Executive Summary / Key Takeaways

• Starco Brands is undergoing a pivotal transformation, shifting from an acquisitive brand house to a vertically integrated consumer products platform through the proposed acquisition of its contract manufacturer, The Starco Group (TSG). This strategic move aims to unlock greater scale, enhance margin efficiencies, and streamline operations.
• The company's core strength lies in its agile brand invention and commercialization platform, exemplified by its diverse portfolio including Whipshots, Soylent, Skylar, Art of Sport, and Winona, which target "behavior-changing" consumer products.
• Recent financial performance for Q2 2025 showed a 24% revenue decline, primarily due to inventory constraints impacting Soylent, but a significant improvement in net loss driven by cost reductions and the absence of prior-period non-recurring share adjustment losses.
• Despite strategic progress, Starco Brands faces substantial liquidity challenges, including an accumulated deficit and working capital deficit, alongside ongoing loan covenant defaults that necessitated a forbearance agreement with its lender.
• The investment thesis hinges on the successful execution of the vertical integration, effective management of liquidity, and the continued ability to launch and scale innovative products, which are critical for long-term value creation and competitive positioning.

The Brand Architect's Ambition: Setting the Scene for Starco Brands

Starco Brands, Inc. (OTCQB:STCB) stands as a unique entity in the consumer products landscape, positioning itself as an inventor and acquirer of "behavior-changing" brands designed to spark excitement in everyday life. The company's overarching strategy centers on building a diverse portfolio of innovative consumer goods, spanning categories from food and spirits to personal care and fragrances. This approach is fundamentally enabled by its core competency in brand invention, marketing, trend-building, and social engagement, which allows for rapid commercialization of novel products.

The U.S. consumer products market is mature, highly competitive, and dominated by established players. Within this dynamic environment, Starco Brands aims to carve out its niche by leveraging a unique operational model. The company's foundational strength, and indeed its primary technological differentiator, lies not in a single patented technology, but in its agile brand invention and commercialization platform. This systematic approach allows STCB to identify market opportunities and swiftly bring innovative products to market.

This capability is significantly amplified by its long-standing strategic relationship with The Starco Group (TSG), a related-party entity that serves as a versatile contract manufacturer. TSG's extensive manufacturing assets, covering a wide array of aerosol and liquid fill products across diverse verticals (including DIY, household, personal care, food, and spirits), provide STCB with unparalleled flexibility. This allows for rapid prototyping, efficient production, and scalable distribution of its varied brand offerings.

The Genesis of a Brand House: History and Strategic Evolution

Starco Brands' journey began in 2010 as Insynergy, Inc., undergoing a pivotal transformation in 2017 when it rebranded to Starco Brands, Inc. This change signaled a strategic shift towards commercializing novel consumer products, a vision solidified by a licensing agreement with The Starco Group (TSG) in July 2017. Ross Sklar, TSG's owner, subsequently took the helm as STCB's CEO, aligning manufacturing capabilities with brand development.

The company embarked on an aggressive acquisition strategy from 2021 to 2023, rapidly expanding its brand portfolio. Key acquisitions included an 85% vested interest in Whipshots Holdings, LLC in Q3 2021, leading to the highly successful launch of Whipshots vodka-infused whipped cream aerosols in December 2021, which garnered over 1 billion impressions worldwide. This was followed by The AOS Group Inc. (premium body and skincare) in September 2022, Skylar Body, Inc. (hypoallergenic fragrances) in December 2022, and Soylent Nutrition, Inc. (plant-based nutrition) in February 2023. These acquisitions, coupled with major distribution and broker agreements covering 47 U.S. states and the U.K., underscore the company's commitment to building a diverse and impactful brand presence.

Operational Dynamics and Technological Edge

Starco Brands' mission to create "behavior-changing products" is supported by its unique operational model. The company's ability to rapidly develop and commercialize products is a key differentiator in the fast-moving consumer goods sector. This agility is best demonstrated by Whipshots, a novel product that quickly captured market attention and continues to innovate with the introduction of new and limited-time flavors.

The strategic relationship with TSG provides STCB with a flexible manufacturing backbone, crucial for scaling its diverse product lines without the heavy capital expenditure of owning all manufacturing assets. This operational synergy allows STCB to focus its resources on brand building and market penetration. Furthermore, the company is investing in its internal infrastructure, with a new Enterprise Resource Planning (ERP) system expected to be fully implemented by the end of 2025. This operational technology aims to enhance efficiency and data management across its growing portfolio. For investors, this integrated approach to brand development, coupled with flexible manufacturing access and internal operational improvements, positions STCB to capitalize on market trends, diversify revenue streams, and build a portfolio of high-impact brands.

Competitive Arena: Battling for Consumer Mindshare

Starco Brands operates in a mature and highly competitive U.S. consumer products market, contending with industry giants such as Procter & Gamble (PG), Colgate-Palmolive (CL), and The Clorox Company (CLX). Competition is fierce, driven by factors like price, quality, and brand recognition. STCB's competitive advantages stem from the strength of its acquired brands, a differentiated portfolio, and the strategic leverage of TSG's manufacturing capabilities. The strong recognition of Whipshots and Soylent, coupled with the growing brand awareness of Skylar, provides STCB with a foothold against larger rivals.

However, STCB's smaller scale presents inherent vulnerabilities. Its profitability margins significantly lag those of its larger competitors. For the trailing twelve months (TTM), STCB reported a Gross Profit Margin of 30.55%, an Operating Profit Margin of 3.74%, and a Net Profit Margin of -3.23%. In contrast, Procter & Gamble reported a TTM Gross Profit Margin of 51% and an Operating Profit Margin of 24%, while Colgate-Palmolive showed a TTM Gross Profit Margin of 60% and an Operating Profit Margin of 22%. The Clorox Company also demonstrated stronger TTM margins with a Gross Profit Margin of 45% and an Operating Profit Margin of 28%. This disparity highlights STCB's challenge in achieving the economies of scale and operational efficiencies enjoyed by its larger counterparts.

STCB's TTM Price-to-Sales (P/S) ratio of 0.54 is considerably lower than PG (4.64), CL (3.70), and CLX (2.09), reflecting investor skepticism regarding its current profitability and future growth trajectory compared to more established, profitable entities. While STCB's Debt-to-Equity ratio of 0.30 is lower than some peers, this also indicates more limited access to traditional debt financing, often relying on related-party loans. The company's operational efficiency, as suggested by its Days of Inventory Outstanding (79.65 days in 2024) and Days of Sales Outstanding (46.17 days in 2024), also trails industry leaders, indicating areas for improvement in working capital management.

Indirect competitors, including private-label brands and digital-first subscription services, further intensify market pressures by offering alternative solutions that can erode STCB's market share, particularly in price-sensitive segments. While barriers to entry such as established brand recognition and regulatory requirements exist, these often favor larger, well-resourced companies, making it challenging for STCB to rapidly expand its market presence.

Recent Financial Performance: A Mixed Picture

Starco Brands' financial performance for the second quarter and first half of 2025 presented a mixed but strategically significant picture. For the three months ended June 30, 2025, total revenue decreased by 24% to $10.59 million, down from $14.01 million in the prior-year period. Similarly, six-month revenue declined by 24% to $20.40 million from $26.94 million. This decline was primarily attributed to "lower product sales of Soylent, driven by inventory constraints that limited our ability to accept and fulfill orders." Related party revenues also saw a substantial 55% decrease for both periods, due to lower royalty income.

Despite the top-line challenges, the company demonstrated notable improvements in its bottom line. Gross profit for Q2 2025 decreased by 22.6% to $4.41 million. However, operating expenses saw significant reductions across the board, with compensation expense down 32%, professional fees down 20%, and marketing, general, and administrative expenses decreasing by 29%. A key driver of the improved net result was the absence of a fair value share adjustment loss in Q2 2025, compared to an $8.68 million loss in Q2 2024. Consequently, the company reported a net loss of $1.85 million for Q2 2025, a substantial improvement from the $11.56 million net loss in the same period last year. For the six months ended June 30, 2025, Starco Brands achieved a net income of $28,839, a significant turnaround from a $16.02 million net loss in the comparable 2024 period, largely due to a $3.69 million fair value gain related to share-based adjustments.

Annually, 2024 saw revenue of $58.67 million, a decrease from $65.21 million in 2023. Net loss for 2024 was -$17.65 million, an improvement from -$46.19 million in 2023. Operating cash flow for 2024 was $2.22 million, up from $686,657 in 2023, and free cash flow also improved to $1.90 million from $313,551. These figures indicate that while revenue generation remains a challenge, cost-cutting and non-recurring items have positively impacted profitability and cash flow.

Liquidity, Capital, and the Path Forward

Starco Brands faces significant liquidity challenges, underscored by an accumulated deficit of $81.39 million and a working capital deficit of approximately $6.30 million as of June 30, 2025. The company has explicitly stated that "substantial doubt exists if the Company is able to meet its obligations as they become due within one year." This precarious financial position is exacerbated by its debt structure.

The company holds approximately $7.00 million in total debt, including $2.47 million in notes payable to CEO Ross Sklar. A $12.5 million revolving line of credit with Gibraltar Business Capital, LLC, secured in May 2024, is critical for working capital. However, as of June 30, 2025, STCB was in "several Events of Default" due to reporting deficiencies and failure to maintain minimum EBITDA financial covenants. While no payment defaults have occurred, a forbearance agreement was enacted on July 18, 2025, providing temporary relief through September 16, 2025. This period may extend to October 16 and November 15, 2025, if the company meets minimum EBITDA thresholds of $300,000 for the periods ending July 31, 2025, and August 31, 2025, respectively. Notably, Ross Sklar contributed $1.00 million in capital in August 2025 as a condition of this forbearance, highlighting the crucial role of related-party support in maintaining liquidity.

To address these challenges, management intends to pursue alternative financing, increase profitable revenue streams across all segments, and further reduce expenses through operational synergies from its shared services model. A major strategic initiative to bolster the company's long-term financial health is the non-binding Letter of Intent announced on July 29, 2025, to acquire its contract manufacturer, The Starco Group. This proposed vertical integration aims to provide "greater scale on revenue and efficiencies on margin," with a planned renaming to STARCO and the creation of two main operating subsidiaries: Starco Brands and Starco Manufacturing. This move could significantly enhance operational control and cost efficiency.

Looking ahead, the company expects Winona Popcorn Spray sales to "continue to grow in 2025" and plans to launch "other products" across various categories over the next 36 months, contingent on securing additional capital. The brand evolution of Skylar, with Leah Kateb joining as Chief Creative Officer and "Refounder," also signals a commitment to growth through strategic talent and brand development. However, the inherent risks of going concern uncertainty, potential debt acceleration, and internal control weaknesses (lack of segregation of duties and corporate documentation) remain critical factors for investors to monitor.

Conclusion

Starco Brands is at a pivotal juncture, actively transforming its business model to address persistent financial challenges and unlock future growth. The strategic pivot towards vertical integration through the proposed acquisition of The Starco Group represents a bold move to enhance operational efficiency, achieve greater scale, and improve margins, which are critical for strengthening its competitive standing against larger, more established rivals. While the company's agile brand invention and commercialization platform, exemplified by successful launches like Whipshots, provides a unique market advantage, its ability to translate this into sustained profitability and positive cash flow remains paramount.

Despite recent improvements in net income driven by cost reductions and non-recurring gains, significant liquidity concerns, including a substantial accumulated deficit and ongoing debt covenant defaults, underscore the high-risk, high-reward nature of this investment. The successful execution of the vertical integration, coupled with effective management of its financial obligations and continued innovation in its diverse brand portfolio, will be key determinants of Starco Brands' long-term viability and its potential to deliver shareholder value in a highly competitive consumer market.