IMPORTANT CAUTION REGARDING FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, ALONG WITH OTHER FEDERAL SECURITIES LAWS. THESE STATEMENTS PREDICT FUTURE FINANCIAL PERFORMANCE, BUSINESS GROWTH, STRATEGIC OPERATIONS, AND OTHER RELATED MATTERS. THIS INCLUDES, BUT IS NOT LIMITED TO, COMMENTS ON HOW THE COVID-19 PANDEMIC HAS INFLUENCED OUR BUSINESS, OPERATIONS, FINANCIAL LIQUIDITY, INVESTMENTS, AND OVERALL FINANCIAL CONDITION. WE HAVE BASED THESE FORWARD-LOOKING STATEMENTS ON OUR CURRENT INTENTIONS, EXPECTATIONS, AND PROJECTIONS REGARDING FUTURE EVENTS. HOWEVER, THESE FORWARD-LOOKING STATEMENTS ARE NOT ASSURED TO OCCUR AND MAY NOT HAPPEN AS EXPECTED. THEY ARE SUBJECT TO BOTH KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND ASSUMPTIONS THAT COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS TO DIFFER SIGNIFICANTLY FROM THOSE EXPRESSED OR IMPLIED IN THESE STATEMENTS. YOU CAN OFTEN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMS LIKE “MAY,” “WILL,” “SHOULD,” “COULD,” “WOULD,” “INTEND,” “PROJECT,” “CONTEMPLATE,” “POTENTIAL,” “EXPECT,” “PLAN,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “CONTINUE,” OR THE NEGATIVE OF SUCH TERMS OR SIMILAR EXPRESSIONS. PLEASE BE AWARE THAT THESE STATEMENTS ARE MERELY PREDICTIONS. FACTORS THAT MAY LEAD TO SUCH DISCREPANCIES INCLUDE, BUT ARE NOT LIMITED TO, THE ELEMENTS DISCUSSED IN OUR OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS.
READING THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT IS CRUCIAL. ANY FORWARD-LOOKING STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q, AS WELL AS OTHER PUBLIC REPORTS, MAY TURN OUT TO BE INACCURATE DUE TO OUR BELIEFS AND ASSUMPTIONS CONNECTED TO THE FACTORS OUTLINED ABOVE OR BECAUSE OF UNIDENTIFIED AND UNPREDICTABLE ELEMENTS. FURTHERMORE, OUR BUSINESS AND FUTURE RESULTS ARE INFLUENCED BY A VARIETY OF OTHER FACTORS, AS DETAILED IN THE “RISK FACTORS” SECTION OF OUR AMENDED ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) ON AUGUST 25, 2022. DUE TO THESE AND OTHER UNCERTAINTIES, OUR FUTURE RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN ANY FORWARD-LOOKING STATEMENTS, AND RELIANCE ON SUCH STATEMENTS SHOULD BE AVOIDED. WE DO NOT ASSUME ANY OBLIGATION TO PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO REFLECT UNANTICIPATED EVENTS OR CIRCUMSTANCES OCCURRING AFTER THIS DATE. THE RISKS DESCRIBED COULD RESULT IN OUR ACTUAL PERFORMANCE FOR 2022 AND BEYOND DIFFERING SIGNIFICANTLY FROM THE RESULTS EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY OR ON OUR BEHALF, NEGATIVELY IMPACTING OUR FINANCIAL CONDITION, LIQUIDITY, AND STOCK PERFORMANCE.
Our Business
Starco Brands, Inc. (previously known as Insynergy Products, Inc.), referred to as “the Company,” “our Company,” “STCB,” “we,” “us,” or “our,” was established in the State of Nevada on January 26, 2010. On September 7, 2017, the Company filed an Amendment to the Articles of Incorporation, changing its name to Starco Brands, Inc. This name change was deemed beneficial by the Board due to shifts in our current and expected business operations. In July 2017, we entered into a licensing agreement with The Starco Group (“TSG”), based in Los Angeles, California. TSG operates as a private label and branded manufacturer of aerosol and liquid fill products across numerous sectors including DIY, paints, coatings, adhesives, household products, hair care, disinfectants, automotive goods, arts & crafts, personal care cosmetics, personal care FDA, sun care, food products, cooking oils, beverages, and spirits. By entering the licensing agreement with TSG, we shifted our focus towards commercializing innovative consumer products produced by TSG.
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In the third quarter of 2021, STCB established two subsidiaries: Whipshots, LLC, a Wyoming limited liability company (“Whipshots LLC”) and Whipshots, LLC, a Delaware limited liability company, which was later renamed Whipshots Holdings, LLC (“Whipshots Holdings”). Whipshots LLC was initially a wholly-owned subsidiary of STCB at its formation and was subsequently contributed to Whipshots Holdings. Currently, Whipshots Holdings is a majority-owned subsidiary of STCB, where we hold 96% of the vested voting interests, with an additional 3% of equity issued subject to vesting requirements that are not owned by the Company.
On September 12, 2022, STCB, through its wholly-owned subsidiary Starco Merger Sub Inc. (“Merger Sub”), successfully completed the acquisition (the “AOS Acquisition”) of The AOS Group Inc., a Delaware corporation (“AOS”). This AOS Acquisition involved Merger Sub merging with AOS, with AOS emerging as the surviving corporation. AOS now functions as a wholly-owned subsidiary of STCB.
Executive Overview
In July 2017, our Board of Directors initiated a licensing agreement with TSG to implement a new strategic marketing plan centered on introducing innovative products aimed at retail distribution both in physical stores and online platforms. Our mission is to create behavior-changing products that ignite excitement among consumers. Our expertise lies in leveraging cultural trends, building powerful brands, and enhancing awareness through creative marketing strategies. The licensing agreement with TSG grants us exclusive and royalty-free access to certain products, along with others that are offered on a non-exclusive and royalty basis, spanning categories such as food, household cleaning, air care, spirits, and personal care.
The current CEO and owner of TSG, Ross Sklar, took on the role of our CEO in August 2017. Mr. Sklar brings extensive experience in commercializing technology across both industrial and consumer markets. Over the past two decades, he has built teams across manufacturing, research and development, and sales and marketing, transforming TSG into a successful, diversified manufacturer supplying a wide range of products to some of the largest retailers in the United States.
Through thorough research, we have pinpointed several untapped consumer needs that we can effectively address using our portfolio of cutting-edge technologies. We are now actively pursuing this vision, and since our inception, we have successfully launched four distinct product lines.
The Breathe® Household cleaning aerosol line offers an eco-friendly solution to household cleaning needs. Recognized as the EPA Safer Choice Program Partner of the Year, this product line utilizes nitrogen as a propellant, which constitutes approximately 80% of the earth’s breathable air. Breathe has earned accolades such as the EPA’s Safer Choice Program’s Partner of the Year award and has also received the prestigious Good Housekeeping Seal of Approval.
In April 2020, we introduced the Breathe® Hand Sanitizer Spray. This innovative product was conceived and patented by Alim Enterprises, LLC (“AE”), an entity owned by Mr. Sklar. The technology was initially developed for Blue Cross Laboratories, LLC (“BCL”), a personal care product manufacturer also owned by Mr. Sklar’s TSG. The product was born out of necessity during the supply chain disruptions caused by the Covid-19 pandemic, which led to a surge in demand for hand sanitizers. The traditional packaging components necessary for manufacturing hand sanitizer became increasingly hard to obtain. BCL, established around 50 years ago and located in Santa Clarita, California, specializes in personal care products, including hand sanitizer. The pandemic severely strained many conventional supply chains, causing BCL to struggle with sourcing sufficient bottles and caps. The idea for an aerosol spray hand sanitizer emerged through AE, leading to the filing of patents for what is believed to be the first-ever aerosol spray hand sanitizer containing a 75% alcohol solution, utilizing only compressed air and nitrogen as propellants. AE, along with its intellectual property counsel, holds that this innovation is unique and merits a utility patent. In February 2021, AE assigned the patent application to us in accordance with a memorandum of understanding established in 2020 among AE, us, and TSG.
Manufacturing of the product is handled by BOV Solutions, a division of TSG, recognized for its capacity as an FDA, CFR210/211 compliant manufacturer of aerosol and OTC products. The Breathe Hand Sanitizer Spray can exclusively be produced in an FDA-approved facility equipped for large-scale aerosol manufacturing. The product is distributed through BOV Solutions and TSG’s established distribution networks in the United States. We officially launched the product in April 2020 through a press release in collaboration with Dollar General, marking its availability in over 15,000 stores. Additional partnerships include Wegmans, HLA, and J Winkler, and the product is now distributed through major retailers such as The Home Depot, Lowes, American Pharmacy, AutoZone, The Farm Shop, Harris Teeter, UNFI, Kehe, Macy’s, Smart & Final, Weeks, among others. The product is available in three sizes: 1 oz., 5 oz., and 9.5 oz. sprays, and can be purchased directly from our website www.breathesanitizer.com, as well as on Amazon.com and Walmart.com.
Additionally, we serve as the marketer of record for Betterbilt Chemical’s Kleen Out® branded drain opener and the Winona® Butter Flavor Popcorn Spray. Our role involves providing marketing services for these brands in accordance with our contractual agreements. Both products are readily available in Walmart stores across the country.
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In 2019, Winona Popcorn Spray entered into a co-marketing partnership with Delish, a media brand owned by Hearst. This collaboration has allowed the brand to achieve widespread distribution throughout Walmart stores nationwide. Furthermore, we successfully launched the Winona Popcorn Spray on Amazon through our strategic partner Pattern (formerly known as iServe), who is also a shareholder in our company. Additionally, Winona Popcorn Spray can be found in H-E-B grocery stores. We have also introduced a new caramel flavor, now distributed through both Walmart and H-E-B. Sales have seen significant growth in 2021, and management anticipates continued sales increases in this category as plans to expand the sales team for this product line are set for 2022.
On September 8, 2021, we, Whipshots LLC, finalized an Intellectual Property Purchase Agreement effective August 24, 2021, with Penguins Fly, LLC, through which Whipshots LLC acquired the trademarks “Whipshotz” and “Whipshots.” The purchase price for these trademarks will be paid to Penguins Fly, LLC over seven years, calculated as a sliding scale percentage between 2% and 5% of gross revenues generated from the sale of Whipshots/Whipshotz products.
On September 14, 2021, we, Whipshots Holdings, entered into a License Agreement with Washpoppin Inc., a New York corporation (“Washpoppin”), wherein Washpoppin granted us the rights to certain intellectual property associated with the recording artist known as “Cardi B.” This agreement pertains to our new product line of vodka-infused whipped-cream aerosols branded as “Whipshots.” We officially launched these products under the Whipshotsâ„¢ brand in the fourth quarter of 2021 and the first quarter of 2022. Additionally, we have entered into Distribution Agreements with multiple distributors to serve as exclusive distributors for Whipshotsâ„¢ in various geographic markets.
During December 2021, we hosted a launch event for Whipshots during Art Basel in Miami. This event garnered over 1.7 billion earned media impressions globally. We launched the product through the Whip Drop program on whipshots.com, offering a limited quantity of cans for sale each day throughout December 2021. Following the success of our online launch, we began retail distribution in the first quarter of 2022, signing a national distribution agreement with RNDC, one of the largest spirits distributors in the nation. We also announced partnerships for distribution through GoPuff and BevMo. Our plan is to register Whipshots in all states, beginning in select markets and cautiously expanding thereafter.
In September 2022, through our wholly-owned subsidiary, Merger Sub, we acquired AOS in the AOS Acquisition. This acquisition involved Merger Sub merging with AOS, with AOS emerging as the surviving corporation. AOS focuses on creating premium body and skincare products designed to empower athletes during all phases of their activities—from pregame to gametime to postgame recovery. We believe that AOS’s innovative deodorants, creams, lotions, and wash-off products align seamlessly with our manufacturing capabilities, which include over-the-counter (OTC), respiratory, sun care, pain management, performance supplements, food, beverage, and apparel.
On September 12, 2022, STCB, through its wholly-owned subsidiary Merger Sub, finalized the AOS Acquisition. AOS is recognized for producing premium body and skincare products aimed at supporting athletes. Starco identified AOS as an opportunity, consistently seeking technologies and brands that are scalable and capable of transforming consumer behavior. Within the sports domain, there are currently no brands that have effectively penetrated multiple consumer product categories. Historically, AOS has operated as a personal care brand, offering products such as body wash, shampoo, deodorant, and face wash. Through our partnership with TSG, Starco Brands has access to intellectual property that will facilitate AOS’s vertical integration in manufacturing and expansion across diverse consumer product categories, including OTC, sun care, air care, beverages, and more. The AOS Acquisition was executed as an all-stock deal, where the valuation of the Company’s shares was set at $0.19 per share, corresponding to the fair value of the stock at the time of acquisition. As part of this transaction, we reserved a total of 61,400,000 restricted shares of common stock for issuance to the AOS Stockholders, with an additional 5,000,000 restricted shares potentially issued after an 18-month indemnification period, and contingent upon AOS meeting specific future sales metrics. Should there be any indemnity claims from AOS Stockholders against the Company or Merger Sub, the Company will satisfy these claims exclusively through the issuance of additional shares of its common stock, not exceeding 5,000,000 shares in total. Notably, any AOS Stockholder classified as a non-“accredited investor” under the Securities Act will receive cash instead of shares, valued at $0.0982 per share.
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Additional restricted shares of Company common stock, to be issued after an 18-month indemnification period and contingent upon meeting future sales metrics, are considered part of the acquisition’s overall consideration. The restricted shares that may be issued in the event of an indemnity claim are not categorized as part of the acquisition’s consideration.
As of September 30, 2022, the Company has disbursed $6,991 in cash to non-accredited investors while retaining $1,175 in cash, equating to 11,961 shares intended for non-accredited investors.
Provided that we can secure capital, our plans involve launching additional products in categories such as spray foods and condiments, air care, sun care, hair care, personal care, spirits, and beverages over the next 48 months. Although initial market reactions to our new lines have been promising, we may face various challenges that could hinder the sustained commercial success of these and future launches. Financing growth and product launches is crucial, and our capacity to raise additional capital is vital to executing our plans. In 2021, we sought financing via a Regulation A offering, which received qualification on December 9, 2021, and engaged The Dalmore Group to assist as the broker-dealer of record, through which we may sell up to 56,818,181 shares of common stock to the public at a price of $1.00 per share. As of September 30, 2022, we raised approximately $200,000 through this Regulation A offering.
To raise additional capital, we will rely on sales of our common stock and other financing sources. The nature of share issuance and the purchasers will depend on our financial needs and available exemptions from registration requirements under the Securities Act. We have reassessed our previous strategy regarding the utilization of Deutsch Marketing services and are now inclined to engage other marketing and social marketing agencies, including Interpublic-owned marketing and public relations agencies, to bolster our marketing strategy. Furthermore, we will leverage Hearst Media’s marketing capabilities for specific product lines under co-branding arrangements, which will significantly support the retail and online distribution of our products.
Our ultimate aim is to establish ourselves as a prominent owner of power brands and a leading third-party marketer of innovative technologies in the consumer products market, ultimately enhancing shareholder value. We will persist in evaluating opportunities to refine our strategy for 2022 and the years ahead.
For extensive details, please visit our websites: www.starcobrands.com, www.breathecleaning.com, www.breathesanitizer.com, www.whipshots.com, and www.artofsport.com.
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Table of Contents Performance Results Overview
Analysis of Financial Performance for the Three Months Ended September 30, 2022 and 2021
September 30, September 30,
2022 2021 Change
Revenues $ 1,658,253 $ 109,503 $ 1,548,750
Cost of goods sold 343,994 - 343,994
Gross profit 1,314,259 109,503 1,204,756
Operating expenses:
Compensation expense 176,148 11,673 164,475
Professional fees 884,558 57,480 827,078
Marketing, General and administrative 364,331 430
