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 is recognized when a customer obtains control of promised goods or
services and is recognized in an amount that reflects the consideration that an
entity expects to receive in exchange for those goods or services. In addition,
the standard requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. The amount of
revenue that is recorded reflects the consideration that the Company expects to
receive in exchange for those goods. 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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The Company only applies the five-step model to contracts when it is probable
that the entity will collect the consideration it is entitled to in exchange for
the goods or services it transfers to the customer. Once a contract is
determined to be within the scope of ASC 606 at contract inception, the Company
reviews the contract to determine which performance obligations the Company must
deliver and which of these performance obligations are distinct. The Company
recognizes as revenues the amount of the transaction price that is allocated to
the respective performance obligation when the performance obligation is
satisfied or as it is satisfied.
The Company earns its revenue from the licensing agreements it has with The
Starco Group, Inc., ("TSG") a related party. The Company licenses the right to
manufacture and sell certain products to TSG. The amount of the licensing
revenue received varies depending upon the product and is determined beforehand
in each agreement. The Company recognized its revenue only when it receives a
report of sales made by TSG to a third party.
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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