FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended September 30, 2005.
Commission File Number: 0-19409
SYNERGY BRANDS, INC.
(Exact name of registrant as it appears in its charter)
Delaware 22-2993066
(State of incorporation) (I.R.S. Employer
identification no.)
223 Underhill Blvd. Syosset NY 11791
(Address of principal executive offices)
516-714-8200
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
[x] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] YES [x] NO
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
[ ] YES [x] NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by chekc mark whether the registrant has filed all documents and
reports required to be field by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
N/A [] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On November 14, 2005 there
were 4,262,786 shares outstanding of the registrant's common stock.
SYNERGY BRANDS, INC.
FORM 10-Q
SEPTEMBER 30, 2005
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and
December 31, 2004 2 - 3
Consolidated Statements of Operations for the nine
months ended September 30, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Operations for the three
months ended September 30, 2005 and 2004 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 (Unaudited) 6 - 7
Notes to Consolidated Financial Statements (Unaudited) 8 -14
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 - 29
Forward Looking Information and Cautionary Statements 30 - 40
Item 4: Control and Procedures 41
PART II: OTHER INFORMATION
Item 2: Unregistered Sales of Equity Securities and use of Proceeds 42
Item 5: Other Information 42
Item 6: Exhibits and Reports on Form 8-K 42
SIGNATURES AND CERTIFICATIONS
1
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
ASSETS September 30, 2005 DECEMBER 31, 2004
(Unaudited)
Current Assets:
Cash and cash equivalents $832,702 $945,806
Accounts receivable trade, less allowance for doubtful accounts of
$127,481 and $127,481 6,597,671 7,227,489
Other receivables 1,801,328 1,264,242
Note Receivable 285,106 314,285
Inventory 3,011,372 1,826,274
Prepaid assets and other current assets 594,825 423,295
------------ ----------
Total Current Assets 13,123,004 12,001,391
Property and Equipment, Net 415,227 366,510
Other Assets 753,634 632,466
Notes Receivable 1,764,227 1,889,815
Intangible Assets, net of accumulated amortization of $2,169,782 and $2,003,048 1,135,210 1,301,944
Goodwill 514,297 514,297
------------ ----------
Total Assets $ 17,705,599 $ 16,706,423
============ ==========
The accompanying notes are an integral part of this statement.
2
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30, 2005 DECEMBER 31,
(Unaudited) 2004
Current Liabilities:
Line-of-Credit $5,191,534 $4,976,610
Notes Payable - Current 1,636,564 384,021
Accounts Payable and Accrued Expenses 1,314,561 3,519,522
Related Party Note Payable 107,512 56,972
------------ ------------
Total Current Liabilities 8,250,171 8,937,125
Notes Payable 1,527,000 1,196,241
Stockholders' Equity:
Class A Preferred stock - $.001 par value; 100,000 shares authorized and
outstanding; liquidation preference of $10.50 per share 100 100
Class B preferred stock - $.001 par value; 900,000 shares authorized, none issued - -
Class B Series B preferred stock - $.001 par value, 250,000 shares authorized, 80,000
and 0 shares issued and outanding; liquidation preference of $10.00 per share 80 -
Class B, Series A Preferred stock - $.001 par value; 500,000 shares authorized;
330,000 and 330,000 shares issued and outstanding; liquidation preference of $10.00 per share 330 330
Common stock - $.001 par value; 5,000,000 shares authorized;
4,214,786 and 3,263,992 shares issued 4,215 3,264
Additional paid-in capital 45,529,839 43,134,165
Deficit (37,491,912) (36,349,706)
Unearned compensation (100,884) (201,756)
Accumulated other comprehensive loss (8,340) (8,340)
Less treasury stock, at cost, 1,000 shares (5,000) (5,000)
------------ ------------
Total stockholders' equity 7,928,428 6,573,057
------------ ------------
Total Liabilities and Stockholders' Equity $ 17,705,599 $ 16,706,423
============ ============
The accompanying notes are an integral part of this statement.
3
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2005 2004
Net Sales $ 47,947,473 $ 39,927,507
------------- -------------
Cost of Sales
Cost of product 44,039,294 36,421,665
Shipping and handling costs 750,439 690,883
------------- -------------
44,789,733 37,112,548
------------- -------------
Gross Profit 3,157,740 2,814,959
Operating expenses
Selling, general and Administrative Expenses 2,863,156 2,574,215
Depreciation and amortization 370,971 504,702
------------- -------------
3,234,127 3,078,917
Operating Profit (loss) (76,387) (263,958)
Other Income (expense)
Interest Income 63,761 4,430
Other Income (expense) (11,873) (16,841)
Equity in earnings of investee 108,306 144,992
Interest and financing expense (1,141,850) (1,077,614)
------------- -------------
(981,656) (945,033)
Loss before income taxes (1,058,043) (1,208,991)
Income tax expense 84,163 11,221
------------- -------------
NET LOSS (1,142,206) (1,220,212)
------------- -------------
Dividend-Preferred Stock (227,083) (108,000)
------------- -------------
Net loss attributable to Common Stockholders $(1,369,289) $ (1,328,212)
============= =============
Basic and diluted net loss per common share: $ (0.38) $ (0.65)
============= =============
The accompanying notes are an integral part of this statement.
4
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2005 2004
Net Sales $17,122,629 $13,759,995
------------ ------------
Cost of Sales
Cost of product 15,700,492 12,241,514
Shipping and handling costs 252,171 219,251
------------ ------------
15,952,663 12,460,765
------------ ------------
Gross Profit 1,169,966 1,299,230
Operating expenses
Selling, general and Administrative Expenses 1,019,493 875,235
Depreciation and amortization 123,549 159,739
------------ ------------
1,143,042 1,034,974
Operating Profit (loss) 26,924 264,256
Other Income (expense)
Interest Income 20,469 3
Other Income (expense) (4,636) (6,354)
Equity in earnings of investee 49,875 36,009
Interest and financing expense (395,438) (427,848)
------------ ------------
(329,730) (398,190)
Loss before income taxes (302,806) (133,934)
Income tax expense 14,883 296
------------ ------------
NET LOSS (317,689) (134,230)
Dividend-Preferred Stock (78,583) (36,000)
------------ ------------
Net loss attributable to Common Stockholders $ (396,272) $ (170,230)
============ ============
Basic and diluted net loss per common share: $ (0.09) $ (0.08)
============ ============
The accompanying notes are an integral part of this statement.
5
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2005 2004
--------------- ---------------
Cash Flows From Operating Activities:
Net loss $(1,142,206) $ (1,220,212)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and Amortization 370,971 504,702
Amortization of financing cost 45,958 58,622
Loss on sale of marketable securities - 15,792
Equity in earnings of investee (108,306) (144,992)
Non-cash compensation - 30,750
Operating expenses paid with common stock 37,525 141,683
Changes in Operating Assets and Liabilities:
Net (increase) decrease in:
Accounts receivable and other receivables 92,732 (5,568,437)
Inventory (1,185,098) 24,678
Prepaid assets, related party note receivable and other assets (25,530) (84,569)
Net decrease in:
Accounts payable, related party note payable, accrued
expenses and other current liabilities (2,154,421) (661,169)
--------------- ---------------
Net cash used in operating activities (4,068,375) (6,903,152)
Cash Flows From Investing Activities
Purchase of fixed assets (108,333) (74,270)
Purchase of marketable securities - (168,377)
Proceeds from sale of marketable securities - 194,515
Payments received on notes receivable 211,867 425,700
Issuance of notes receivable (12,100) -
Repayment of security deposit (20,000 451,003
Investee dividend received 28,800 -
--------------- ---------------
Net cash provided by investing activities 100,234 828,571
Cash Flows From Financing Activities
Borrowings under line of credit 30,462,920 26,132,894
Repayments under line of credit (29,455,496) (21,964,569)
Proceeds from the issuance of notes payable 2,535,531 1,990,000
Repayments under notes payable (173,333) -
Net proceeds from private placement 770,000 -
Issuance of common stock 54,345 -
Consulting services (46,436) -
Proceeds from the exercise of stock purchase options - 34,250
Payment of dividends (227,083) (108,000)
Payment of financing costs (65,411) -
--------------- ---------------
Net cash provided by financing activities 3,855,037 6,084
Foreign currency translation - (34,898)
--------------- ---------------
Net decrease in cash (113,104) (24,904)
Cash and cash equivalents, beginning of period 945,806 777,522
--------------- ---------------
Cash and cash equivalents, end of period $ 832,702 $ 752,618
=============== ===============
The accompanying notes are an integral part of this statement.
6
SYNERGY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2005 2004
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 720,826 $ 934,243
=========== ===========
Cash paid for income taxes $ 84,163 $ 11,221
=========== ===========
Supplement disclosures of
non-cash operating, investing and financing activities:
Common Stock issued for an acquisition - $ 525,000
=========== ==========
Common Stock issued with debt financing $ 63,500 $ 75,000
Common Stock issued with debt conversions $1,553,854 -
=========== ==========
Common Stock issued for services $ 37,525 $ 141,683
=========== ==========
The accompanying notes are an integral part of this statement.
7
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2005 and 2004
NOTE A - UNAUDITED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 2005, the consolidated
statements of operations for the nine months ended September 30, 2005 and 2004,
the consolidated statements of operations for the three months ended September
30, 2005 and 2004, and the condensed consolidated statements of cash flows for
nine months ended September 30, 2005 and 2004, have been prepared by Synergy
Brands, Inc. ("Synergy" or the "Company") without audit. The balance sheet at
December 31, 2004 has been derived from the audited financial statements as of
that date. In the opinion of management, all adjustments (which include only
normally recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2005 (and for
all other periods presented) have been made. Certain information and note
disclosures, normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America,
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Annual Report on Form 10-K for the year ended
December 31, 2004 filed by the Company. The results of operations for the
periods ended September 30, 2005 and 2004 are not necessarily indicative of the
operating results for the respective full years.
NOTE B - STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations ("APB
No.25") and has adopted the disclosure provisions of SFAS No. 148. Under APB No.
25, when the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based
Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires that the fair value of such equity
instruments to be recognized as an expense in the historical financial
statements as services are performed. Prior to SFAS No. 123(R), only certain pro
forma disclosures of fair value were required. The provisions of this statement,
as amended by the Securities and Exchange Commission, are effective as of the
beginning of the first fiscal year that begins after June 15, 2005. The adoption
of SFAS No. 123(R) is not expected to have a material impact on the Company's
financial position or results of operations.
NOTE C - ADVERTISING EXPENSE
The Company expenses advertising and promotional costs as incurred. Advertising
and promotional costs were approximately $54,000 and $106,000 for the nine
months ended September 30, 2005 and 2004, respectively.
8
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2005 and 2004
NOTE D - VENDOR ALLOWANCES
The Company accounts for vendor allowances under the provisions of EITF No.
02-16 "Accounting by a Customer" (including a reseller) for Certain
Consideration Received from a Vendor. The Company recognizes vendor allowances
at the date goods are purchased and recorded under fixed and determined
arrangements. The Company receives allowances and credits from suppliers for
volume incentives, promotional allowances and, to a lesser extent, new product
introductions, which are typically based on contractual arrangements covering a
period of one year or less. Volume incentives and promotional allowances earned
based on quantities purchased and new product allowances are recognized as a
reduction to the cost of purchased inventory and recognized when the related
inventory is sold. Promotional allowances that are based on the sell-through of
products are recognized as a reduction of cost of sales when the products are
sold for which the promotional allowances are given. For the nine months ended
September 30, 2005, the Company recognized approximately $ 1,582,000 in vendor
allowances arising from arrangements with a major supplier that met the criteria
for being fixed and determinable. Vendor allowances from manufacturers, included
in other receivables in the accompanying consolidated balance sheet aggregated $
1,801,328 and $1,246,697 at September 30, 2005 and December 31, 2004.
NOTE E - INVENTORY
Inventory, consisting of goods held for sale, as of September 30, 2005 consisted
of the following:
Grocery, health and beauty products $2,511,195
General Merchandise 500,177
----------
$3,011,372
==========
NOTE F - NOTE RECEIVABLE
In December 2004, the Company sold accounts receivable for $2,200,000. This
promissory note, which is secured by the accounts receivable, requires monthly
payments of principal and interest at 4% for seven years, beginning in January
2005. As a condition for the sale, the Company is obligated to issue 50,000
shares of common stock, which will vest through April 1, 2006 to the note
holder. In the event the value of the shares is less than $200,000 at April 1,
2006, the Company will be obligated to pay the difference in cash or additional
shares. The value of the shares ($200,000) was treated as a reduction of the
sales price. The Company does not anticipate selling selected products to this
customer base in the future. The balance of the note receivable at September 30,
2005 was $1,993,519.
9
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2005 AND 2004
NOTE G - INVESTMENT
The Company holds a 22.0% interest in an investee ("Interline Travel and Tours
or ITT"). The Company accounts for this investment under the equity method. The
Company recorded equity in the net earnings of investee of $108,306 and $144,992
during the nine months ended September 30, 2005 and September 30, 2004,
respectively. At September 30, 2005, the investment in ITT is approximately
$416,335 as included in "Other Assets" on the accompanying balance sheet.
Summarized results of operations of this investee for the nine months ended
September 30, 2005 and 2004 is as follows:
2005 2004
Revenues $ 10,041,000 $ 8,955,000
Total expenses (9,349,000) (8,020,000)
Other income 168,000 94,000
Income before income taxes 860,000 1,029,000
Income tax expense (292,000) (348,000)
--------------- -------------
Net income $ 568,000 $ 681,000
=============== =============
NOTE H - LINE-OF-CREDIT AND NOTES PAYABLE
In 2002, two of the Company's subsidiaries entered into two revolving loan and
security agreements with the same financial institution (the "Lender"). The
lines of credit, as amended in March 2005, allow for the borrowing of up to
$6,000,000 based on the sum of 85% of the net face amount of eligible accounts
receivable, as defined, plus the lesser of (1) $2,750,000 or (2) eligible
inventory and eligible goods in transit, as defined. The Company's agreement
expired with IIG on May 31, 2005. Currently, the Company is operating under the
terms of its extension agreement and IIG has allowed the Company to operate
under such terms without an extension agreement. The Company is seeking to
refinance its secured financing needs through other Asset Based Lenders. There
is no assurance that the Company will be successful and it may need to continue
to incur high financing costs. Interest accrues on outstanding borrowings at the
greater of (i) 4% per annum in excess of the prime rate or (ii) 9.5% per annum.
At September 30, 2005, the interest rate on outstanding borrowings was 10.75%.
Outstanding borrowings are collateralized by a continuing security interest in
all of the subsidiaries' accounts receivable, chattel paper, inventory,
equipment, instruments, investment property, documents and general intangibles.
925,000 shares of the Company's common stock have also been pledged as
collateral on the outstanding borrowings. In 2005, the lender converted $792,500
of outstanding debt into 333,618 shares of common stock.
On February 5, 2003, the Company received $500,000 pursuant to the issuance of
two secured promissory notes from certain shareholders of ITT, a 22% investee.
Borrowings under the notes bear interest at a rate of 12%. The Company was not
required to repay any principal until the maturity date of the notes, February
4, 2005. 25,000 restricted shares of the Company's common stock were also issued
as part of the financing. The relative estimated fair value of the common stock
that was issued of $56,000 was recorded as debt discount was amortized over the
life of the notes payable. As security for the notes, the Company pledged as
collateral its investment in the common stock of ITT (See Note G). In 2004, the
Company converted $263,646 of the debt into 66,756 shares of common stock. In
March 2005 the Company converted $236,354 of this debt into 94,542 shares of
common stock.
10
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2005 and 2004
NOTE H Continued
On March 1, 2004, the Company received $490,000 pursuant to the issuance of
three secured promissory notes from certain shareholders of ITT. Borrowings
under the notes bear interest at a rate of 12%. The Company is not required to
repay any principal until the maturity date of the notes, February 28, 2006.
19,600 restricted shares of the Company's common stock were also issued as part
of the financing. The relative estimated fair value of the common stock that was
issued of $75,000 was recorded as debt discount and will be amortized over the
life of the notes payable. As security for the notes, the Company pledged as
collateral its investment in the common stock of ITT (see Note G).
On April 2, 2004 the Company completed a financing with Laurus Master Funds
("Laurus"). The financing consisted of a $1.5 million secured convertible
debenture that converts into common stock under certain conditions at $3.00 per
share as amended, and matures on April 2, 2007. The debenture provides for
monthly payments of $50,000, plus interest commencing October 1, 2004. In
addition, Laurus was issued 100,000 warrants exercisable at $3.00 per share. The
debenture has a three-year term with a coupon rate of prime plus 3%. The Company
has filed an S-3 registration statement which has been granted effectiveness to
register the common stock underlying the debenture and warrant. In 2004, the
Company converted $500,000 of this outstanding debt into 100,000 shares of
common stock. The Company repaid $100,000 of this debt in 2004. In March 2005,
the Company converted $525,000 of this outstanding debt into 150,000 shares of
common stock. On January 25, 2005, the Company completed a financing with Laurus
Master Funds ("Laurus'). The financing consisted of a $500,000 secured
convertible debenture that converts into common stock under certain conditions
at $3.00 per share and matures on January 25, 2008. The financing provides
Laurus with registration rights for common shares it is issued under conversion.
The debenture provides for monthly payments of $16,666.67 plus interest,
commencing August 1, 2005. The Company repaid $33,333 of this debt at September
30, 2005. In addition, Laurus was issued 33,333 warrants exercisable at $ 3.50
per share. . The debenture has a three-year term with a coupon rate of prime
plus 3%. The conversion prices on the Laurus debentures were always above the
current stock price at the closing date.
In January 2005, the Company entered into a promissory note with a major
regional bank for $1,000,000. Borrowing under the note bears interest at prime
(6.75% at September 30, 2005). The Company is not required to repay any
principal until the maturity date of the note, September 1, 2006. As security
for the note, a pledge agreement was entered by certain Shareholders of ITT.
Borrowings at September 30, 2005 were $795,531.
On April 6, 2005, the Company received $500,000 pursuant to the issuance of
three secured promissory notes from certain shareholders of ITT. Borrowings
under the notes bear interest at a rate of 9%. The Company is not required to
repay any principal until the maturity date of the notes, April 5, 2007. 25,000
restricted shares of the Company's common stock were also issued as part of the
financing. The relative estimated fair value of the common stock that was issued
of $54,000 was recorded as debt discount and will be amortized over the life of
the notes payable. As security for the notes, the Company pledged as collateral
its investment in the common stock of ITT (see Note G).
On May 5, 2005, the Company received $100,000 pursuant to the issuance of one
secured promissory note from certain stockholder of ITT. Borrowings under the
note bear interest at a rate of 9%. The Company is not required to repay any
principal until the maturity date of the note, May 4, 2007. 5,000 restricted
shares of the Company's common stock were also issued as part of the financing.
The relative estimated fair value of the common stock that was issued of $9,500
was recorded as debt discount and will be amortized over the life of the notes
payable. As security for the notes, the Company pledged as collateral its
investment in the common stock of ITT (See Note G).
On June 21, 2005, the Company completed a financing with Laurus Master Funds
("Laurus"). The financing consisted of a $500,000 secured convertible debenture
that converts into common stock under certain conditions at $3.00 per share and
matures on June 21, 2008. The financing provides Laurus with registration rights
for common shares it is issued under conversion. The debenture provides for
monthly payments of $16,666.67 plus interest, commencing December 1, 2005. In
addition, Laurus was issued 33,333 warrants exercisable at $ 3.50 per share. The
Company's common stock quoted market price at the date of closing was $2.15 per
share. The debenture has a three-year term with a coupon rate of prime plus 3%.
At June 30, 2005 the Company recorded a charge of $18,000 as prepaid expense for
the fare value of the warrants, and this amount will be amortized over the life
of the note.
11
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
NOTE I - STOCKHOLDERS' EQUITY
In March 2005 certain shareholders of ITT converted $236,354 of debt into 94,542
shares of common stock. In March 2005 Laurus Master Funds converted $525,000 of
debt into 150,000 shares of common stock (See Note H). In April and June 2005,
the Company converted $207,500 of debt of IIG into 85,218 shares of common stock
(See Note H). In the third quarter of 2005, the Company converted $585,000 of
debt into 248,400 shares of common stock (See Note H).
During the nine months ended September 30, 2005, the Company issued 79,634
shares of common stock as compensation for services under existing agreements
and recorded a charge to operations of $37,525. In February 2005, the Company
issued 30,000 shares of common stock to Class B Series A Preferred Stockholders
in compliance with the subscription agreements dated February 26, 2003. In July
2005, the Company issued 50,000 shares of common stock to Class B Series A
Preferred Stockholders in compliance with the subscription agreements dated July
2, 2003.
In March 2005, the Company designated 250,000 shares of Class B Preferred stock,
par value $.001 per share to be designated as Class B, Series B Preferred Stock.
On July 22, 2005, the Company completed an $800,000 private placement of
Preferred Stock and Common Stock consisting of 80,000 shares of Series B Class B
Preferred Stock and 88,000 shares of restricted Common Stock. The holders of
Class B Series B Preferred Stock have no voting rights with respect to general
corporate matters. The holders of Class B Series B Preferred Stock are entitled
to receive dividends at the annual rate of $.80 per share per annum. The Company
may, as its option, at any time in whole, or from time to time in part, out of
earned funds of the Corporation, redeem the Class B, Series B Preferred Stock on
any date set by the Board of Directors, at $10.00 per share plus, in each case,
an amount equal to all dividends of Class B, Series B Preferred Stock accrued
and unpaid thereon, pro rata to the date of redemption. If however, as to each
share of Class B, Series B Preferred Stock outstanding, if not redeemed by the
Company within 2 years of the issuance of such shares, the Company will be
obligated to issue to the then holder of record of such outstanding Class B,
Series B Preferred Stock, half a share of the Company's unissued restricted
Common Stock per share of Class B, Series B Preferred Stock for each year that
said share is not redeemed within limits as provided under applicable law.
12
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2005 and 2004
NOTE J - SEGMENT AND GEOGRAPHICAL INFORMATION
All of the Company's identifiable assets and results of operations are located
in the United States and Canada. Management evaluates the various segments of
the Company based on the types of products being distributed which were, as
shown below:
Nine Months Ended September 30, 2005 and 2004
Proset PHS Group B2C Corporate Total
Revenue from external 2005 $ 985,102 $ 45,523,173 $ 1,439,198 $ - $ 47,947,473
customers 2004 $3,248,172 $ 35,125,961 $ 1,553,374 $ - $ 39,927,507
Net Income (loss) attributable 2005 $ (372,743) $ 168,651 $ (301,148) $ (864,049) $(1,369,289)
to common Stockholders 2004 $ (107,373) $ (17,322) $ (413,417) $ (790,100) $(1,328,212)
Interest & Finance 2005 $ 51,981 $ 951,384 $ - $ 138,485 $1,141,850
Expenses 2004 $ 179,303 $ 784,926 $ 38,250 $ 75,135 $1,077,614
Depreciation & 2005 $ 137,565 $ 8,802 $ 115,656 $ 108,948 $ 370,971
amortization 2004 $ 160,065 $ 4,079 $ 102,606 $ 237,952 $ 504,702
Identifiable assets as follows:
September 30, 2005 $1,959,526 $ 10,601,615 $ 1,815,040 $ 3,329,418 $17,705,599
December 31, 2004 $2,117,631 $ 9,160,367 $ 1,837,998 $ 3,590,427 $16,706,423
Three Months Ended September 30, 2005 and 2004
Proset PHS Group B2C Corporate Total
Revenue from external 2005 $ 258,195 $ 16,342,845 $ 521,589 $ - $ 17,122,629
customers 2004 $1,446,351 $ 11,732,159 $ 581,485 $ - $ 13,759,995
Net Income (loss) attributable 2005 $ (141,029) $ 159,651 $ (97,268) $ (317,626) $ (396,272)
to common Stockholders 2004 $ (20,102) $ 242,240 $(137,527) $ (254,841) $ (170,230)
Interest & Financie 2005 $ 18,597 $ 314,324 $ - $ 62,517 $ 395,438
Expenses 2004 $ 72,411 $ 303,539 $ 12,750 $ 39,148 $ 427,848
Depreciation & 2005 $ 45,855 $ 2,934 $ 38,444 $ 36,316 $ 123,549
amortization 2004 $ 53,355 $ 2,507 $ 43,922 $ 59,955 $ 159,739
13
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2005 and 2004
NOTE K - NET LOSS PER SHARE
Basic and diluted loss per share is calculated by dividing the net loss
applicable to common stock by the weighted-average number of common shares
outstanding during each period. Incremental shares from assumed exercises of
stock options and warrants of 748,316 and 766,650 for the nine months ended
September 30, 2005 and 2004, respectively, have been excluded from the
calculation of diluted loss per share since their effect would be antidilutive.
Nine Months ended September 30,
2005 2004
------------ -------------
Net loss applicable to common stock $(1,369,289) $ (1,328,212)
============ =============
Weighted-average number of shares in basic 3,633,443 2,063,129
and diluted EPS =========== =============
Three Months ended September 30,
2005 2004
------------ ----------
Net loss applicable to common stock $ (396,272) $(170,230)
============ ==========
Weighted-average number of shares in basic 3,988,018 2,180,154
and diluted EPS ============ ==========
NOTE L - SUBSEQUENT EVENTS
In October, 2005 SYBR.com Inc., a wholly owned subsidiary of the Company,
invested $1 million in a Private Placement of Debentures issued by ITT. The
investment consists of a five year 8% Note (ITT Note), and 200,000 warrants
exercisable into 200,000 common shares of ITT stock at $5.00 per share (ITT
Warrants). The Company financed this investment with a $1 million fully recourse
note with a major Shareholder under the same terms and conditions as the ITT
Note and assigned to such shareholder the ITT Warrants. As consideration for the
financing, the Company has retained the benefit to be derived from 100,000 of
the warrants received from ITT.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Synergy Brands, Inc. (SYBR or the Company) is a holding company that operates in
the wholesale and online distribution of Groceries and Health & Beauty Aids
(HBA) as well as wholesale and online distribution of premium cigars and salon
products through three business segments. It principally focuses on the sale of
nationally known brand name consumer products manufactured by major U.S.
manufacturers. The consumer products are concentrated within the Grocery and
Health & Beauty Aids (HBA) industries as well as the premium cigar business. The
company uses logistics web based programs to optimize its distribution costs on
both wholesale and retail levels.
The Company also owns 22% of the outstanding common stock of Interline Travel
and Tours, Inc. (AKA: PERX, ITT). PERX provides cruise and resort hotel packages
through a proprietary reservation system to airline employees and their
retirees. PERX is believed to be the largest Company in this sector of the
travel industry. Information on PERX can be found at www.perx.com. The Company
believes that its capital investment in this unique travel Company could provide
for material future capital appreciation. Synergy Brands does not manage PERX's
day-to day operations. SYBR and PERX have been exploring several opportunities
to optimize the shareholder value of both Companies.
Business-to-Business (B2B): The Company operates two businesses segments within
the B2B sector. B2B is defined as sales to non-retail customers.
PHS Group ("PHS") distributes Grocery and HBA products to retailers and
wholesalers predominately located in the Northeastern United States and Canada.
PHS is the largest subsidiary of the Company and represents about 95% of the
overall Company sales. PHS's core sales base continues to be the distribution of
nationally branded consumer products in the grocery and (HBA) sectors. PHS has
positioned itself as a distributor for major manufacturers as opposed to a full
line wholesaler. A full line wholesaler has the responsibility of servicing the
entire needs of a retail operation, whereby a distributor caters to specific
merchandising categories. As a result, PHS is able to plan the needs of its
customers directly from the source of supply and in turn merchandise sales to
its customers through this unique focus. PHS concentrates on the fastest moving
promotional items such as: Tide, Bounty, Nyquil, Pantene, Clorox bleach, Scott
tissues, Marcal tissues among many others, and uses logistics and distribution
savings to streamline and reduce its sale prices. The second business segment
within the Company's B2B sector is Proset Hair Systems (Proset). Proset imports
and distributes Salon Hair care products and luxury goods to wholesalers and
distributors, in the Northeastern part of the United States.
Business to Consumer (B2C): The Company operates online businesses within the
B2C segment. B2C is defined as sales to retail customers.
The Company's B2C activities are conducted through its wholly owned subsidiary
Gran Reserve Corporation (GRC). GRC operates the following businesses
o Cigars Around the World is a recently acquired company that sells premium
cigars to restaurants, hotels, casinos, country clubs and many other
leisure related destinations. The company was acquired in June
2003.(www.cigarsaroundtheworld.com.)
o CigarGold.com and Netcigar.com sell premium cigars through the Internet
directly to the consumer. (www.cigargold.com, www.netcigar.com.)
o BeautyBuys.com sells salon hair care products directly to the consumer via
the Internet. (www.beautybuys.com)
o The Company's B2C websites also expects to generate revenue through
affiliate and partnership agreements specifically integrated to Online
retailers, such as www.overstock.com and www.google.com.
15
CONSOLIDATED RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2005
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY OF CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
NINE MONTHS ENDED 9/30/05
Revenue 47,947,473 20.09% 47,947,473 20.09%
Gross Profit 3,157,740 12.18% 3,157,740 12.18%
SG&A 2,372,215 13.65% 2,863,156 11.22%
Operating profit (loss) 523,502 13.58% (76,387) -71.06%
Net loss attributable to Common Stockholders (505,240) -6.11% (1,369,289) -3.09%
Net income (loss) per common share (0.13) (0.38)
Interest and financing expenses 1,003,365 0.09% 1,141,850 5.96%
NINE MONTHS ENDED 9/30/04
Revenue 39,927,507 39,927,507
Gross Profit 2,814,959 2,814,959
SG&A 2,087,307 2,574,215
Operating profit (loss) 460,902 (263,958)
Net loss attributable to Common Stockholders (538,112) (1,328,212)
Net income (loss) per common share (0.26) (0.65)
Interest and financing expenses 1,002,479 1,077,614
Revenues increased by 20.1% to $47,947,473 for the nine months ended September
30, 2005 as compared to $39,927,507 for the nine months ended September 30,
2004. B2B operations represented 95% of revenues and 85% of gross profit. The
Company's grocery operation continued to develop additional vendor relationships
in the grocery and HBA businesses as well as expand its sales in Canada. In
particular the Company continues to increase its Metro NY business from its
warehousing operations in Syosset, NY and S. Kearney, NJ.
Gross profit for the nine months ended September 30, 2005 was $3,157,740 as
compared to $2,814,959 for the nine months ended September 30, 2004 an increase
of 12.2%. PHS and GRC increased their operating margins for the period while
Proset materially reduced it's operating margins for the period. The following
segment analysis will further define the components, which caused the increase
in operating gross profit.
Selling General and Administrative expenses (SG&A) increased by 11.2% while
revenues increased by 20.1% for the nine months ended September 30, 2005 as
compared to the nine months ended September 30, 2004. The Company streamlined
its operations by centralizing all administrative functions at its corporate
offices, reduced staff in its Proset operation through outsourcing, while also
reducing the costs involved in retail sales. The largest subsidiary of the
Company, PHS Group increased its SG&A expenses by 29% to $1,546,787 for the nine
months ended September 30, 2005 as compared to $1,195,969 for the nine months
16
ended September 30, 2004. The increase in SG&A for PHS group was caused by a 30%
increase in revenues. PHS incurs variable expenses in connection with selling
costs as well as its promotional expenses. As revenues rise sales commissions
and certain operating expenses resulting from sales increase commensurately.
Operating expenses that are generated through the Company's warehousing facility
in Syosset, were also a contributing factor to an increased SGA for PHS.
The net loss attributable to Common Stockholders of the Company was $1,369,289
for the nine months ended September 30, 2005 as compared to a net loss
attributable to Common Stockholders of $1,328,212 for the nine months ended
September 30, 2004. A material factor that affected the Company's costs thereby
resulting in the loss was increased financing costs resulting from higher
revenues. The increase was attributable to the development of the Company's
wholesale operation. Corporate expenses such as legal, accounting, and
regulatory costs represent the difference between the Company's consolidated
results and operating results. Management believes that its corporate expenses
increase as a result of additional regulatory requirements that have been
enacted by the Securities and Exchange Commission (SEC). The Company will be
required to comply with additional governance and financial regulations that
will likely result in additional corporate expenses. Corporate expenses for the
nine months ended September 30, 2005 totaled $490,941, which include legal,
accounting and regulatory expenses as compared to $486,908 for the nine months
ended September 30, 2004.
Interest and financing costs increased by 6% to $1,141,850 at September 30, 2005
as compared to $1,077,614 at September 30, 2004. Management believes that
financing costs were increased as a result of revenue growth. As a result the
Company was required to utilize its line of credit to support account receivable
and inventory growth. Although the working capital needed to support revenue
growth is directly related to the growth in accounts receivable and inventory,
the Company has invested in capital assets, such as warehousing and trucks to
support the growth of the business. (see Liquidity and Capital Resources).
In order to fully understand the Company's results a discussion of the Company's
segments and their respective results follows;
B2B OPERATIONS
The Company's B2B operations consist of two operating businesses, PHS Group and
Proset Hair Systems. PHS Group distributes Grocery and HBA products to retailers
and wholesalers predominately located in the Northeastern United States and
Canada. PHS is the largest subsidiary of the Company and represents about 95% of
the overall company sales. PHS's core sales base remains the distribution of
nationally branded consumer products in the grocery and health and beauty (HBA)
sectors. PHS has positioned itself as a distributor for major manufacturers as
opposed to a full line wholesaler. A full line wholesaler has the responsibility
of servicing the entire needs of a retail operation, where as a distributor
caters to specific merchandising categories. As a result, PHS is able to plan
the needs of its customers directly from the source of supply and in turn
increase sales to its customers through this unique focus. PHS concentrates on
the fastest moving promotional items and uses logistics and distribution savings
to streamline and reduce its sale prices. The second business segment within the
company's B2B sector is Proset Hair Systems (Proset). Proset distributes Salon
Hair care products to wholesalers, distributors, chain drug stores and
supermarkets in the Northeastern part of the United States.
17
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
B2B CHANGE
NINE MONTHS ENDED 9/30/05
Revenue 45,523,173 29.60%
Gross Profit 2,688,644 38.14%
SG&A 1,546,787 29.33%
Operating profit (loss) 1,133,055 51.84%
Net profit (loss) 168,651 1073.62%
Interest and financing expenses 951,384 21.21%
NINE MONTHS ENDED 9/30/04
Revenue 35,125,961
Gross Profit 1,946,284
SG&A 1,195,969
Operating profit (loss) 746,236
Net profit (loss) (17,322)
Interest and financing expenses 784,926
PHS increased its revenues by 30% to $45.5 million for nine months ended
September 30, 2005 as compared to $35.1 million for the nine months ended
September 30, 2004. The increase in PHS business is attributable to the
utilization of additional vendors, development of a wholesale operation and
expansion of the Canadian distribution business in Ontario, Canada. The Company
also benefited from increases in the vendor allowances it receives from its
vendors, thereby providing its customers with additional discounts. The overall
gross profit percentage increased from 5.5% to 5.9%. Gross profit increased by
38% to $2,688,644 for the nine months ended September 30, 2005 as compared to
$1,946,284 for the nine months ended September 30, 2004. In 2005 several PHS
vendors created special packaging with promotional pricing that enabled PHS to
widen its margin. As an example, special packaging was created for Nyquil,
Marcal paper, Clorox displays as well as Herbal essence shampoos among others,
with unique retail display features, that PHS has been able to strongly promote
during FY 2005 as opposed to marketing those products for normal replenishment.
Promotional displays allow PHS to sell better mixes of product as well as
introduce new items in combination with regularly stocked items. As long as the
Company maintains or expands its vendor relationships, management believes that
it should improve its operating results. However, the Company is dependent on
promotional allowances and any material changes to manufacture's allowances will
have a material adverse effect to the Company's operating results. Net profit
improved from a loss of $17,322 for the nine months ended September 20, 2004 to
a profit of $168,651 for the nine months ended September 30, 2005.
18
PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES
Salon
Products CHANGE
NINE MONTHS ENDED 9/30/05
Revenue 985,102 -69.67%
Gross Profit 32,310 -92.86%
SG&A 212,016 -3.13%
Operating profit (loss) (317,271) -531.59%
Net profit (loss) (372,743) -247.15%
Interest and financing expenses 51,981 -71.01%
NINE MONTHS ENDED 9/30/04
Revenue 3,248,172
Gross Profit 452,435
SG&A 218,858
Operating profit (loss) 73,512
Net profit (loss) (107,373)
Interest and financing expenses 179,303
Proset revenues decreased by 70% for the nine months ended September 30, 2005 as
compared to the nine months ended September 30, 2004. Gross profit decreased by
93% to $32,310 for the nine months ended September 30, 2005 as compared to
$452,435 for the nine months ended September 30, 2004. SG&A decreased by 3% for
the nine months ended September 30, 2005. Management has been disappointed with
Proset's operation for the nine months ended September 30, 2005. Proset's
backlog of orders has not materialized and as a result the results were below
expectations. Proset's management believes that the delay in order flow should
be corrected, but there is no assurance that it will. Results of operations
would have been improved if Proset's business expectations were materialized.
Proset represented about 2% of sales for the period, but it's net loss
represented 27% of the overall net loss of the Company.
19
B2C SEGMENT INFORMATION OF OPERATING BUSINESSES
B2C CHANGE
NINE MONTHS ENDED 9/30/05
Revenue 1,439,198 -7.35%
Gross Profit 436,786 4.94%
SG&A 613,412 -8.78%
Operating profit (loss) (292,282) -18.55%
Net profit (loss) (301,148) -27.16%
Interest and financing expenses - -100.00%
NINE MONTHS ENDED 9/30/04
Revenue 1,553,374
Gross Profit 416,240
SG&A 672,480
Operating profit loss (358,846)
Net profit (loss) (413,417)
Interest and financing expenses 38,250
The Company's B2C segment includes three businesses, which include Cigars Around
the World, CigarGold and BeautyBuys. Cigars Around the World (CAW) was acquired
in June of 2003. CAW sells premium cigars to Hotels, Restaurants, Casinos, PGA
Clubs and other leisure related destinations. CAW sells its cigars in customized
retail displayed humidors. CAW also has its own retail website that operates
under the name www.CigarsAroundTheWorld.com. The displays range from counter top
humidors to Walled Display units. CigarGold (CG) is the Company's cigar online
unit. CG sells premium cigars online to retail customers throughout the United
States. It has a selection of over 1000 products, which include brand-name hand
made premium cigars and cigar accessories. CigarGold operates under the domain
names: www.CigarGold.com, www.NetCigar.com, and www.GoldCigar.com. The online
unit also operates www.BeautyBuys.com. BeautyBuys.com sells salon hair products
to the retail consumer. Previously the operation also sold fragrances and
cosmetics to retail customers. However, the Company decided in 2003 to limit its
selection to salon hair care products, since those items are already carried and
stocked within its wholesale salon operation, Proset Hair Systems.
Revenues in the Company's B2C operation for nine months ended September 30, 2005
were $1,439,198 as compared to $1,553,374 for the nine months ended September
30, 2004. CAW on a current operating basis represents approximately 59% of B2C
revenues for the nine months ended September 30, 2005. Gross profit for the nine
months ended September 30, 2005 was $436,786 as compared to $416,240 for the
nine months ended September 30, 2004. The table above provides comparative
details for the Company's B2C operation. CAW is operating profitably, but the
logistical support in Miami Florida is consuming the segment's resources and
thereby not allowing it to show a profit at these sales levels. The customer
metrics for this segment are very strong. The segment has over 20,000 customers,
generates an average order of $100, has over a 50% repeat rate and generates a
99% fulfillment rate, which the Company gauges is far in excess of its
competition. The Company believes that building its B2C segment brands along
with the popularity of Bill Rancic, the winner of the NBC show "The Apprentice"
should bring this segment to effective critical mass.
20
CONSOLIDATED RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2005
AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY OF CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
THREE MONTHS ENDED 9/30/05
Revenue 17,122,629 24.44% 17,122,629 24.44%
Gross Profit 1,169,966 -9.95% 1,169,966 -9.95%
SG&A 817,887 11.28% 1,019,493 16.46%
Operating profit (loss) 264,846 -42.98% 26,924 -89.81%
Net loss attributable to Common Stockholders (78,646) -192.95% (396,272) -132.79%
Net income (loss) per common share (0.01) (0.09)
Interest and financing expenses 332,921 -14.35% 395,438 -7.58%
THREE MONTHS ENDED 9/30/04
Revenue 13,759,995 13,759,995
Gross Profit 1,299,230 1,299,230
SG&A 734,998 875,235
Operating profit (loss) 464,448 264,256
Net profit (loss) attributable to Common Stockholders 84,611 (170,230)
Net income (loss) per common share 0.04 (0.08)
Interest and financing expenses 388,700 427,848
Revenues increased by 24.4% to $17,122,629 for the three months ended September
30, 2005 as compared to $13,759,995 for the three months ended September 30,
2004. B2B operations represented 95% of revenues and 83% of gross profit. The
Company's grocery operation continued to develop additional vendor relationships
in the grocery and HBA businesses as well as expand its sales in Canada.
Gross profit for the three months ended September 30, 2005 was $1,169,966 as
compared to $1,299,230 for the three months ended September 30, 2004, a decrease
of 10%. The following segment analysis will further define the components, which
caused the decrease in operating gross profit. Gross profit decreased primarily
due to the operating performance of Proset. Proset's gross profit decreased by
$185,000 for the period, which was cause for the 10% reduction in overall gross
profit for the period.
Selling General and Administrative expenses (SG&A) increased by 16.5% while
revenues increased by 24.4% for the three months ended September 30, 2005 as
compared to the three months ended September 30, 2004. The Company streamlined
its operations by centralizing all administrative functions at its corporate
offices, reduced staff in its Proset operation through outsourcing, while also
reducing the costs involved in retail sales. The largest subsidiary of the
Company, PHS Group increased its SG&A expenses by 22% to $516,347 for the three
months ended September 30, 2005 as compared to $423,030 for the three months
ended September 30, 2004. The increase in SG&A for PHS group was caused by a 39%
increase in revenues. PHS incurs variable expenses in connection with selling
costs as well as its promotional expenses. As revenues rise sales commissions
and certain operating expenses resulting from sales increase commensurately.
21
The net loss attributable to Common Stockholders of the Company was $396,272 for
the three months ended September 30, 2005 as compared to a net loss attributable
to Common Stockholders of $170,230 for the three months ended September 30,
2004. A material factor that affected the Company's costs, thereby resulting in
the loss was continued high financing costs required to finance increased
inventory, and accounts receivable, as well as warehouse operations. Proset's
loss of $141,029 also contributed to the Company's quarterly loss. Corporate
expenses such as legal, accounting, and regulatory costs represent the
difference between the Company's consolidated results and operating results.
Management believes that its corporate expenses increase as a result of
additional regulatory requirements that have been enacted by the Securities and
Exchange Commission (SEC). The Company will be required to comply with
additional governance and financial regulations that will likely result in
additional corporate expenses. Corporate expenses for the three months ended
September 30, 2005 totaled $201,606, which include legal, accounting and
regulatory expenses as compared to $140,237, for the three months ended
September 30, 2004.
Interest and financing costs decreased by 7.6% to $395,438 at September 30, 2005
as compared to $427,848 at September 30, 2004. Additional capital, together with
faster receivable turnover, reduced the Company's financing costs.
In order to fully understand the Company' results a discussion of the Company's
segments and their respective results follows;
B2B OPERATIONS
The Company's B2B operations consist of two operating businesses, PHS Group and
Proset Hair Systems. PHS Group distributes Grocery and HBA products to retailers
and wholesalers predominately located in the Northeastern United States and
Canada. PHS is the largest subsidiary of the Company and represents about 93% of
the overall company sales. PHS's core sales base remains the distribution of
nationally branded consumer products in the grocery and health and beauty (HBA)
sectors. PHS has positioned itself as a distributor for major manufacturers as
opposed to a full line wholesaler. A full line wholesaler has the responsibility
of servicing the entire needs of a retail operation, where as a distributor
caters to specific merchandising categories. As a result, PHS is able to plan
the needs of its customers directly from the source of supply and in turn
increase sales to its customers through this unique focus. PHS concentrates on
the fastest moving promotional items and uses logistics and distribution savings
to streamline and reduce its sale prices. The second business segment within the
company's B2B sector is Proset Hair Systems (Proset). Proset distributes Salon
Hair care products to wholesalers, distributors, chain drug stores and
supermarkets in the Northeastern part of the United States.
22
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
B2B CHANGE
THREE MONTHS ENDED 9/30/05
Revenue 16,342,845 39.30%
Gross Profit 998,246 4.86%
SG&A 516,347 22.06%
Operating profit (loss) 478,965 -9.02%
Net profit (loss) 159,651 -34.09%
Interest and financing expenses 314,324 3.55%
THREE MONTHS ENDED 9/30/04
Revenue 11,732,159
Gross Profit 951,985
SG&A 423,030
Operating profit (loss) 526,448
Net profit (loss) 242,240
Interest and financing expenses 303,539
PHS increased its revenues by 39% to $16.3 million for three months ended
September 30, 2005 as compared to $11.7 million for the three months ended
September 30, 2004. The increase in PHS business is attributable to the
utilization of additional vendors, development of a wholesale operation and
expansion of the Canadian distribution business in Ontario, Canada. The Company
also benefited from increases in the vendor allowances it receives from its
vendors, thereby providing its customers with additional discounts. The overall
gross profit percentage decreased from 8.1% to 6.1%. Gross profit increased by
5% to $998,246 for the three months ended September 30, 2005 as compared to
$951,985 for the three months ended September 30, 2004. In 2005 several PHS
vendors created special packaging with promotional pricing that enabled PHS to
widen its margin. As an example, special packaging was created for Nyquil,
Marcal paper, Clorox displays as well as Herbal essence shampoos among others,
with unique retail display features, that PHS has been able to strongly promote
during FY 2005 as opposed to marketing those products for normal replenishment.
Promotional displays allow PHS to sell better mixes of product as well as
introduce new items in combination with regularly stocked items. As long as the
Company maintains or expands its vendor relationships, management believes that
is should improve its operating results. Net profit was $159,651 for the three
months ended September 30, 2005 as compared to a profit of $242,240 for the
three months ended September 30, 2005.
23
PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES
Salon
Products CHANGE
THREE MONTHS ENDED 9/30/05
Revenue 258,195 -82.15%
Gross Profit 2,016 -98.93%
SG&A 75,902 -6.94%
Operating profit (loss) (119,741) -327.47%
Net profit (loss) (141,029) -601.57%
Interest and financing expenses 18,597 -74.32%
THREE MONTHS ENDED 9/30/2004
Revenue 1,446,351
Gross Profit 187,557
SG&A 81,561
Operating profit (loss) 52,641
Net profit (loss) (20,102)
Interest and financing expenses 72,411
Proset revenues decreased by 82% for the three months ended September 30, 2005
as compared to the three months ended September 30, 2004. Proset has transferred
its business model from retail services to wholesale distribution. Gross profit
decreased by 99% to $2,016 for the three months ended September 30, 2005 as
compared to $187,557 for the three months ended September 30, 2004. At the same
time SG&A decreased by 7% to $75,902 for the third quarter of 2005. Management
has been disappointed with Proset's operation for the three months ended
September 30,2005. Proset's backlog of orders has not materialized and as a
result the results were below expectations. Proset's management believes that
the delay in order flow should be corrected, but there is no assurance that it
will. Results of operations would have been improved if Proset's business
expectations were materialized. Proset represented about 2% of sales for the
period, but its net loss represented 36% of the overall net loss of the Company.
24
B2C SEGMENT INFORMATION OF OPERATING BUSINESSES
B2C CHANGE
THREE MONTHS ENDED 9/30/05
Revenue 521,589 -10.30%
Gross Profit 169,704 6.27%
SG&A 225,638 -2.07%
Operating profit loss (94,378) -17.68%
Net profit (loss) (97,268) -29.27%
Interest and financing expenses - -100.00%
THREE MONTHS ENDED 9/30/2004
Revenue 581,485
Gross Profit 159,688
SG&A 230,407
Operating profit loss (114,641)
Net profit (loss) (137,527)
Interest and financing expenses 12,750
The Company's B2C segment includes three businesses, which include Cigars Around
the World, CigarGold and BeautyBuys. Cigars Around the World (CAW) was acquired
in June of 2003. CAW sells premium cigars to Hotels, Restaurants, Casinos, PGA
Clubs and other leisure related destinations. CAW sells its cigars through
customized retail displayed humidors. CAW also has its own retail website that
operates under the name www.CigarsAroundTheWorld.com. The displays range from
counter top humidors to Walled Display units. CigarGold (CG) is the Company's
cigar online unit. CG sells premium cigars online to retail customers throughout
the United States. It has a selection of over 1000 products, which include
brand-name hand made premium cigars and cigar accessories. CigarGold operates
under the domain names: www.CigarGold.com, www.NetCigar.com, and
www.GoldCigar.com. The online unit also operates www.BeautyBuys.com.
BeautyBuys.com sells salon hair products to the retail consumer. Previously the
operation also sold fragrances and cosmetics to retail customers. However, the
Company decided in 2003 to limit its selection to salon hair care products,
since those items are already carried and stocked within its wholesale salon
operation, Proset Hair Systems.
Revenues in the Company's B2C operation for three months ended September 30,
2005 were $521,589 as compared to $581,485 for the three months ended September
30, 2004. CAW on a current operating basis represents approximately 62% of B2C
revenues for the three months ended September 30, 2005. Gross profit for the
three months ended September 30, 2005 was $169,704 as compared to $159,688 for
the three months ended September 30, 2004. The table above provides comparative
details for the Company's B2C operation. CAW is operating profitably, but the
logistical support in Miami Florida is consuming the segments resources and
thereby not allowing it to show a profit at these sales levels. The customer
metrics for this segment are very strong. The segment has over 20,000 customers,
generates an average order of $100, has over a 50% repeat rate and generates a
99% fulfillment rate, far in excess of its competition. The Company believes
that building its B2C segment brands along with the popularity of Bill Rancic,
the winner of the NBC show "The Apprentice" should bring this segment to
effective critical mass.
25
LIQUIDITY AND CAPITAL RESOURCES
The Company's predominant need for working capital is to finance its Receivables
and Inventory levels. In order to finance its requirements the Company has
relied on secured debt financings, trade financing, equity based financing as
well as its cash flow from operations. The Company's major lender, International
Investment Group Trade Opportunities Fund (IIG), provides receivable and
inventory financing to its three operating segments. In addition, most of the
Company's major vendors provide trade credit for purchases ranging from COD to
30 days. One vendor to the Company represents over 37% of the Company's
purchases. Loss of this vendor would have a material adverse effect on the
Company's operations. Working capital increased 333% at September 30,2005 and
totaled approximately $4.9 million, an increase of $3,747,000 from 2004. The
Company's operations require financing of inventory and receivables. IIG
provides the Company's operating subsidiaries a facility that allows for
borrowings of up to 85% against eligible accounts receivables and 50% against
eligible inventory and orders in transit up to a limit of $6 million. It is
important to note that as the borrowings increase from IIG, commensurate with
increased revenues and additional need for inventory, additional capital will be
needed to support the borrowing base with IIG. Therefore as the financial
leverage of the Company increases, additional capital is needed to support the
Company's growth. The Company turns its overall inventory on average
approximately every 17 days; its receivables average 38 days of collections (the
turn is computed on ending balances).
September 30, 2005 2004
Working Capital $ 4,872,833 $ 1,125,907
Assets 17,705,599 16,094,200
Liabilities 9,777,171 13,529,591
Equity 7,928,428 2,564,609
Line of Credit Facility 5,191,534 8,182,005
Receivable turnover (days) 38 60
Inventory Turnover (days) 17 15
Tangible Assets 16,056,092 14,222,381
The Company has a revolving loan and security agreement with IIG for financing
its operations. The line of credit under the loan allows borrowings up to
$6,000,000 for accounts receivable, orders in transit, and inventory based upon
a borrowing base formula. The Company's agreement expired with IIG on May 31,
2005. Currently, the Company is operating under the terms of its extension
agreement and IIG has allowed the Company to operate under such terms without an
extension agreement. The Company is seeking to refinance its secured financing
needs through other Asset Based Lenders. There is no assurance that the Company
will be successful and it may need to continue to incur high financing costs.
Management believes that its IIG facility has enabled the Company to achieve its
recent growth. By providing financing on all of the Company's tangible assets,
the Company has been able to expand its sales through receivable order and
inventory financing support. In addition IIG provides the Company with a
financing option in Canada, borrowing against anticipated vendor allowances as
well as securing product through sales order financing. Management believes that
to achieve profitable operations, financing costs must be reduced. By improving
its operating results, management believes that it can generate positive cash
flow, assuming financing costs can be reduced. However, there can be no
assurance that the Company will reduce its financing costs, so that it can
improve its operating results. Failure to reduce financing costs will inhibit
the Company's growth. Management believes that its current capital structure
needs to be improved in order to secure a profitable operation.
26
In March 2005 certain shareholders of ITT converted $236,354 of debt into 94,542
shares of common stock.
In March 2005, the Company converted $525,000 of debt which Laurus Master Funds
("Laurus") into 150,000 shares of common stock. On January 25, 2005 the Company
completed a financing with Laurus Master Funds ("Laurus"). The financing
consisted of a $500,000 secured convertible debenture that converts into common
stock under certain conditions at $3.00 per share as amended, or matures January
25, 2008. The debenture provides for monthly payments of $16,666.67 plus
interest, commencing August 1, 2005. The Company repaid $33,333 of this debt at
September 30, 2005. In addition, Laurus was issued 33,333 warrants exercisable
at $3.50 per share. The Company's common stock quoted market price at the date
of closing was $2.52 per share. The debenture has a three-year term with a
coupon rate of prime plus 3%.
On June 21, 2005, the Company completed a financing with Laurus Master Funds
("Laurus"). The financing consisted of a $500,000 secured convertible debenture
that converts into common stock under certain conditions at $3.00 per share and
matures on June 21, 2008. The financing provides Laurus with registration rights
for common shares it is issued under conversion. The debenture provides for
monthly payments of $16,666.67 plus interest, commencing December 1, 2005. In
addition, Laurus was issued 33,333 warrants exercisable at $3.50 per shares. The
Company's common stock quoted market price at the date of closing was $2.15 per
share. The debenture has a three-year term with a coupon rate of prime plus 3%.
In April and June 2005 the Company converted $207,500 of debt of IIG into 85,218
shares of common stock. In the third quarter of 2005, the Company converted
$585,000 of debt of IIG into 248,400 shares of common stock. In April 2005 the
Company increased its 9% secured notes by $500,000. In May 2005 the Company
increased its 9% secured notes by $100,000. As the Company grows it intends to
raise additional capital to accommodate its growth plans however, there can be
no assurance that additional capital can be attained.
In March 2005, the Company designated 250,000 shares of Class B Preferred stock,
par value $.001 per share to be designated as Class B, Series B Preferred Stock.
On July 22, 2005, the Company completed an $800,000 private placement of
Preferred Stock and Common Stock consisting of 80,000 shares of Series B Class B
Preferred Stock and 88,000 shares of restricted Common Stock. The holders of
Class B Series B Preferred Stock have no voting rights with respect to general
corporate matters. The holders of Class B Series B Preferred Stock are entitled
to receive dividends at the annual rate of $.80 per share per annum. The Company
may, as its option, at any time in whole, or from time to time in part, out of
earned funds of the Corporation, redeem the Class B, Series B Preferred Stock on
any date set by the Board of Directors, at $10.00 per share plus, in each case,
an amount equal to all dividends of Class B, Series B Preferred Stock accrued
and unpaid thereon, pro rata to the date of redemption. If however, as to each
share of Class B, Series B Preferred Stock outstanding, if not redeemed by the
Company within 2 years of the issuance of such shares, the Company will be
obligated to issue to the then holder of record of such outstanding Class B,
Series B Preferred Stock, half a share of the Company's unissued restricted
Common Stock per share of Class B, Series B Preferred Stock for each year that
said share is not redeemed.
Management believes that continued cost containment, improved financial and
operating controls, debt reduction, and a focused sales and marketing effort
should provide sufficient cash flow from operations in the near term and the
Company is working toward reliance on such financial sources and attributes to
cover its cash flow requirements but achievement of these goals, however, will
likely continue to be dependent upon the Company's attainment of increased
revenues, improved operating costs, reduced financing cost and trade support
levels that are consistent with management's plans. Such operating performance
will be subject to financial, economic and other factors beyond its control, and
there can be no assurance that the Company's goals will be achieved. In the
interim while such goals are being pursued achievement of positive cash flow has
been reliant on equity and debt financing, including the Company's exchange of
notes payable for common shares and its issuance of further common and preferred
stock in private placements and the Company is hopeful that the market will
continue to recognize the Company's stature so that such financing method will
continue to be available in the future because, at least in the near future, the
Company is likely to continue to use such financing opportunities to maintain
adequate cash flow.
Expected interest payments on notes payable for the period ended September 30,
are as follows:
September 30, 2006 September 30, 2007 September 30, 2008 Total
$259,000 $142,000 $51,000 $452,000
Variable interest rate on notes of $1,341,666 was 9.75%. Variable interest rate
on note of $795,531 was 6.75%.
27
CRITICAL ACCOUNTING POLICIES.
The discussion and analysis of the Company's financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements requires management to make estimates
and disclosures on the date of the financial statements. On an on going basis,
management evaluates its estimates. Management uses authoritative
pronouncements, historical experience and other assumptions as the basis for
making judgments. Actual results could differ from those estimates. Management
believes that the following critical accounting policies affect its more
significant judgments and estimates in the preparation of the Company's
financial statements.
ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS.
The Company's accounts receivable are due from businesses engaged in the
distribution of grocery, health and beauty products as well as from consumers
who purchase health and beauty products and premium handmade cigars from the
Company's Web sites. Credit is extended based on evaluation of a customers'
financial condition and, generally, collateral is not required. Accounts
receivable are due within 10 - 60 days and are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding longer
than the contractual payment terms are considered past due. Estimates are used
in determining the allowance for doubtful accounts based on the Company's
historical collections experience, current trends, credit policy and a
percentage of its accounts receivable by aging category. In determining these
percentages, the Company looks at historical write-offs of its receivables. The
Company also looks at the credit quality of its customer base as well as changes
in its credit policies. The Company continuously monitors collections and
payments from its customers. The Company writes off accounts receivable when
they become uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts. Although risk
management practices and methodologies are utilized to determine the adequacy of
the allowance, it is possible that the accuracy of the estimation allowance
process could be materially impacted by different judgments as to collectibility
based on the information considered and further deterioration of accounts.
VALUATION OF DEFERRED TAX ASSETS.
Deferred tax assets and liabilities represent temporary differences between the
basis of assets and liabilities for financial reporting purposes and tax
purposes. Deferred tax assets are primarily comprised of reserves, which have
been deducted for financial statement purposes, but have not been deducted for
income tax purposes as well as net operating loss carry forwards. The Company
annually reviews the deferred tax asset accounts to determine if is appears more
likely than not that the deferred tax assets will be fully realized. At
September 30, 2005, the Company has established a full valuation allowance.
VALUATION OF LONG-LIVED ASSETS.
The Company reviews its long-lived assets periodically to determine potential
impairment by comparing the carrying value of the assets with expected net cash
flows expected to be provided by the operating activities of the business or
related products. Should the sum of the expected future net cash flows be less
than the carrying value, the Company would determine whether an impairment loss
should be recognized. An impairment loss would be measured by comparing the
amount by which the carrying value exceeds the fair value of the Asset.
Long-lived assets and intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. Impairment is measured by comparing the carrying value of the
long-lived assets to the estimated undiscounted future cash flows expected to
result from use of the assets and their ultimate disposition. To the extent
impairment has occurred, the carrying amount of the asset would be written down
to an amount to reflect the fair value of the asset.
28
SEASONALITY
Sales by PHS Group and Proset usually peak at the end of the a calendar quarter,
when the Company's suppliers offer promotions which lower prices and, in turn,
the Company is able to lower its prices and increase sales volume. Suppliers
tend to promote at quarterly end and as a result reduced products costs may
increase sales. In particular, the second and first quarters are usually better
operating quarters. Sales of beauty care products and fragrances increase over
traditional gift giving holidays such as Christmas, Mother's Day, Father's Day,
and Valentine's Day.
Cigar product sales also increase during holiday periods and summer months as
well as around special sporting events.
INFLATION
The Company believes that inflation, under certain circumstances, could be
beneficial to the Company's major business, PHS Group. When inflationary
pressures drive product costs up, the Company's customers sometimes purchase
greater quantities of product to expand their inventories to protect against
further pricing increases. This enables the Company to sell greater quantities
of products that are sensitive to inflationary pressures.
However, inflationary pressures frequently increase interest rates. Since the
Company is dependent on financing, any increase in interest rates will increase
the Company's credit costs, thereby reducing its profits.
29
FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS
Other than the factual matters set forth herein, the matters and items set forth
in this report are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. These statements relate to
future events or the Company's future financial performance and include, but are
not limited to, statements concerning:
The anticipated benefits and risks of the Company's key strategic
partnerships, business relationships and acquisitions;
The Company's ability to attract and retain customers;
The anticipated benefits and risks associated with the Company's business
strategy, including those relating to its distribution and fulfillment
strategy and its current and future product and service offerings;
The Company's future operating results and the future value of its common
stock;
The anticipated size or trends of the market segments in which the Company
competes and the anticipated competition in those markets;
Potential government regulation; and
The Company's future capital requirements and its ability to satisfy its
capital needs.
Furthermore, in some cases, you can identify forward-looking statements by
terminology such as may, will, could, should, expect, plan, intend, anticipate,
believe, estimate, predict, potential or continue, the negative of such terms or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. Factors that could cause such
differences include, but are not limited to, those identified herein and other
risks included from time to time in the Company's other Securities and Exchange
Commission ("SEC") reports and press releases, copies of which are available
from the Company upon request.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements. Moreover the Company assumes no
responsibility for the accuracy and completeness of the forward-looking
statements to conform such statements to actual results or to changes in its
expectations.
In addition to the other information in this Form 10-Q, the following risk
factors should be carefully considered in evaluating the Company business
because these factors may have a significant impact on the Company's business,
operating results and financial condition. As a result of the risk factors
discussed below and elsewhere in this Form 10-Q and the risks discussed in the
Company's other SEC filings, actual results could differ materially from those
projected in any forward-looking statements.
1. THE COMPANY HAS INCURRED OPERATING LOSSES.
The Company has a long history of operating losses. To date, a large portion of
the Company's expenses have been financed through capital raising activities.
Although the Company has narrowed its losses, it still continues to report
operating deficits as opposed to profits. A large portion of the Company's
historical losses are a direct result of fees and expenses paid for in stock
and/or other working capital financing. Due to a pattern of historical losses,
there is no assurance that further financing will not be needed for operating
purposes.
30
2. INTERNET
The internet environment is still relatively new to business and is subject to
inherent risks as in any new developing business including rapidly developing
technology with which to attempt to keep pace and level of acceptance and level
of consumer knowledge regarding its use.
3. DEPENDENCE ON PUBLIC TRENDS.
The Company's business is subject to the effects of changing customer
preferences and the economy, both of which are difficult to predict and over
which the Company has no control. A change in either consumer preferences or a
downturn in the economy may affect the Company's business prospects.
4. POTENTIAL PRODUCT LIABILITY.
As a participant in the distribution chain between the manufacturer and
consumer, the Company would likely be named as a defendant in any product
liability action brought by a consumer. To date, no claims have been asserted
against the Company for product liability; there can be no assurance, however,
that such claims will not arise in the future. Currently, the Company does carry
product liability insurance. In the event that any products liability claim is
not fully funded by insurance, and if the Company is unable to recover damages
from the manufacturer or supplier of the product that caused such injury, the
Company may be required to pay some or all of such claim from its own funds. Any
such payment could have a material adverse impact on the Company.
5. RELIANCE ON COMMON CARRIERS.
Although the Company has in the last few years leased a fleet of trucks operated
by the Company to make deliveries, the Company is still dependent, for shipping
of product purchases, on common carriers in the trucking industry. Although the
Company uses several hundred common carriers, the trucking industry is subject
to strikes from time to time, which could have material adverse effect on the
Company's operations if alternative modes of shipping are not then available.
Additionally the trucking industry is susceptible to various natural disasters
which can close transportation lanes in any given region of the country. To the
extent common carriers are prevented from or delayed in utilizing local
transportation lanes, the Company will likely incur higher freight costs due to
the limited availability of trucks during any such period that transportation
lanes are restricted.
6. COMPETITION.
The Company is subject to competition in all of its various product sale
businesses. While these industries may be highly fragmented, with no one
distributor dominating the industry, the Company is subject to competitive
pressures from other distributors based on price and service and product quality
and origin.
7. LITIGATION
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions should not materially affect
the financial position, results of operations or cash flows of the Company, but
there can be no assurance as to this.
31
8. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING.
Synergy's qualification for trading on the NASDAQ Small Cap system has in the
past been questioned, the focus being on the market quotes for the Company's
stock, the current bid price having for a time been reduced below the minimum
NASDAQ standard of $1 and having been below such level for an appreciable period
of time, as well as the Company also being notified in the past that
stockholders' equity has fallen below minimum NASDAQ continued listing standard
of $2,500,000. NASDAQ has established, and the Commission has approved, certain
maintenance requirements, which the Company must adhere to remain listed,
including the requirement that a stock listed in such market have a bid price
greater than or equal to $1.00 and the listed Company maintain stockholders
equity above $2,500,000. The bid price per share for the Common Stock of Synergy
has been below $1.00 in the past and the Common Stock has remained on the NASDAQ
Small Cap System because Synergy has complied with alternative criteria which
are now eliminated under the new rules. If the bid price dips below $1.00 per
share, and is not brought above such level for a sustained period of time or the
Company fails to maintain stockholders' equity at a level of at least $2,500,000
the Common Stock could be delisted from the NASDAQ Small Cap System and
thereafter trading would be reported in the NASDAQ's OTC Bulletin Board or in
the "pink sheets." (see Item 5-"Market For The Registrant's Common Stock and
Related Stockholder Matters" contained in the Company's Annual Report on form
10K for the year ended December 31, 2004 for a more in depth discussion of the
Company's current NASDAQ listing status)In the event of delisting from the
NASDAQ Small Cap System, the Common Stock would become subject to the rules
adopted by the Commission regulating broker-dealer practices in connection with
transactions in "penny stocks", including what the Company believes to be
stringent disclosure rules very different from NASDAQ trading practice
procedures. These disclosure requirements may have the effect of reducing the
level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. If the Common Stock became subject to the
penny stock rules, many broker-dealers may be unwilling to engage in
transactions in the Company's securities because of the added disclosure
requirements, thereby making it more difficult for purchasers of the Common
Stock to dispose of their shares. The Company's common stock has historically
remained at NASDAQ trading levels above $1 except for limited periods of time
and the Company has achieved and is confident of maintaining a level of
Stockholders' equity above $2,500,000. Historical stability combined with the
Company's increasing business share in the market and its continuing
establishment as a viable force in the industries wherein it participates gives
the Company confidence that its susceptibility to market deficiencies is in a
much lessened state then in years past and that it can continue to achieve and
maintain NASDAQ listing compliance, but of this there can be no assurance.
9. RISKS OF BUSINESS DEVELOPMENT AND BUSINESS CONCENTRATION.
Because still the lines of product and product distribution established for the
Company are relatively new and different from its historical non-internet
product distribution business, the Company's operations in these areas should
continue to be considered subject to all of the risks inherent in a new business
enterprise, including the absence of an appreciable operating history and the
expense of new product development and uncertainties on demand and logistics of
delivery and other satisfaction of customer demands. Various problems, expenses,
complications and delays may be encountered in connection with the development
of the Company's new products and methods of product distribution. These
expenses must either be paid out of the proceeds of future offerings or out of
generated revenues and Company profits and will likely be a drain on Company
capital if revenue and revenue collection does not keep pace with Company
expenses. There can be no assurance as to the continued availability of funds
from any of these sources. The Company conducts its business with a limited
amount of vendors and customers. Loss of any material vendors or customers may
have an adverse effect on overall performance.
10. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS.
The market for the Company's products is rapidly changing with evolving industry
standards and frequent new product introductions. The Company's future success
will depend in part upon its continued ability to enhance its existing products
and to introduce new products and features to meet changing customer
requirements and emerging industry standards and to continue to have access to
such products from their sources on a pricing schedule conducive to the Company
operating at a profit. The Company will have to develop and implement an
appropriate marketing strategy for each of its products. There can be no
assurance that the Company will successfully complete the development of future
products or that the Company's current or future products will achieve market
acceptance levels and be made available for sale by the Company conducive to the
Company's fiscal needs. Any delay or failure of these products to achieve market
acceptance or limits on their availability for sale by the Company would
adversely affect the Company's business. In addition, there can be no assurance
that the products or technologies developed by others will not render the
Company's products or technologies non-competitive or obsolete.
Management believes actions taken and presently being taken to meet and enhance
the Company's operating and financial requirements should assure and provide the
opportunity for the Company to continue as a going concern. However, Management
cannot predict the outcome of future operations and no adjustments have been
made to offset the outcome of this uncertainty.
32
11. .EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS AND LITIGATION MAY
IMPACT CIGAR INDUSTRY.
The tobacco industry in general has been subject to extensive regulation at the
federal, state and local levels. Recent trends have increased regulation of the
tobacco industry. Although regulation initially focused on cigarette
manufacturers, it has begun to have a broader impact on the industry as a whole
and may focus more directly on cigars in the future. The increase in popularity
of cigars may likely lead to an increase in regulation of cigars. A variety of
bills relating to tobacco issues have been introduced in the U.S. Congress,
including bills that would (i) prohibit the advertising and promotion of all
tobacco products or restrict or eliminate the deductibility of such advertising
expense, (ii) increase labeling requirements on tobacco products to include,
among others things, addiction warnings and lists of additives and toxins, (iii)
shift control of tobacco products and advertisements from the Federal Trade
Commission (the "FTC") to the Food and Drug Administration (the "FDA"), (iv)
increase tobacco excise taxes and (v) require tobacco companies to pay for
health care costs incurred by the federal government in connection with tobacco
related diseases. There has also been recent cooperation between federal and
State authorities to curtail internet sales of tobacco products because of tax
issues as well as underage purchase questions. Future enactment of such
proposals or similar bills may have an adverse effect on the results of
operations or financial condition of the Company. Although, except for warning
labeling and smoke free facilities, current legislation and regulation focuses
on cigarette smoking and sales, there is no assurance that the scope of
legislation will not be expanded in the future to encompass cigars as well.
A majority of states restrict or prohibit smoking in certain public places and
restrict the sale of tobacco products to minors. Local legislative and
regulatory bodies also have increasingly moved to curtail smoking by prohibiting
smoking in certain buildings or areas or by designating "smoking" areas. These
restrictions generally do not distinguish between cigarettes and cigars. These
restrictions and future restrictions of a similar nature have and likely will
continue to have an adverse effect on the Company's sales or operations because
of resulting difficulty placed upon advertising and sale of tobacco products,
such as restrictions and in many cases prohibition of counter access to or
display of premium handmade cigars, and/or decisions by retailers not to
advertise for sale and in many cases to sell tobacco products because of public
pressure to stop the selling of tobacco products. Numerous proposals also have
been and are being considered at the state and local levels, in addition to
federal regulations, to restrict smoking in certain public areas, regulating
point of sale placement and promotions of tobacco products and requiring warning
labels.
Increased cigar consumption and the publicity such increase has received may
increase the risk of additional regulation. The Company cannot predict the
ultimate content, timing or effect of any additional regulation of tobacco
products by any federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not have a material
adverse effect on the Company's business.
In addition numerous tobacco litigation has been commenced and may in the future
be instituted, all of which may adversely affect(albeit focusing primarily on
cigarette smoking) cigar consumption and sale and may pressure applicable
government entities to institute further and stricter legislation to restrict
and possibly prohibit cigar sale and consumption, any and all of which may have
an adverse affect on Company business.
Certain states have taken action the limit the shipping of cigarettes sold via
catalogs and the Internet. Although cigars are not affected, the major shipping
companies may limit the shipments of cigars tighter with cigarettes. In
addition, certain states have encouraged credit card companies not to accept
tobacco related orders for processing. Since tobacco sales are less then 3% of
overall sales, this should not effect on GRC. However, should the merchant
processors disallow all tobacco orders processing, it will have an adverse
affect on GRC.
12. NO DIVIDENDS LIKELY.
No dividends have been paid on the Common Stock since inception, nor, by reason
of its current financial status and its contemplated financial requirements,
does Synergy contemplate or anticipate paying any dividends upon its Common
Stock in the foreseeable future.
13. POTENTIAL LIABILITY FOR CONTENT ON THE COMPANY'S WEB SITE.
Because the Company posts product information and other content on its Web
sites, the Company faces potential liability for negligence, copyright, patent,
trademark, defamation, indecency, spamming, viruses, breach of security and
other claims based on the nature and content of the materials that the Company
posts. Such claims have been brought, and sometimes successfully pressed,
against other Internet content distributors. In addition, the Company could be
exposed to liability with respect to the unauthorized duplication of content or
unauthorized use of other parties' proprietary technology or infiltration into
the Company's system by unauthorized personnel.
33
14. THE COMPANY'S NET SALES WOULD BE HARMED IF IT EXPERIENCES SIGNIFICANT CREDIT
CARD FRAUD.
A failure to adequately control fraudulent credit card transactions would harm
the Company's net sales and results of operations because it does not carry
insurance against such risk. Under current credit card practices, the Company
may be held liable for fraudulent credit card transactions where it does not
obtain a cardholder's signature, a frequent practice in internet sales.
15. THE COMPANY DEPENDS ON CONTINUED USE OF THE INTERNET AND GROWTH OF THE
ONLINE PRODUCT PURCHASE MARKET.
The Company's future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the internet as an effective medium of business
and communication by the Company's target customers. Rapid growth in the use of
and interest in the Internet has occurred only recently. As a result, acceptance
and use may not continue to develop at historical rates, and a sufficiently
broad base of consumers may not adopt, and continue to use, the Internet and
other online services as a medium of commerce.
In addition, the Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements and/or potential customer
continued preferences for more traditional see and touch purchasing. The
Company's success will depend, in large part, upon third parties maintaining the
Internet infrastructure to provide a reliable network backbone with the speed,
data capacity, security and hardware necessary for reliable Internet access and
services and hopeful continued shifting of potential customers shopping
preferences to the internet.
16. IF THE COMPANY DOES NOT RESPOND TO RAPID TECHNOLOGY CHANGES, ITS SERVICES
COULD BECOME OBSOLETE AND ITS BUSINESS WOULD BE SERIOUSLY HARMED.
As the Internet and online commerce industry evolve, the Company must license
leading technologies useful in its business, enhance its existing services,
develop new services and technology that address the increasingly sophisticated
and varied needs of its prospective customers and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. The Company may not be able to successfully implement new
technologies or adapt its proprietary technology and transaction processing
systems to customer requirements or emerging industry standards. If the Company
is unable to do so, it could adversely impact its ability to build on its varied
businesses and attract and retain customers.
17. POTENTIAL FUTURE SALES OF COMPANY STOCK.
The majority of the shares of common stock of the Company outstanding are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act of 1933. In general under Rule 144 a person (or persons whose
shares are aggregated) who has satisfied a one year holding period may, under
certain circumstances, sell within any three month period a number of shares
which does not exceed the greater of 1% of the then outstanding shares of common
stock or the average weekly trading volume during the four calendar weeks prior
to such sale. Rule 144 also permits, under certain circumstances, the sale of
shares by a person who is not an affiliate of the Company and who has satisfied
a two-year holding period without, any quantity limitation. The majority of
holders of the shares of the outstanding common stock of the Company deemed
"restricted securities" have already satisfied at least their one year holding
period or will do so with the next fiscal year, and such stock is either
presently or within the next fiscal year will become eligible for sale in the
public market (subject to volume limitations of Rule 144 when applicable). The
Company is unable to predict the effect that sales of its common stock under
Rule 144, or otherwise, may have on the then prevailing market price of the
common stock. However, the Company believes that the sales of such stock under
Rule 144 may have a depressive effect upon the market.
34
18. THE COMPANY MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.
The success of the Company's business model depends in large part on its
continued ability to increase its number of customers. The market for its
businesses may grow more slowly than anticipated because of or become saturated
with competitors, many of which may offer lower prices or broader distribution.
The Company is also highly dependant on internet sales which require interest of
potential suppliers in the internet mode of product purchasing. Some potential
suppliers may not want to join the Company's networks because they are concerned
about the possibility of their products being listed together with their
competitors' products thus limiting availability of product mix made available
by the Company. If the Company cannot continue to bring new customers to its
sites or maintain its existing customer base or attract listing of a mixture of
product, the Company may be unable to offer the benefits of the network model at
levels sufficient to attract and retain customers and sustain its business.
19. BECAUSE THE COMPANY'S INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO
ENTRY, THE COMPANY MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
The U.S. market for e-commerce services is extremely competitive. The Company
expects competition to intensify as current competitors expand their product
offerings and enter the e-commerce market, and new competitors enter the market.
The principal competitive factors are the quality and breadth of services
provided, potential for successful transaction activity and price. E-commerce
markets are characterized by rapidly changing technologies and frequent new
product and service introductions. The Company may fail to update or introduce
new market pricing formats, selling techniques and/or other mechanics and
administrative tools and formats for internet sales consistent with current
technology on a timely basis or at all. If its fails to introduce new service
offerings or to improve its existing service offerings in response to industry
developments, or if its prices are not competitive, the Company could lose
customers, which could lead to a loss of revenues.
Because there are relatively low barriers to entry in the e-commerce market,
competition from other established and emerging companies may develop in the
future. Many of the Company's competitors may also have well-established
relationships with the Company's existing and prospective customers. Increased
competition is likely to result in fee reductions, reduced margins, longer sales
cycles for the Company's services and a decrease or loss of its market share,
any of which could harm its business, operating results or financial condition.
Many of the Company's competitors have, and new potential competitors may have,
more experience developing Internet-based software applications and integrated
purchasing solutions, larger technical staffs, larger customer bases, more
established distribution channels, greater brand recognition and greater
financial, marketing and other resources than the Company has. In addition,
competitors may be able to develop products and services that are superior to
those of the Company or that achieve greater customer acceptance. There can be
no assurance that the e-commerce solutions offered by the Company's competitors
now or in the future will not be perceived as superior to those of the Company
by either businesses or consumers.
20. THE COMPANY'S BUSINESS MAY SUFFER IF IT IS NOT ABLE TO PROTECT IMPORTANT
INTELLECTUAL PROPERTY.
The Company's ability to compete effectively against other companies in its
industry will depend, in part, on its ability to protect its proprietary
technology and systems designs relating to its technologies. The Company does
not know whether it has been or will be completely successful in doing so.
Further, its competitors may independently develop or patent technologies that
are substantially equivalent or superior to those of the Company.
21. THE COMPANY MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF ITS
PROPRIETARY KNOWLEDGE.
The Company relies, in part, on contractual provisions to protect its trade
secrets and proprietary knowledge. These agreements may be breached, and the
Company may not have adequate remedies for any breach. Its trade secrets may
also be known without breach of such agreements or may be independently
discovered by competitors. Its inability to maintain the proprietary nature of
its technology could harm its business, results of operations and financial
condition by adversely affecting its ability to compete.
35
22. OTHERS MAY ASSERT THAT THE COMPANY'S TECHNOLOGY INFRINGES THEIR INTELLECTUAL
PROPERTY RIGHTS.
The Company believes that its technology does not infringe the proprietary
rights of others. However, the e-commerce industry is characterized by the
existence of a large number of patents and trademarks and frequent claims and
litigation based on allegations of patent infringement and violation of other
intellectual property rights. As the e-commerce market and the functionality of
products in the industry continues to grow and overlap, the Company believes
that the possibility of an intellectual property claim against it will increase.
For example, the Company may inadvertently infringe an intellectual property
right of which it is unaware, or there may be applications to protect
intellectual property rights now pending of which it is unaware which it may be
infringing when they are issued in the future, or the Company's service or
systems may incorporate and/or utilize third party technologies that infringe
the intellectual property rights of others. The Company has been and expects to
continue to be subject to alleged infringement claims. The defense of any claims
of infringement made against the Company by third parties, whether or not
meritorious, could involve significant legal costs and require the Company's
management to divert time and attention from its business operations. Either of
these consequences of an infringement claim could have a material adverse effect
on the Company's operating results. If the Company is unsuccessful in defending
any claims of infringement, it may be forced to obtain licenses or to pay
royalties to continue to use its technology. The Company may not be able to
obtain any necessary licenses on commercially reasonable terms or at all. If the
Company fails to obtain necessary licenses or other rights, or if these licenses
are costly, its operating results may suffer either from reductions in revenues
through the Company's inability to serve customers or from increases in costs to
license third-party technologies.
23. THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO CONTINUE
TO LICENSE SOFTWARE THAT IS NECESSARY FOR ITS SERVICE OFFERING.
Through distributors, the Company licenses a variety of commercially available
Internet technologies, which are used in its services and systems to perform key
functions. As a result, the Company is to a certain extent dependent upon
continuing to maintain these technologies. There can be no assurance that the
Company would be able to replace the functionality provided by much of its
purchased Internet technologies on commercially reasonable terms or at all. The
absence of or any significant delay in the replacement of that functionality
could have a material adverse effect on the Company's business, financial
condition and results of operations.
24. THE COMPANY'S SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS OF
ITS CUSTOMERS.
Interruptions of service as a result of a high volume of traffic and/or
transactions could diminish the attractiveness of the Company's services and its
ability to attract and retain customers. There can be no assurance that the
Company will be able to accurately project the rate or timing of increases, if
any, in the use of its service, or that it will be able to expand and upgrade
its systems and infrastructure to accommodate such increases in a timely manner.
The Company currently maintains systems in the U.S. Any failure to expand or
upgrade its systems could have a material adverse effect on its results of
operations and financial condition by reducing or interrupting revenue flow and
by limiting its ability to attract new customers. Any such failure could also
have a material adverse effect on the business of its customers, which could
damage the Company's reputation and expose it to a risk of loss or litigation
and potential liability.
25. A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO THE
COMPANY'S CUSTOMERS.
Service offerings involving complex technology often contain errors or
performance problems. Many serious defects are frequently found during the
period immediately following introduction and initial implementation of new
services or enhancements to existing services. Although the Company attempts to
resolve all errors that it believes would be considered serious by its customers
before implementation, its systems are not error-free. Errors or performance
problems could result in lost revenues or cancellation of customer agreement and
may expose the Company to litigation and potential liability. In the past, the
Company has discovered errors in software used in the Company after its
incorporation into Company sites. The Company cannot assure that undetected
errors or performance problems in its existing or future services will not be
discovered or that known errors considered minor by it will not be considered
serious by its customers. The Company has experienced periodic minor system
interruptions, which may continue to occur from time to time.
36
26. THE FUNCTIONING OF THE COMPANY'S SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON
WHICH IT RELIES COULD BE DISRUPTED BY FACTORS OUTSIDE THE COMPANY'S CONTROL.
The Company's success depends on the efficient and uninterrupted operation of
its computer and communications hardware systems. These systems are vulnerable
to damage or interruption from natural disasters, fires, power loss,
telecommunication failures, break-ins, sabotage, computer viruses, intentional
acts of vandalism and similar events. Despite any precautions the Company takes
or plans to take, the occurrence of a natural disaster or other unanticipated
problems could result in interruptions in its services. In addition, if any
hosting service fails to provide the data communications capacity the Company
requires, as a result of human error, natural disaster or other operational
disruption, interruptions in the Company's services could result. Any damage to
or failure of its systems could result in reductions in, or terminations of, its
services, which could have a material adverse effect on its business, results of
operations and financial condition.
27. THE COMPANY MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT
IN DILUTION TO ITS STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIES
WHICH COULD IMPAIR ITS FINANCIAL PERFORMANCE.
If appropriate opportunities present themselves, the Company may acquire
complementary or strategic businesses, technologies, services or products that
it believes will be useful in the growth of its business. The Company does not
currently have any commitments or agreements with respect to any new
acquisitions. They may not be able to identify, negotiate or finance any future
acquisition successfully. Even if the Company does succeed in acquiring a
business, technology, service or product, the process of integration may produce
unforeseen operating difficulties and expenditures and may require significant
attention from the Company's management that would otherwise be available for
the ongoing development of its business. Moreover the anticipated benefits of
any acquisition may not be realized or may depend on the continued service of
acquired personnel who could choose to leave. If the Company makes future
acquisitions, it may issue shares of stock that dilute other stockholders, incur
debt, assume contingent liabilities or create additional expenses related to
amortizing intangible assets, any of which might harm its financial results and
cause its stock price to decline. Any financing that it might need for future
acquisitions may only be available to it on terms that restrict its business or
that impose on it costs that reduce its revenue.
28. THE COMPANY'S SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND
ONLINE COMMERCE.
The Company's future revenues and profits depend to a large extent upon the
widespread acceptance and use of the Internet and other online services as a
medium for commerce by merchants and consumers. The use of the Internet and
e-commerce may not continue to develop at past rates and a sufficiently broad
base of business and individual customers may not adopt or continue to use the
Internet as a medium of commerce. The market for the sale of goods and services
over the Internet is a relatively new and emerging market. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty. Growth in the Company's customer base
depends on obtaining businesses and consumers who have historically used
traditional means of commerce to purchase goods. For the Company to be
successful, these market participants must accept and use novel ways of
conducting business and exchanging information.
E-commerce may not prove to be a viable medium for purchasing for the following
reasons, any of which could seriously harm the Company's business:
- the necessary infrastructure for Internet communications may not develop
adequately;
- the Company's potential customers, buyers and suppliers may have security
and confidentiality concerns;
- complementary products, such as high-speed modems and high-speed
communication lines, may not be developed or be adequately available;
- alternative-purchasing solutions may be implemented;
- buyers may dislike the reduction in the human contact inherent in
traditional purchasing methods;
- use of the Internet and other online services may not continue to
increase or may increase more slowly than expected;
- the development or adoption of new technology standards and protocols may
be delayed or may not occur; and
- new and burdensome governmental regulations may be imposed.
37
29. THE COMPANY'S SUCCESS DEPENDS ON THE CONTINUED RELIABILITY OF THE INTERNET.
The Internet continues to experience significant growth in the number of users,
frequency of use and bandwidth requirements. There can be no assurance that the
infrastructure of the Internet and other online services will be able to support
the demands placed upon them. Furthermore, the Internet has experienced a
variety of outages and other delays as a result of damage to portions of its
infrastructure, and could face such outages and delays in the future. These
outages and delays could adversely affect the level of Internet usage and also
the level of traffic and the processing of transactions. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services or other Internet service providers to support the
Internet or other online services also could result in slower response times and
adversely affect usage of the Internet and other online services generally and
the Company's service in particular. If use of the Internet and other online
services does not continue to grow or grows more slowly than expected, if the
infrastructure of the Internet and other online services does not effectively
support growth that may occur, or if the Internet and other online services do
not become a viable commercial marketplace, the Company will have to adapt its
business model to the new environment, which would materially adversely affect
its results of operations and financial condition.
30. GOVERNMENT REGULATION OF THE INTERNET MAY IMPEDE THE COMPANY'S GROWTH OR ADD
TO ITS OPERATING COSTS.
Like many Internet-based businesses, the Company operates in an environment of
tremendous uncertainty as to potential government regulation. The Internet has
rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt all existing regulations to the Internet environment. Laws
and regulations have been introduced or are under consideration and court
decisions have been or may be reached in the U.S. and other countries in which
the Company does business that affect the Internet or other online services,
covering issues such as pricing, user privacy, freedom of expression, access
charges, content and quality of products and services, advertising, intellectual
property rights and information security. In addition, it is uncertain how
existing laws governing issues such as taxation, property ownership, copyrights
and other intellectual property issues, libel, obscenity and personal privacy
will be applied to the Internet. The majority of these laws were adopted prior
to the introduction of the Internet and, as a result, do not address the unique
issues of the Internet. Recent laws that contemplate the Internet, such as the
Digital Millennium Copyright Act in the U.S., have not yet been fully
interpreted by the courts and their applicability is therefore uncertain. The
Digital Millennium Copyright Act provides certain "safe harbors" that limits the
risk of copyright infringement liability for service providers such as the
Company with respect to infringing activities engaged in by users of the
service.
In the area of user privacy, several states have legislation and/or have
proposed legislation that limits or would limit the uses of personal user
information gathered online or require online services to establish privacy
policies. The Federal Trade Commission also has become increasingly involved in
this area. The Company does not sell personal user information regarding its
customers. The Company does use aggregated data for analysis regarding the
Company network, and does use personal user information in the performance of
its services for its customers. Since the Company does not control what its
customers do with the personal user information they collect, there can be no
assurance that its customers' sites will be considered compliant.
As online commerce evolves, the Company expects that federal, state or foreign
agencies will continue to adopt regulations covering issues such as pricing,
content, user privacy, and quality of products and services. Any future
regulation may have a negative impact on the Company's business by restricting
its methods of operation or imposing additional costs. Although many of these
regulations may not apply to its business directly, the Company anticipates that
laws regulating the solicitation, collection or processing of personal
information could indirectly affect its business.
Internet regulation which has met with the most successful challenges is that
which touches upon Free Speech. Title V of the Telecommunications Act of 1996,
known as the Communications Decency Act of 1996, prohibits the knowing
transmission of any comment, request, suggestion, proposal, image or other
communication that is obscene or pornographic to any recipient under the age of
18. The prohibitions scope and the liability associated with a violation are
currently unsettled. In addition, although substantial portions of the
Communications Decency Act of 1996 have been held to be unconstitutional, the
Company cannot be certain that similar legislation will not be enacted and
upheld in the future. Subsequent attempts at such legislation such as the Child
Online Protection Act passed in 1998 have met with similar and successful
constitutional attack. It is possible that such legislation could expose
companies involved in online commerce to liability, which could limit the growth
of online commerce generally. Legislation like the Communications Decency Act
and Child Online Protection Act could reduce the growth in Internet usage and
decrease its acceptance as a communications and commerce medium.
38
The worldwide availability of Internet web sites often results in sales of goods
to buyers outside the jurisdiction in which the Company or its customers are
located, and foreign jurisdictions may claim that the Company or its customers
are required to comply with their laws. Foreign regulation of internet use has
not met with the success of constitutional and other judicial scrutiny that US
regulation has been limited by. As an Internet Company, it is also unclear which
jurisdictions may find that the Company is conducting business therein. Its
failure to qualify to do business in a jurisdiction that requires it to do so
could subject the Company to fines or penalties and could result in its
inability to enforce contracts in that jurisdiction.
The Company is not aware of any recent related legislation other than that
specifically referenced herein which may affect the manner in which the Company
utilizes the internet in its business but there can be no assurance that future
government regulation will not be enacted further restricting use of the
internet that might adversely affect the Company's business.
31. TAXES MAY BE IMPOSED ON INTERNET COMMERCE.
In the U.S., the Company does not collect sales or other similar taxes on goods
sold through the Company's internet websites. The Internet Tax Freedom Act of
1998, (extended through November 2003 and internet access tax prohibitions
though November 1, 2007), prohibits the imposition of new or discriminatory
taxes on electronic commerce by United States federal and state taxing
authorities except for taxes caused by nexus of the Seller of the goods in the
State. Sales to customers in such States may be taxable, but to date no such
taxes have ever been collected by the Company. The Company is not aware of any
further extensions of this legislation but understands that more permanent
application of the aforesaid Internet Tax Freedom Act is currently being
discussed in the federal legislature and further extension has been recommended
by the Advisory Commission on Electronic Commerce established by US Congress to
further review application of the statute. The status of the prohibition is
uncertain and States have attempted to impose sales and use tax, often
successfully mainly based upon the nexus of the retailer with the State imposing
the tax on customers in that State. A number of proposals have been made at the
State and local level that would impose additional taxes on the sale of goods
and services through the Internet. Such proposals, if adopted and not in
conflict with federal prohibitions, could substantially impair the growth of
electronic commerce, and could adversely affect the Company's opportunity to
derive financial benefit from such activities. There has been recent activity in
attempts to enforce the federal Jenkins Act which historically allowed State
taxation of sales of goods made through use of the United States mails and is
currently being reviewed toward possibly allowing the States to tax internet
sales. . In addition, non-U.S. countries may seek to impose service tax (such as
value-added tax) collection obligations on companies that engage in or
facilitate Internet commerce. A successful assertion by one or more states or
any foreign country that the Company should collect sales or other taxes on the
sale of merchandise could impair its revenues and its ability to acquire and
retain customers.
32. THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO
ONLINE COMMERCE.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. A compromise or
breach of the technology used to protect the Company's customers' and their
end-users' transaction data could result from, among other things, advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments. Any such compromise could have a material adverse effect
on the Company's reputation and, therefore, on its business, results of
operations and financial condition. Furthermore, a party who is able to
circumvent the Company's security measures could misappropriate proprietary
information or cause interruptions in its operations. The Company may be
required to expend significant capital and other resources to protect against
security breaches or to alleviate problems caused by such breaches. Concerns
over the security of transactions conducted on the Internet and other online
services and the privacy of users may also inhibit the growth of the Internet
and other online services generally, especially as a means of conducting
commercial transactions. The Company currently has practices and procedures in
place to protect the confidentiality of its customers' and their end-users'
information. However, its security procedures to protect against the risk of
inadvertent disclosure or intentional breaches of security might fail to
adequately protect information that it's obligated to keep confidential. The
Company may not be successful in adopting more effective systems for maintaining
confidential information, and its exposure to the risk of disclosure of the
confidential information of others may grow with increases in the amount of
information it possesses. To the extent that the Company activities involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage its reputation and expose it to a risk
of loss or litigation and possible liability. The Company's insurance policies
may not be adequate to reimburse it for losses caused by security breaches.
39
33. IF THE COMPANY'S FULFILLMENT CENTERS ARE NOT EFFECTIVELY OPERATED THE
COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED.
If the Company does not successfully operate its fulfillment centers such could
significantly limit the Company's ability to meet customer's demands, which
would likely result in diminished revenues, adversely affecting the Company's
business. Because it is difficult to predict sales increases the Company may not
manage its facilities in an optimal way which may result in excess inventory,
warehousing, fulfillment and distribution capacity having an adverse impact on
working capital of the Company, or the lack of sufficiency in such areas causing
delays in fulfillment of customer orders adversely affecting customer confidence
and loyalty.
34. THE COMPANY'S STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The stock market, and in particular the market for Internet-related stocks, has,
from time to time, experienced extreme price and volume fluctuations. Many
factors may cause the market price for the Company's common stock to decline,
perhaps substantially, including:
- failure to meet its development plans;
- the demand for its common stock;
- downward revision in securities analyst's estimates or changes in general
market conditions;
- technological innovations by competitors or in competing technologies;
and
- investor perception of the Company's industry or its prospects.
The Company's stock pricing has fluctuated significantly in the past and there
is no assurance such trend may not continue in the future.
40
Item 4-Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial
Officer, have evaluated our disclosure controls and procedures as of and have
found such to be effective as of the end of the period covered by this report.
Under rules promulgated by the SEC, disclosure controls and procedures are
defined as those controls or other procedures of an issuer that are designed to
ensure that information required to be disclosed by the issuer in the reports
filed or submitted by it under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Based on the evaluation of our disclosure controls and
procedures, management determined that such controls and procedures were
effective in timely alerting them to material information relating to the
Company (including its Consolidated Subsidiaries) required to be included in the
Company's periodic reports.
Further, there were no significant changes in the internal controls or in other
factors that could significantly affect these controls after September 30, 2005,
the date of the conclusion of the evaluation of disclosure controls and
procedures.
The Company's management, including its principal executive officer and the
principal financial officer, does not expect that the Company's disclosure
controls and procedures and its internal control processes will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, 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. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected. The
Company monitors its disclosure controls and procedures and internal controls
and makes modifications as necessary; the Company's intent in this regard is
that the disclosure controls and procedures and the internal controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
41
Item 2- Unregistered Sales of Equity Securities and use of Proceeds
On July 22, 2005, the Company completed an $800,000 private placement of
Preferred Stock and Common Stock consisting of 80,000 shares of Series B Class B
Preferred Stock and 88,000 shares of restricted Common Stock. The holders of
Class B Series B Preferred Stock have no voting rights with respect to general
corporate matters. The holders of Class B Series B Preferred Stock are entitled
to receive dividends at the annual rate of $.80 per share per annum. The Company
may, as its option, at any time in whole, or from time to time in part, out of
earned funds of the Corporation, redeem the Class B, Series B Preferred Stock on
any date set by the Board of Directors, at $10.00 per share plus, in each case,
an amount equal to all dividends of Class B, Series B Preferred Stock accrued
and unpaid thereon, pro rata to the date of redemption. If however, as to each
share of Class B, Series B Preferred Stock outstanding, if not redeemed by the
Company within 2 years of the issuance of such shares, the Company will be
obligated to issue to the then holder of record of such outstanding Class B,
Series B Preferred Stock, half a share of the Company's unissued restricted
Common Stock per share of Class B, Series B Preferred Stock for each year that
said share is not redeemed within limites as provided under applicable law.
Item 5 - Other Information.
The Company was made aware of a foreign entity by the name Sonae SGPS who
supposedly is interested in launching a takeover bid for the Company, which
interest, if any, and legitimacy thereof, if any, has not been confirmed by the
Company, and the Company is not aware of and has not been otherwise approached
by or on behalf of such other entity regarding any such takeover offer or intent
and has no further comment at this time other than to undertake to make any
appropriate filings and disclosure with the Securities and Exchange Commission
as may be required if and when material information may develop further, if
ever, on this subject, which the Company has no knowledge at this time, may be
forthcoming.
Item 6- Exhibits and Reports on Form 8-K
(1) 31.1 Certification Pursuant to Exchange Act Rule 13a - 14(a) /
15d-14(a) signed by the Chief Executive Officer.
31.2 Certification Pursuant to Exchange Act Rule 13a - 14(a) /
15d-14(a) signed by the Chief Financial Officer.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
signed by the Chief Executive Officer.
32.2 Certification Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
signed by Chief Financial Officer.
(2) There was one report filed on 8-K for the relevant period. On
July 22, 2005 the Company completed an $800,000 private
placement of Preferred Stock and Common Stock consisting of
80,000 shares of Series B Class B Preferred Stock and 88,000
shares of restricted Common Stock.
42
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Synergy Brands, Inc.
/s/ Mair Faibish
by-------------------
Mair Faibish
Date: November 14, 2005 Chief Executive Officer
/s/ Mitchell Gerstein
by----------------------
Date: November 14, 2005 Mitchell Gerstein
Chief Financial Officer
43
Exhibit 31.1
Certification Pursuant
To Exchange Act Rule 13-a-14(a)/-15d-14(a)
I, Mair Faibish, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15 (e) and internal control over financial
reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for
the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financing reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting, and the preparation of financial statements for external purposes in
accordance with general accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and to the audit committee of the registrant's board of
directors (or persons fulfilling the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 14, 2005
/s/ Mair Faibish
- ----------------
Mair Faibish
Chief Executive Officer
44
Exhibit 31.2
Certification Pursuant
To Exchange Act Rule 13-a-14(a)/-15d-14(a)
I, Mitchell Gerstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial
reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for
the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financing reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial
reporting, and the preparation of financial statements for external purposes in
accordance with general accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and to the audit committee of the registrant's board of
directors (or persons fulfilling the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 14, 2005
/s/ Mitchell Gerstein
- ---------------------
Mitchell Gerstein
Chief Financial Officer
45
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of
Synergy Brands Inc., (the "Company"), hereby certify that the Quarterly Report
on Form 10-Q of the Company for the quarterly period ended September 30, 2005
(the "Report") fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, and that information contained
in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: November 14, 2005
/s/ Mair Faibish
Mair Faibish
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002), I, the undersigned Chief Financial Officer of
Synergy Brands, Inc. (the "Company"), hereby certify that the Quarterly Report
on Form 10-Q of the Company for the quarterly period ended September 30, 2005
(the "Report") fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, and that information contained
in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: November 14, 2005
/s/ Mitchell Gerstein
- ---------------------
Mitchell Gerstein
Chief Financial Officer
46