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,"
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.
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 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 the Company 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 the Company
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
The Company conducted extensive research and has identified specific channels to
penetrate with its 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 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.
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. 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
The Company 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 the Company 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. The Company 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. 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, Macy's, Smart & Final, Weeks and 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.com and
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 the Company. Winona Popcorn Spray is also sold in H-E-B
grocery stores, and the Company expects sales to continue to grow in this space.
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
The Company is also planning to launch new products over the next year that are
viewed as disruptive in their market and leading edge, again as long as its
financing plans come to fruition. The Company has now engaged and contracted
with a financial advisory firm to assist the Company in procuring future
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
For more information please visit our websites at www.starcobrands.com,
www.breathecleaning.com, and www.breathesanitizer.com.
Results of Operation for the Three Months Ended June 30, 2021 and 2020
For the three months ended June 30, 2021, the Company recorded royalty revenues
of $242,056 compared to $296,590 for the three months ended June 30, 2020, a
decrease of $54,534, a percentage loss of 18%. 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 and cleaning sprays, partially
offset by growth in sales of Kleen-out and Winona Popcorn Spray.
For the three months ended June 30, 2021, compensation expense decreased
$11,640, or -26% to $33,560 compared to $45,200 for the three months ended June
For the three months ended June 30, 2021, the Company incurred $99,847 in
professional fees compared to $27,473 for the six months ended June 30, 2020 in
the prior period, an increase of $72,374. 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 June 30, 2021, the Company incurred $137,621 in
marketing, general and administrative expense as compared to $68,852 for the
three months ended June 30, 2020, an increase of $68,769. The increase can be
attributed to an increase in spending on marketing.
Other income and expense
For the three months ended June 30, 2021, we had total other expense of $11,794
compared to other income of $544 for the three months ended June 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 June 30, 2020 which
did not reoccur in the corresponding period for 2021.
For the three months ended June 30, 2021, the Company recorded a net loss of
$40,766 as compared to a net gain of $155,609 in the prior year. Our increase in
net loss is primarily the result of increased marketing and professional
spending, in addition to the decline in revenue.
Results of Operation for the Six Months Ended June 30, 2021 and 2020
For the six months ended June 30, 2021, the Company recorded royalty revenues of
$374,570 compared to $352,264 for the six months ended June 30, 2020, an
increase of $22,306, a percentage gain of 6%. The increase in the current period
is due to increases of sales of our Breathe cleaning sprays, Kleen-out, and
Winona Popcorn Spray.
For the six months ended June 30, 2021, compensation expense decreased $13,930,
or -15% to $77,793 compared to $91,723 for the six months ended June 30, 2020.
For the six months ended June 30, 2021, the Company incurred $110,402 in
professional fees compared to $29,279 in the prior period, an increase of
$81,123. 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
For the six months ended June 30, 2021, the Company incurred $320,364 in
marketing, general and administrative expense as compared to $106,499 for the
six months ended June 30, 2020, an increase of $213,865. The increase can be
attributed to an increase in spending on marketing.
Other income and expense
For the six months ended June 30, 2021, we had total other expense of $22,686
compared to $3,259 for the six months ended June 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 six months ended June 30, 2020 which did not reoccur
in the corresponding period for 2021.
For the six months ended June 30, 2021, the Company recorded a net loss of
$156,675 as compared to a net gain of $121,504 in the prior year. Our increase
in net loss is primarily the result of increased marketing and professional
spending, partially offset by increased revenue.
Liquidity and Capital Resources
As reflected in the accompanying unaudited condensed financial statements, the
Company had an accumulated deficit of $16,293,696 at June 30, 2021, primarily
due to the issuance of stock for services when the Company reorganized in 2017
and 2018, had a net loss of $156,675 and used net cash for operating activities
of $477,852 for the six months ended June 30, 2021.
We used $42,392 in financing activities for the six months ended June 30, 2021,
compared to $77,520 provided by financing activities during the six months ended
June 30, 2020.
In the comparative period in 2020 the Company was operating at a net gain of
$121,504 compared to the Company generating a net operating loss of $156,675 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
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 an additional $100,000 was advanced to the Company on the same terms.
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
The Company earns its 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 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.
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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