Starco Brands, Inc. - Quarter Report: 2016 September (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

FORM 10-Q

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the quarterly period ended SEPTEMBER 30, 2016

  [   ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

Commission file number:  0-54892

INSYNERGY PRODUCTS, INC

 (Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (818) 260-9370

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]        No  [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  [X]        No  [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  [  ]        No  [X]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:  As of November 10, 2016, the issuer had 26,296,868 shares of its common stock issued and outstanding.

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TABLE OF CONTENTS

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 PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

INSYNERGY PRODUCTS, INC.

INDEX TO FINANCIAL STATEMENTS

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The accompanying notes are an integral part of these unaudited condensed financial statements.

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INSYNERGY PRODUCTS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Insynergy Products, Inc. (formerly Insynergy, Inc.) (the "Company") was incorporated in the State of Nevada on January 26, 2010 to engage in Direct Response marketing of consumer products with the goal of producing sales through television and/or retail.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The Company’s unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The accompanying unaudited condensed financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown and are not necessarily indicative of the results to be expected for the full year ending December 31, 2016. These unaudited condensed financial statements should be read in conjunction with the financial statements and related notes included in the Company’s restated Annual Report on Form 10-K/A for the year ended December 31, 2015.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include the estimated useful lives of property and equipment.  Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the prior year financial information to conform to the presentation used in the financial statements for the nine months ended September 30, 2016.

Recently issued 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.

NOTE 3 – INVENTORY

As of September 30, 2016, the Company has no inventory. As of December 31, 2015, there was $131,759 of finished goods and $372,187 of work in process inventory. Inventory is carried at the lower of cost or net realizable value. Management has recognized that all the existing inventory no longer has any commercial value and has therefore written all remaining inventory down to zero resulting in a loss on inventory impairment of $373,512, which has been recorded to cost of goods sold.

NOTE 4 – PRODUCT RETURNS AND ALLOWANCES

The Company recorded an allowance for estimated customer returns of $223,313 and $609,770 for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively. The allowance was based on multiple criteria, including type of store, history of returns, length of time since product was sold to the customer and inventory remaining with customer (if known). Use of these criteria resulted in different percentages being applied to different customers. The allowance will be evaluated and adjusted accordingly on a quarterly basis

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NOTE 5 – NOTES PAYABLE

During the year ended December 31, 2015, the Company received short term loans from three creditors for a total of $354,000. The loans are uncollateralized, non-interest bearing and are due on demand. During the nine months ended September 30, 2016, the Company added $1,400 to the balance due and repaid $35,000 for a balance due as of September 30, 2016 of $320,400.

The Company also has financing loans for its product liability and Director and Officer Insurance. The product liability was cancelled in April 2016. As of September 30, 2016, and December 31, 2015 the loans have a balance of $12,017 and $16,671, respectively, they bear interest at 5.99% and 6.7% and are due within one year.

NOTE 6 – COMMITMENTS & CONTIGENCIES

The Company currently occupies office space in Burbank, California. The Company signed a three-year lease starting January 1, 2016. Current lease payments are $3,425 with yearly increases.  The lease required a deposit of $3,500 which was paid on December 10, 2015. Minimum lease payments over the next three years are as follows: 

Investment Agreement

On July 9, 2014, the Board of Directors approved an investment arrangement with an individual. Per the terms of the agreement the investor has transferred $150,000 to the Company for which he is now entitled to the following. $1 per unit sold through all retail outlets including online and retail shopping shows until the investment is paid back in full. Once the original investment is recouped the investor shall then receive a 2% royalty in perpetuity on all future retail sales of the fitness product. The investment remains with the Company and is disclosed as an accrued liability on the balance sheet. This agreement is currently being renegotiated.

NOTE 7 – RELATED PARTY TRANSACTIONS

As of December 31, 2015, the Company owed its officers $3,253 for cash advances and expense reimbursement. During the nine months ended September 30, 2016, the officers advanced the Company an additional $49,405 and were repaid $25,215, for a balance due of $27,443. The advances were used to pay for general operating expenses. They are uncollateralized, non-interest bearing and due on demand.

NOTE 8 – STOCK OPTIONS

For the nine months ended September 30, 2016 and 2015, $16,324 and $32,648 has been amortized to expense, respectively, for the vesting of options.

A summary of the status of the Company’s outstanding stock options and changes during the periods is presented below:

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A summary of the status of the Company’s outstanding stock warrants and changes during the periods is presented below:

NOTE 9 – GOING CONCERN

As reflected in the accompanying financial statements, the Company has an accumulated deficit of $15,438,127 at September 30, 2016, had a net loss of $782,170 and net cash used in operating activities of $20,449 for nine months ended September 30, 2016.

The Company recognizes its cash position does not support the Company’s daily operations.  Management is analyzing future potential opportunities for the business including the potential of a restructuring. The Company has been unable to raise additional funds and may need to scale back operations. This raises substantial doubt about the Company’s ability to continue as a going concern.

 NOTE 10– SUBSEQUENT EVENTS

Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855, from the balance sheet date through the date the financial statements were issued, and has determined that no material subsequent events exist.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 operating results;

        ·our business prospects;

        ·our contractual arrangements and relationships with third parties;

        ·the dependence of our future success on the general economy;

        ·our possible 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.

Plan of Operations

Insynergy Products (“Insynergy”) was a company with experience in commercializing consumer products through commercial and infomercial production development. The corporate goal was to develop intellectual property (“IP”) internally or via a license from a third party; however, due to the inability to raise funds the Company has abandoned this strategy. The Board of Directors is cognizant of the Company’s limitations. The Company currently has no revenue from current operations, with liabilities exceeding its assets. Management is analyzing new potential growth paths and the potential for a restructuring; however, there is still substantial doubt about the Company’s ability to continue as a going concern.

In the third quarter of 2015, we entered into a license with Mr. Ross Sklar of The Starco Group.  Insynergy secured the exclusive license to a broad body of novel products and technologies.

Results of Operation for the Three Months Ended September 30, 2016 and 2015

Revenues

For the three months ended September 30, 2016 the Company recorded revenue of $28,239 compared to negative revenue of ($115,335) for the three months ended September 30, 2015. In the current period we recognized $82,350 of revenue from the accrued product returns and allowance account. This revenue is not from sales in the current period. It is from sales made in 2015 and held in reserve in the event of subsequent returns (Note 4). This was offset by $34,300 reversal of a sale recognized in the prior quarter. In the prior period the negative revenue was due to a mark down program for the Plumber’s Hero at two major retailers.  Cost of goods sold was $0 compared to $5,887 of cost of goods sold in the prior period.

Operating Expenses

For the three months ended September 30, 2016, the Company incurred compensation expense of $65,750 compared to $71,522 for the three months ended September 30, 2015; a decrease of $5,772 or 8%.

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For the three months ended September 30, 2016, the Company incurred $0 in advertising and promotional expense as compared to $14,639 for three months ended September 30, 2015. In the prior year there was spending on promotional activities for the Plumber’s Hero. There have been no such expenditures in the current period.

For the three months ended September 30, 2016, the Company incurred $11,020 in professional fees compared to $14,276 for the same period in the prior year. Professional fees are mainly for accounting, auditing and legal services associated with our quarterly filings as a public company. The decrease is due to decreased audit fees.

For the three months ended September 30, 2016, the Company incurred $30,608 in general and administrative expense as compared to $179,681 for the same period in the prior year; a decrease of $149,073 or 82.9%. In the prior year there was $80,740 of non-cash expense for stock based compensation.

Other Income and Expense

For the three months ended September 30, 2016 we had total other income of $6,527 compared to total other expense of $53,871 for the same period in the prior year. For the three months ended September 30, 2016, the Company recorded interest expense of $1,715, which was offset by a gain on forgiveness of debt of $8,242.  For the three months ended September 30, 2015 we had interest expense of $15,332, a loss on disposal of property and equipment of $17,034, amortization of debt discount of $20,228, and a loss in the fair value of the derivative liability of $1,277

Net Loss

For the three months ended September 30, 2016 we realized a net loss of $72,612 as compared to $6,956,926 for the same period in the prior year. In the prior period our cash and non-cash expenses were far greater than in the current period as discussed above, including non-cash licensing expense of $6,501,715.

Results of Operation for the Nine Months Ended September 30, 2016 and 2015

Revenues

For the nine months ended September 30, 2016 the Company recorded revenue of $202,841 compared to revenue of $1,761,693 for the nine months ended September 30, 2015. In the current period, we recognized $164,700 of revenue from the accrued product returns and allowance account. This revenue is not from sales in the current period. It is from sales made in 2015 and held in reserve in the event of subsequent returns (Note 4). This was offset by $34,300 reversal of a sale recognized in the prior quarter. The nine months ended September 30, 2015, saw much of our sales for Plumber’s Hero. Cost of goods sold was $503,946 compared to $904,180 of cost of goods sold in the prior period. In the current period $373,512 was a result of the impairment of all remaining finished and work in process inventory of Plumber’s Hero.

Operating Expenses

For the nine months ended September 30, 2016, the Company incurred compensation expense of $197,750 compared to $187,521 for the nine months ended September 30, 2015; an increase of $10,229 or 5.4%. The increase is due to increased salaries for officers.

For the nine months ended September 30, 2016, the Company incurred $52,407 in advertising and promotional expense as compared to $577,743 for the nine months ended September 30, 2015. In the prior year there was substantial spending on promotional activities for the Plumber’s Hero. There have been no such expenditures in the current period; however, we did recognize $52,059 that was previously in prepaid expenses for promotional activities that will no longer be completed and for which there will be no refunds.

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For the nine months ended September 30, 2016, the Company incurred $53,520 in professional fees compared to $84,551 for the same period in the prior year. Professional fees are mainly for accounting, auditing and legal services associated with our quarterly filings as a public company. The decrease is due to decreased audit fees.

For the nine months ended September 30, 2016, the Company incurred $172,621 in general and administrative expense as compared to $749,174 for the same period in the prior year; a decrease of $576,553 or 76.9%. In the prior year there was $132,738 of non-cash expense for stock based compensation.

Other Income and Expense

For the nine months ended September 30, 2016 we had total other expense of $4,767 compared to $263,212 for the same period in the prior year. For the nine months ended September 30, 2016, the Company recorded interest expense of $3,941 and a loss on disposal of property and equipment of $20,461, which was offset by a gain on forgiveness of debt of $19,635.  For the nine months ended September 30, 2015 we had interest expense of $19,148, a loss on conversion of debt of $226,811, and as a result of the convertible Promissory Note with KBM Worldwide, Inc., we recorded amortization of debt discount of $50,029 and a gain on derivative of $47,022.  

Net Loss

For the nine months ended September 30, 2016 we realized a net loss of $782,170 as compared to $7,506,403 for the same period in the prior year. In the prior period our cash and non-cash expenses were far greater than in the current period as discussed above, including non-cash licensing expense of $6,501,715.

Liquidity and Capital Resources

As reflected in the accompanying financial statements, the Company has an accumulated deficit of $15,438,127 at September 30, 2016, had a net loss of $782,170 and net cash used in operating activities of $20,449 for the nine months ended September 30, 2016. 

Net cash used in financing activities for the nine months ended September 30, 2016 was $14,054 compared to $677,235 provided by financing activities for the nine months ended September 30, 2015. The Company now recognizes its cash position does not support the Company’s daily operations.  Management is analyzing future potential opportunities for the business including the potential of a restructuring; however, there is still substantial doubt about the Company’s ability to continue as a going concern.

Obligations and Commitments

During the year ended December 31, 2015, the Company received short term loans from three creditors for a total of $354,000. The loans are uncollateralized, non-interest bearing and are due on demand. During the nine months ended September 30, 2016, the Company added $1,400 to the balance due and repaid $35,000 for a balance due as of September 30, 2016 of $320,400.

The Company also has a financing loan for its Director and Officer Insurance. As of September 30, 2016, the balance on this loan is $12,027.

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 1 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.

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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.

The Company follows paragraph 605-15-25 of the FASB Accounting Standards Codification for revenue recognition when the right of return exists.  The Company will recognize revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) The seller's price to the buyer is substantially fixed or determinable at the date of sale, (ii) The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product. If the buyer does not pay at time of sale and the buyer's obligation to pay is contractually or implicitly excused until the buyer resells the product, then this condition is not met., (iii) The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product, (iv) The buyer acquiring the product for resale has economic substance apart from that provided by the seller. This condition relates primarily to buyers that exist on paper, that is, buyers that have little or no physical facilities or employees. It prevents entities from recognizing sales revenue on transactions with parties that the sellers have established primarily for the purpose of recognizing such sales revenue, (v) The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (vi) The amount of future returns can be reasonably estimated.

The Company records an allowance for sales returns. The allowance is based on multiple criteria, including type of store, history of returns, length of time since product was sold to the customer and inventory remaining with customer (if known). The allowance will be evaluated and adjusted accordingly on a quarterly basis

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

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not anticipate the adoption of this ASU will have a significant impact on its consolidated financial position, results of operations, or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements.

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In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this newly issued guidance to its consolidated financial statements.

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 our financial position or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, they concluded that our disclosure controls and procedures were not effective for the quarterly period ended September 30, 2016.  The following aspects of the Company were noted as potential material weaknesses:

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timely and accurate reconciliation of accounts

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lack of timely document preparation

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lack of segregation of duties

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complex accounting transaction expertise

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lack of corporate documentation

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.

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Changes in Internal Controls

Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in the Company's internal controls over financial reporting during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are not presently any material pending legal proceedings to which the Company is a party or as to which any of our property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.

ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINING SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS

Part I Exhibits

Part II Exhibits

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INSYNERGY PRODUCTS, INC.

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