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 growing revenues from
royalties over the next 12 months as the Company continues to execute on its
marketing pull through strategy and as it expands its distribution.
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 provides 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 manufacturer that also owns some brands. It has 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.
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After researching the Company's best opportunities the Company launched and is
now in market with four product lines.. The Company intends to raise capital via
a Regulation A public offering in Q1 2021. This will assist in marketing their
products and launching new sku's and new lines. The Company is now executing on
this vision and is in market with 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.
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 and Lowes
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 Lowes. 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 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.
The product is being manufactured by BOV Solutions, a division of The Starco
Group that is an at scale FDA, CFR210/211manufacturer 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 product is in distribution through 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 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. The Company also just landed HEB and Winona
Popcorn Spray which is now distributed through all their stores.
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 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.
-14-
We will need to rely on sales of our common stock in our upcoming Regulation A
offering projected to begin in Q1 2021. 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 applicable brands owned by Hearst that will be
cobranded with a Starco Brands product and then will be marketed throughout the
Hearst platform. Each product deal will have its own media budget that Hearst
contributes for a certain royalty on gross sales. Media spends in this deal
range from $1.5M to 3m per year. 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, Ophra, House Beautiful, Prevention Magazine, Good Housekeeping and
others. Hearst contributes between 1.5 million and 3 million dollars of media
space for approximately 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 platforms for our products without the use of any
upfront capital. The Company has recently replicated this deal with Winona
Popcorn Spray and Hearst's Delish.com and other products Starco Brands will be
coming out with.
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 and advisory firm called Issuance, Inc. and signed a
broker dealer agreement with The Dalmore Group 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 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 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 September 30, 2020 and 2019
Revenues
For the three months ended September 30, 2020, the Company recorded royalty
revenues of $767,808 compared to $50,034 for the three months ended September
30, 2019, an increase of $717,774, a percentage gain of 1,435%. The current
royalties equate to approximately $3.5 million of gross revenues of Starco
Brands and Starco Brands represented products. 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. Revenues are from our marketing
licensing agreements with The Starco Group and other affiliated companies, 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.
-15-
Operating Expenses
For the three months ended September 30, 2020, compensation expense to Sandy
Lang, Marty Goldrod and Rachel Boulds, the only people compensated in the
Company, increased $1,456, or 3.2% to $47,113 compared to $45,657 for the three
months ended September 30, 2019.
For the three months ended September 30, 2020, the Company incurred $34,677 in
professional fees compared to $6,911 in the prior period, an increase of
$27,766, or 401.8%. Professional fees are mainly for accounting, auditing and
legal services associated with our quarterly filings as a public company and
advisory and valuation services. The increase is primarily due to an increase in
legal fees.
For the three months ended September 30, 2020, the Company incurred $222,334 in
marketing, general and administrative expense as compared to $56,130 for the
three months ended September 30, 2019, an increase of $166,204, or 296.1%. The
increase can be attributed to an increase of spending on marketing.
Other income and expense
For the three months ended September 30, 2020, we had total other expense of
$1,768 compared to $2,804 for the three months ended September 30, 2019. For the
three months ended September 30, 2020, we had other income from sub leasing our
office space of $7,000, interest expense of $8,768. For the three months ended
September 30, 2019, we had other income of $5,250, interest expense of $24,071.
Net loss
For the three months ended September 30, 2020, the Company recorded net income
of $461,916 as compared to a net loss of $61,468 in the prior year. Our increase
in net income is attributed to our increase in revenue attributed to the Breathe
Hand Sanitizer Spray, growth in the Breathe Household Cleaning line and to
continued growth with the Winona Popcorn Spray.
Results of Operation for the Nine Months Ended September 30, 2020 and 2019
Revenues
For the nine months ended September 30, 2020, the Company recorded royalty
revenues of $1,120,072 compared to $228,783 for the nine months ended September
30, 2019, an increase of $891,289 or 389.6%. 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. Revenues are from our marketing licensing
agreements with The Starco Group and other affiliated companies, for various
products mentioned above.
Operating Expenses
For the nine months ended September 30, 2020 compensation expense to Sandy Lang,
Marty Goldrod and Rachel Boulds, the only people compensated in the Company,
decreased $229, or .2% to $138,836 compared to $138,607 for the nine months
ended September 30, 2019.
For the nine months ended September 30, 2020, the Company incurred $63,956 in
professional fees compared to $37,354 in the prior period, an increase of
$26,602, or 71.2%. 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.
For the nine months ended September 30, 2020, the Company incurred $328,833 in
marketing, general and administrative expense as compared to $157,284 for the
nine months ended September 30, 2019, an increase of $171,549, or 109.1%. The
increase can be attributed to an increase of spending on marketing.
-16-
Other income and expense
For the nine months ended September 30, 2020, we had total other expense of
$5,027 compared to total other income of $11,296 for the nine months ended
September 30, 2019. For the nine months ended September 30, 2020, we had other
income from sub leasing our office space of $15,750, interest expense of $24,077
and a gain on forgiveness of debt of $3,300. For the nine months ended September
30, 2019, we had other income of $15,750, interest expense of $23,888 and a gain
on forgiveness of debt of $19,434.
Net loss
For the nine months ended September 30, 2020, the Company recorded net income of
$583,420 as compared to a net loss of $93,166 in the prior year. Our increase
from a net loss to net income is attributed to the Breathe Hand Sanitizer Spray,
growth in the Breathe Household Cleaning line and to continued growth with the
Winona Popcorn Spray.
Liquidity and Capital Resources
As reflected in the accompanying unaudited financial statements, the Company has
an accumulated deficit of $16,096,886 at September 30, 2020, due to providing
stock for services when the Company reorganized in 2017/18, and had net income
of $583,420 and net cash provided by operating activities of $427,490 for the
nine months ended September 30, 2020.
We netted $128,508 from financing activities for the nine months ended September
30, 2020, due to a $100,000 loan from our CEO and a net $60,837 from other
related party cash advances to pay for general operating expenses, compared to
$65,787 provided by financing activities the nine months ended September 30,
2019.
In the comparative period in 2019 the Company was operating at a net loss of
$93,166 compared to the Company generating a net operating profit of $583,420 in
2020. Operating expenses include items such as only two out of the four Board
Member's compensation, marketing expenses, administrative costs, insurance,
legal and other professional fees, compliance and website maintenance. No cash
compensation has ever been paid to the Ross Sklar the CEO and Chairman of the
Board.
We have an outstanding loan of approximately $289,000 from Sandy Lang that
requires monthly interest payments of $2,545. This was used to pay
administrative and other operating 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.
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.
-17-
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.
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, ("TSG") a related party. 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 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.
-18-© Edgar Online, source Glimpses
STARCO BRANDS, INC. 
