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 March 31, 2006.
------------------
Commission File Number: 0-19409
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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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [x]
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 check mark whether the registrant has filed all documents
and reports required to be filed 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 May 10, 2006
there were 4,707,590 shares outstanding of the registrant's common stock.
SYNERGY BRANDS, INC.
FORM 10-Q
MARCH 31, 2006
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and
December 31, 2005 2 - 3
Consolidated Statements of Operations for the three
months ended March 31, 2006 and 2005 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005 (Unaudited) 5 -6
Notes to Consolidated Financial Statements (Unaudited) 7 -12
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-23
Item 4: Control and Procedures 24
PART II: OTHER INFORMATION
Item 1A: Risk Factors 25-38
Item 2: Unregistered Sales of Equity Securities and use of Proceeds 39
Item 5: Other Information 39
Item 6: Exhibits and Reports on Form 8-K 39
SIGNATURES AND CERTIFICATIONS
1
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
ASSETS March 31, 2006 December 31, 2005
- ------ (Unaudited)
Current Assets:
Cash and cash equivalents $ 1,315,824 $ 263,554
Accounts receivable trade, less allowance for doubtful accounts of
$127,481 for both periods 6,420,902 7,494,324
Other receivables 2,187,626 1,848,369
Note Receivable - current 290,856 287,967
Inventory 3,139,409 1,909,315
Prepaid assets and other current assets 387,328 398,426
----------- -----------
Total Current Assets 13,741,945 12,201,955
Property and Equipment, Net 337,837 356,014
Other Assets 850,476 802,887
Notes Receivable 2,628,283 2,691,439
Intangible Assets, net of accumulated amortization of $ 2,553,545 and
$2,518,946 751,447 786,046
Goodwill 514,297 514,297
----------- -----------
Total Assets $18,824,285 $17,352,638
=========== ===========
The accompanying notes are an integral part of this statement.
2
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2006 December 31, 2005
(Unaudited)
Current Liabilities:
Line-of-Credit $ 4,310,983 $ 4,033,242
Notes Payable - Current 2,078,531 1,645,531
Accounts Payable and Accrued Expenses 1,386,237 1,883,591
Related Party Note Payable 21,492 61,882
Deferred income 792,961 127,000
------------ ------------
Total Current Liabilities 8,590,204 7,751,246
Notes Payable 3,525,900 2,668,691
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; 150,000 shares authorized, none issued -- --
Class B, Series A Preferred stock - $.001 par value; 500,000 shares authorized;
330,000 issued and outstanding; liquidation preference of $10.00 per share 330 330
Class B Series B preferred stock - $.001 par value, 250,000 shares authorized,
80,000 shares issued and outstanding; liquidation preference of $10.00 per share 80 80
Common stock - $.001 par value;14,000,000 shares authorized;
4,613,190 and 4,457,530 shares issued 4,613 4,458
Additional paid-in capital 46,039,204 45,918,817
Deficit (39,289,170) (38,910,484)
Unearned compensation (33,636) (67,260)
Accumulated other comprehensive loss (8,340) (8,340)
Less treasury stock, at cost, 1,000 shares (5,000) (5,000)
------------ ------------
Total stockholders' equity 6,708,181 6,932,701
------------ ------------
Total Liabilities and Stockholders' Equity $ 18,824,285 $ 17,352,638
============ ============
The accompanying notes are an integral part of this statement.
3
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2006 2005
Net Sales $ 15,370,677 $ 14,934,354
------------ ------------
Cost of Sales
Cost of product 13,906,415 13,871,481
Shipping and handling costs 261,975 257,673
------------ ------------
14,168,390 14,129,154
------------ ------------
Gross Profit 1,202,287 805,200
Operating expenses
Selling, general and Administrative Expenses 1,090,427 915,631
Depreciation and amortization 103,510 124,603
------------ ------------
1,193,937 1,040,234
Operating Profit (loss) 8,350 (235,034)
Other Income (expense)
Interest Income 37,170 22,081
Other Income (expense) (655) (5,305)
Equity in earnings of investee 15,465 11,815
Interest and financing expense (400,948) (356,311)
------------ ------------
(348,968) (327,720)
Loss before income taxes (340,618) (562,754)
Income tax expense 38,068 55,143
------------ ------------
NET LOSS (378,686) (617,897)
Dividend-Preferred Stock (90,250) (74,250)
------------ ------------
Net loss attributable to Common Stockholders $ (468,936) $ (692,147)
============ ============
Basic and diluted net loss per common share: $ (0.10) $ (0.21)
============ ============
The accompanying notes are an integral part of this statement.
4
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2006 2005
------------ ------------
Cash Flows From Operating Activities:
Net loss $ (378,686) $ (617,897)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and Amortization 103,510 124,603
Amortization of financing cost 14,209 11,708
Equity in earnings of investee (15,465) (11,815)
Operating expenses paid with common stock 33,000 6,524
Changes in Operating Assets and Liabilities:
Net (increase) decrease in:
Accounts receivable and other receivables 734,165 407,773
Inventory (1,230,094) (212,533)
Prepaid assets, related party note receivable and other assets 21,895 (526,970)
Net decrease in:
Accounts payable, related party note payable, accrued
expenses and other current liabilities (486,801) (1,875,403)
Deferred Income 649,418 --
------------ ------------
Net cash used in operating activities (554,849) (2,694,010)
Cash Flows From Investing Activities
Purchase of fixed assets (2,527) (4,165)
Payments received on notes receivable 75,262 69,841
Issuance of notes receivable (14,995) (8,500)
Payment of security deposit -- (20,000)
------------ ------------
Net cash provided by investing activities 57,740 37,176
Cash Flows From Financing Activities
Borrowings under line of credit 10,918,314 10,584,054
Repayments under line of credit (10,580,572) (9,578,757)
Proceeds from the issuance of notes payable 1,882,500 1,215,000
Repayments of notes payable (624,000) --
Payment of dividends (90,250) (74,250)
Payment of financing costs (46,707) (64,985)
Proceeds from issuance of common stock 90,094 --
Net cash provided by financing activities 1,549,379 2,081,062
------------ ------------
Net increase (decrease) in cash 1,052,270 (575,772)
------------ ------------
Cash and cash equivalents, beginning of period 263,554 945,806
Cash and cash equivalents, end of period $ 1,315,824 $ 370,034
============ ============
The accompanying notes are an integral part of this statement.
5
SYNERGY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2006 2005
---------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 265,645 $282,653
========== ========
Cash paid for income taxes $ 38,068 $ 55,143
========== ========
Supplement disclosures of non-cash operating,
investing and financing activities:
Common Stock issued for an acquisition -- --
========== ========
Common Stock issued with debt financing -- --
========== ========
Common Stock issued with debt conversions $ 60,000 $761,354
========== ========
Common Stock issued for services $ 33,000 $ 6,525
========== ========
The accompanying notes are an integral part of this statement.
6
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2006 and 2005
NOTE A - UNAUDITED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 2006, the consolidated statements
of operations for the three months ended March 31, 2006 and 2005, and the
condensed consolidated statements of cash flows for three months ended March 31,
2006 and 2005, have been prepared by Synergy Brands, Inc. ("Synergy" or the
"Company") without audit. The balance sheet at December 31, 2005 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 March 31, 2006 (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, 2005 filed by the Company. The results of
operations for the periods ended March 31, 2006 and 2005 are not necessarily
indicative of the operating results for the respective full years.
NOTE B - STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted 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.
NOTE C - ADVERTISING EXPENSE
The Company expenses advertising and promotional costs as incurred. Advertising
and promotional costs were approximately $53,000 and $11,000 for the three
months ended March 31, 2006 and 2005, respectively.
7
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2006 and 2005
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 three months ended
March 31, 2006, the Company recognized approximately $556,553 in vendor
allowances arising from arrangements with a major supplier that met the criteria
for being fixed and determinable. Vendor allowances from a manufacturer,
included in other receivables in the accompanying consolidated balance sheet
aggregated $2,081,063 and $1,730,806 at March 31, 2006 and December 31, 2005.
NOTE E - INVENTORY
Inventory, consisting of goods held for sale, as of March 31, 2006 consisted of
the following:
Grocery, health and beauty products $2,709,373
General Merchandise 430,036
----------
$3,139,409
==========
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 March 31,
2006 was $ 1,852,389.
In October, 2005 SYBR.com Inc., a wholly owned subsidiary of the Company,
invested $1 million in a Private Placement of Senior Subordinated 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. In relation to the ITT
warrants, Company has recorded deferred income of $127,000.
8
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2006 and 2005
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 $15,465 and $11,815
during the three months ended March 31, 2006 and March 31, 2005, respectively.
At March 31, 2006, the investment in ITT is $379,804 as included in "Other
Assets" on the accompanying balance sheet.
Summarized results of operations of this investee for the three months ended
March 31, 2006 and 2005 is as follows:
2006 2005
----------- -----------
Revenues $ 6,970,000 $ 3,160,000
Total expenses (6,846,000) (3,142,000)
Other income 89,000 64,000
Income before income taxes 213,000 82,000
Income tax expense (113,000) (27,000)
----------- -----------
Net income $ 100,000 $ 55,000
=========== ===========
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 December 2005, allow for the borrowing of up to
$5,300,000 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. As amended, the agreement
extends through December 31, 2006. 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) 5% per annum in excess of the prime rate or (ii) 10.50% per annum. At March
31, 2006, the interest rate on outstanding borrowings was 12.75%. 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. In addition
1,175,000 shares of the Company's common stock have also been pledged as
collateral on the outstanding borrowings. In the first quarter of 2006, the
Lender converted $60,000 of outstanding debt into 31,200 shares of common stock.
In 2005 the Lender converted $1,003,000 of outstanding debt into 427,532 shares
of common stock.
9
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2006 and 2005
NOTE H Continued
In 2004, the Company received $490,000 pursuant to the issuance of secured
promissory notes from certain shareholders 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 $1.75 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. At March 31, 2006, the outstanding balance was $375,000.
In 2005, the Company received $600,000 pursuant to the issuance of secured
promissory notes from certain shareholders of ITT (see Note G).
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 $1.75 per share as
amended, 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 $133,333 of this debt at March 31, 2006. 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. At March 31, 2006, the outstanding balance was
$366,667.
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
(7.75% at March 31, 2006). 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 March 31, 2006 were $621,531.
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 $1.75 per share as
amended, 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. The Company repaid $66,667 of this debt at March 31, 2006. 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 fair value of the warrants, and this amount is being amortized over the life
of the note. At March 31, 2006 the outstanding balance was $433,333.
On March 14, 2006 the Company closed a $1.75 million junior secured five year
loan with an existing lender bearing a fixed interest rate of 10%. Payments will
be made at a rate of $32,000 per month starting October 1, 2006.
NOTE I - STOCKHOLDERS' EQUITY
In the first quarter of 2006 the Company converted $60,000 of debt of IIG into
31,200 shares of common stock (see Note H).
During the three months ended March 31, 2006, the Company issued 24,460 shares
of common stock as compensation for services under existing agreements and
recorded a charge to operations of $33,000. In March 2006, 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.
During the three months ended March 31, 2006, the Company issued 70,000 shares
of common stock in connection with the sale of securities and the satisfaction
of certain obligations.
Effective January 2006, the Company cancelled options to acquire 300,000 shares
of common stock held by employees. There are no options outstanding with
employees at March 31, 2006.
Subsequent to March 31, 2006 the Company issued approximately 93,000 shares of
common stock as consideration of services.
10
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2006 and 2005
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:
Three Months Ended March 31, 2006 and 2005
Total Proset PHS Group B2C Corporate
Revenue from external customers 2006 $ 492,522 $14,487,003 $ 391,152 $ -- $15,370,677
2005 $ 176,391 $14,378,829 $ 379,134 $ -- $14,934,354
Net Income (loss) attributable
to common Stockholders 2006 $ (3,414) $ 93,599 $ (145,449) $(413,672) $ (468,936)
2005 $ (124,425) $ (104,489) $ (141,696) $(321,537) $ (692,147)
Interest & Finance Expenses 2006 $ 22,551 $ 293,133 $ -- $ 85,264 $ 400,948
2005 $ 16,129 $ 300,634 $ -- $ 39,548 $ 356,311
Depreciation &
amortization 2006 $ 24,876 $ 3,204 $ 39,114 $ 36,316 $ 103,510
2005 $ 45,855 $ 2,934 $ 39,498 $ 36,316 $ 124,603
Identifiable assets are as follows:
March 31, 2006 $1,451,441 $11,655,419 $1,688,361 $4,029,064 $ 18,824,285
December 31, 2005 $1,392,551 $10,056,544 $1,715,940 $4,187,603 $ 17,352,638
11
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2006 and 2005
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, warrants and convertable debt and equity securities of 1,232,930
and 1,054,801 for the three months ended March 31, 2006 and 2005, respectively,
have been excluded from the calculation of diluted loss per share since their
effect would be antidilutive.
Three Months ended March 31,
2006 2005
------------ ----------
Net loss applicable to common stock $ (468,936) $ (692,147)
============ ==========
Weighted-average number of shares in basic
and diluted EPS 4,563,651 3,302,884
============ ==========
12
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 Aid (HBA) as well as wholesale, retail and online distribution of premium
cigars and salon & luxury products through three business segments. It
principally focuses on the sale of nationally known brand name grocery and HBA
consumer products manufactured by major U.S. manufacturers. The company uses
supply based logistics 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). 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 94% 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 increase 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. 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 three 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 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 sells premium cigars through the Internet directly
to the consumer. (www.cigargold.com)
o GRC opened its first retail store in Miami, Florida in March,
2006. The store is expected to be an extension to CAW operation
and the store is called Cigars Around the World.
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 affiliates and partnership agreements such as
www.overstock.com, www.google.com and paid links.
13
CONSOLIDATED RESULTS OF OPERATIONS FOR
THE THREE MONTHS ENDED MARCH 31, 2006
AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2005.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING % OPERATING AND %
SEGMENTS CHANGE CORPORATE SEGMENTS CHANGE
THREE MONTHS ENDED 3/31/06
Revenue $15,370,677 2.92% $ 15,370,677 2.92%
Gross Profit 1,202,287 49.32% 1,202,287 49.32%
SG&A 873,618 14.47% 1,090,427 19.09%
Operating Profit (loss) 261,475 664.84% 8,350 103.55%
Net loss attributable to
common stockholders (55,264) -85.09% (468,936) -32.25%
Net loss per common share (0.01) (0.10)
Interest and financing expenses 315,684 -0.34% 400,948 12.53%
THREE MONTHS ENDED 3/31/05
Revenue $14,934,354 $ 14,934,354
Gross Profit 805,200 805,200
SG&A 763,205 915,631
Operating Profit (loss) (46,292) (235,034)
Net loss attributable to
common stockholders (370,610) (692,147)
Net loss per common share (0.11) (0.21)
Interest and financing expenses 316,763 356,311
Synergy Brands
Synergy Brands is a holding Company that operates through wholly owned
segments. In order to fully understand the results of operations, each segment
is analyzed respectively.
Revenues increased by 3% to $15,370,677 for the three months ended
March 31, 2006, as compared to $14,934,354 for the three months ended March 31,
2005. The largest percentage increase was in Proset's Operation. The increase
was due in large part to sales of designer luxury goods, which were imported
from Europe.
The Company reduced its promotional markdowns which resulted in flat to
marginally higher revenues, while creating a desirable increase in operating
profit. Even though the Company was able to grow revenue by only 3%, gross
profit increased by 49% and the Company further attained operating profit.
Selling General and Administrative expenses (SGA) increased by 19% to
$1,090,427 for the three months ended March 31, 2006 as compared to $915,631 for
the three months ended March 31, 2005. The increase of SG&A was marginal as
compared to increased sales as well as an increase in corporate regulatory costs
on a corporate level. The largest subsidiary of the Company, PHS Group,
increased its SGA expenses by 12% to $571,191 for the three months ended March
31, 2006 as compared to $509,911 for the three months ended March 31, 2005. PHS
incurs variable expenses in connection with selling costs such as sales
commission, drivers, warehousing and administrative personnel as well as its
promotional expenses. As revenues rise sales commissions and certain operating
expenses resulting from sales increase commensurately.
14
The net loss attributable to Common Stockholders of the Company was
$468,936 for the three months ended March 31, 2006 as compared to $692,147 for
the three months ended March 31, 2005. Interest and financing costs represents
86% of the total loss. Management believes that its corporate expenses may
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 March 31, 2006 totaled $571,191, which include legal,
accounting and regulatory expenses as compared to $509,911 for the three months
ended March 31, 2005.
Below is a summary of the results of operation by segment:
PHS Group: (B2B Operations)
Synergy's Grocery operation improved its operation through an expansion
of its Metro NY wholesale operation. Sales improved by 1% to $14.5 million and
operating profit increased by 95% to $387,000. PHS represented 94% of the
Company's overall revenues and provides the most of the cash flow for the
Company's other segments as well as corporate regulatory expenses. PHS plans to
continue attempting to build its Metro NY, operations and increase its
international sales to Canada and the Caribbean.
B2C operations. (Gran Reserve Corporation supra GRC)
B2C operations consist of www.CigarGold.com,
www.CigarsAroundtheWorld.com, www.BeautyBuys.com; retail store operation in
Miami and online partnership programs such as www.Overstock.com and
www.Google.com. The operation has relocated to a 6,000 square foot facility in
Miami Lakes Florida, which handles administration, and order flow for the
operation. Sales increased by 3% to $391,152 while operating loss increased by
3% to $145,476. Retail store operations commenced in December of 2005 with a
grand opening, which occurred on March 4, 2006. GRC plans to have its retail
outlets act as its hubs for expansion in FY 2006. The combination of online
sales as well as retail store sales is expected to be the focus for growth in FY
2006. The retail store is an expansion of Bill Rancic's Cigars Around the World
(CAW) concept of providing the ultimate destination to a cigar aficionado. The
Company has been disappointed by GRC's growth and believes that rapidly changing
antismoking legislation may shift the Cigar business to be a complete
destination business as opposed to a leisurely activity.
Proset operations
In the first quarter of 2006, the Company secured direct contacts in
Europe for Luxury Goods and secured Costco and other customers for the
distribution of these goods. These goods include some of the most respected
producers for Bags, wallets, briefcases, and eyewear in Europe. Management
expects that Proset-operating results should significantly improve in FY 2006.
Furthermore, Proset-operating structure has been integrated into PHS Group, thus
allowing for logistics to be integrated into PHS operations. The flow of luxury
goods has materialized in the first quarter and Costco has already received
numerous deliveries.
15
Corporate Expenses:
The Company's allocation to corporate expenses was increased by 42% to
$216,809. Corporate expenses represent 20% of overall operating expense of the
Company. Operating expenses for all operations including corporate expenses
totaled $1.1 million in first quarter of 2006.
Below is a detailed review of the Company's performance.
In order to fully understand the Company's results a discussion of the
Company's segments and their respective results follow;
B2B OPERATIONS
The Company's B2B operations consist of two operating businesses, PHS
Group and Proset. 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 94% of
the overall company sales. PHS's core sales base remain 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 imports and
distributes salon hair care products and luxury goods to wholesalers and
distributors, in the northeastern part of the United States.
16
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
---------- ---------
THREE MONTHS ENDED 3/31/06
Revenue 14,487,003 0.75%
Gross Profit 961,519 35.15%
SG&A 571,191 12.02%
Operating Profit (loss) 387,124 94.90%
Net Profit(loss) 93,599 189.58%
Interest and financing expenses 293,133 -2.50%
THREE MONTHS ENDED 3/31/05
Revenue 14,378,829
Gross Profit 711,467
SG&A 509,911
Operating Profit (loss) 198,622
Net loss (104,489)
Interest and financing expenses 300,634
PHS increased its revenues by 1% to $14.5 million for three months ended March
31, 2006 as compared to $14.4 million for the three months ended March 31, 2005.
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, increase of its Domestic Wholesale
business and expansion into the Dominican Republic. PHS increased its gross
profit by increasing Direct Store Delivery sales as well as focusing on
promotional merchandise offered by its vendors. The overall gross profit
percentage increased from 4.9% to 6.6%. PHS has been able to maintain its sales
and customer base while increasing margins by 35%. This has been achieved
through its wholesale operations by generating incremental retail sales as
opposed to lower margin wholesale revenues. Additionally, PHS has taken
advantage of promotional rebates, which further enables its cost of foods to be
reduced. PHS plans to continue this approach, but it does rely on manufactures
promotion to achieve its targeted results. Net profit was $93,599 for the three
months ended March 31, 2006 as compared to a loss of $104,489 for the three
months ended March 31, 2005.
17
PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES
Salon
products Change
---------- ---------
THREE MONTHS ENDED 3/31/06
Revenue 492,522 179.22%
Gross Profit 127,916 5714.36%
SG&A 83,213 30.25%
Operating Profit(loss) 19,827 118.44%
Net loss (3,414) -97.26%
Interest and financing expenses 22,551 39.82%
THREE MONTHS ENDED 3/31/05
Revenue 176,391
Gross Profit 2,200
SG&A 63,886
Operating Profit(loss) (107,541)
Net Profit(loss) (124,425)
Interest and financing expenses 16,129
Proset revenues increased by 179% to $492,522 for the three months
ended March 31, 2006 as compared to $176,391 the three months ended
March 31, 2005. SG&A increased by 30% to $83,213 for the three months
ended March 31, 2006 as compared to $63,886 for the three months ended
March 31, 2005. Net loss improved from a loss of $124,425 for the three
months ended March 31, 2005, to a loss of $3,414 for the three months
ended March 31, 2006. The increase in revenue was in a large part due
to an increase in sales of designer luxury goods, which was imported
from Europe and sold to Costco. Proset is continuing to secure a supply
chain of designer luxury goods and plans to merchandise such items with
the consent of the manufactures to targeted retailers in the United
States and Canada. Proset plans to continue to distribute salon
products as merchandise becomes available. Proset hopes it can start to
distribute its newly acquired line of salon products from Italy under
the NYCE logo at the end of the second quarter of 2006.
18
B2C SEGMENT INFORMATION OF OPERATING BUSINESSES
B2C CHANGE
---------- ---------
THREE MONTHS ENDED 3/31/06
Revenue 391,152 3.17%
Gross Profit 112,852 23.39%
SG&A 219,214 15.74%
Operating Profit(loss) (145,476) 5.90%
Net loss (145,449) 2.65%
Interest and financing expenses -- --
THREE MONTHS ENDED 3/31/05
Revenue 379,134
Gross Profit 91,533
SG&A 189,408
Operating Profit(loss) (137,373)
Net Profit(loss) (141,696)
Interest and financing expenses --
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 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 sells premium cigars through the Internet directly to the
consumer. (www.cigargold.com)
o GRC opened its first retail store in Miami, Florida in March, 2006. The
store is expected to be an extension to CAW operation and the store is
called Cigars Around the World.
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 affiliates and partnership
agreements such as www.overstock.com, www.google.com and paid links.
Cigars Around the World (CAW), a wholly owned subsidiary of Synergy Brands, Inc.
(NASDAQ: SYBR), officially opened its first retail outlet and cigar club in
Miami Lakes Florida, on March 4, 2006. The 6,000 square-foot facility, located
at 15804 57th Ave, in Miami Lakes features more than 1,000 unique cigars that
include brand name, hand made premium cigars as well as Gran Reserve Corp's
(GRC) proprietary brands as well as Cigar Accessories. The entire facility is
temperature and humidity controlled so all the Cigars can be viewed in a total
store experience. In addition, the store houses a Cigar Lounge with Free
satellite TV and Free Wireless Internet which will enhance the customer's Cigar
smoking and shopping experience. CAW expects to use its facility for Radio
remotes for special events, seminars on upcoming news in the Cigar world, and
other organized events for its members.
CAW features the top selling Cigar brands which include Macanudo,
Partagas, Montecristo, Cohiba, Arturo Fuentes-Opus X, Hemingway, Padron, Punch,
Romeo y' Julietta, Suarez Gran Reserve, Davidoff, Ashton, Mike Ditka and Breton
labels among others. The store will also offer premium brands of upscale
accessories. All the products in the store are available nationally on the
Store's website www.CigarsAroundTheWorld.com.
Bill Rancic, founder of CAW at www.CigarsAroundTheWorld.com and Donald
Trump's first "Apprentice" on the popular NBC-TV program, was on hand for the
store's grand opening. One of the attractions of the new store is the membership
program which enables club members to rent a climate controlled locker to keep
their personal cache in a perfectly controlled temperature and humidity
environment. Management believes that the club has the potential to provide an
additional revenue stream to the strong sales we continue to see in the cigar
division.
19
Upcoming events include plans for a Father's Day celebration in the
lounge of Cigars Around the World similar to the grand opening. Fathers will be
given the special treatment they deserve as well as exceptional discounts on
their favorite cigars. CAW plans NFL weekends as the football season starts and
a Super Bowl event next year. Based upon this model, CAW is exploring other
retail opportunities to expand this concept.
The store's grand opening celebration received coverage by local media
including WSVN-TV, FOX; WPLG-TV, ABC; WAXY-AM, 790 The Ticket; the Miami Herald;
the Miami Laker; and the Miami New Times.
Revenues in the Company's B2C operation for the three months ended
March 31, 2006 increased by 3% to $391,152 as compared to $379,134 for the three
months ended March 31,2005. CAW on a current operating basis represents
approximately 56% of B2C revenues for the three months ended March 31, 2006.
Gross profit for the three months ended March 31, 2006 increased by 23% to
$112,852 as compared to $91,533 for the three months ended March 31, 2005. The
Company has restructured its operations to centralize all administration in
Florida as opposed to Chicago, which was the headquarters for CAW since its
acquisition in 2003. As a result SG&A increased by 16% to $219,214 for the
period.
CAW is operating profitably, but the logistical support in Miami,
Florida is consuming the segment's resources and thereby is the major reason the
Company believes for not allowing it to show a profit at those sales levels. The
On-line segment has over 20,000 customers, generates an average order of $100,
with over a 50% repeat rate and generates at a 99% fulfillment rate. The Company
believes that building its B2C segment brands along with popularity of Bill
Rancic, the winner of the NBC show "The Apprentice" should bring the segment
effective critical mass.
20
LIQUIDITY AND CAPITAL RESOURCES
March 31, 2006 2005
Working Capital $ 5,151,741 $ 2,699,587
Assets 18,824,285 16,420,027
Liabilities 12,116,104 9,728,614
Equity 6,708,181 6,691,413
Line of Credit Facility 4,310,983 5,981,907
Receivable turnover (days) 38 43
Inventory Turnover (days) 17 12
Net cash used in operating activies (554,849) (2,694,010)
Net cash provided by investing activites 57,740 37,176
Net cash provided by financing activites 1,549,379 2,081,062
Liquidity for the Company predominately involves the need to finance accounts
receivables, inventory, financing costs and operating expenses. The cash flow
realized from the Company's gross profit was not sufficient to cover the
Company's operating expenses. The Company generated a net loss attributable to
Common Shareholders of approximately $469,000. Financing costs totaled $401,000.
Reductions in financing expenses would be beneficial to the Company's
performance. This reduction could be achieved through equity-based transactions,
refinancing at lower rates as well as increasing the operating margins for the
Company.
Although the Company improved its cash flow from operating activities by $2.1
million, it needed to secure funds from financing activities to cover its
operating needs. The Company financed its operating activities by issuing $1.7
million in 10% notes in the first quarter of 2006.
The Company's working capital improved by $2.4 million to $5.1 million due to a
$1.8 million reduction in the Company's lines of credit and a $300,000 reduction
in accounts payable. Receivables increased by $525,000 due to revenue increases
and vendor rebates.
The Company acquired sufficient capital to cover its operating expenses and had
unused availability of $1.4 million under its line of credit. The Company
believes that it has sufficient availability under its line of credit and an
ability to raise sufficient capital to cover its operating losses. However, the
goal of the Company is to generate an operating profit and not rely on external
financing whether debt or equity.
The capital resources available to the Company consist of $6.3 million in lines
of Credit, $3.5 million in long-term notes and $4 million in Preferred Stock.
The Company's objective is to reduce its notes through the issuance of equity
and cash flow as well as refinancing its current obligations with lower rates.
However there is no assurance that the Company would be able to achieve its
objectives. Achieving these goals and objectives is material to the Company's
success.
21
The Company's liquidity relies on the turnover of it inventory and accounts
receivables. The Company reduced its receivable turnover from 43 days to 38 days
and the Company turns its overall inventory on average approximately every 17
days. The Company believes that its collection procedures and procurement
policies are consistent with industry standards. However, nearly 51% of the
Company's assets consist of trade receivables and inventory. Management believes
the Company must maintain a strict policy on insuring collections of receivables
and adequate procurement based upon customer demands.
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 progress so that such financing method may
continue to be available in the future.
Expected interest payments on notes payable for the period ended March 31, are
as follows:
03/31/07 03/31/08 03/31/09 03/31/10 03/31/11 Total
$352,000 $178,000 $109,000 $98,000 $58,000 $795,000
Variable interest rate on notes of $1,175,000 was 10.75%. Variable interest rate
on note of $621,531 was 7.75%.
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 may be 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.
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 March
31, 2006, the Company has established a full valuation allowance.
22
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.
SEASONALITY
Sales by PHS Group and Proset usually peak at the end of the 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 quarter end and as a result reduced products costs
may increase sales. In particular, the first and second 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. However, inflation increases prices which
maybe a natural hedge to an increase in interest in the Company's consumer
business. However, in certain times rising prices may cause a decline in sales
that would result in reduced operating profit.
23
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 March 31, 2006, 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.
24
ITEM 1A: RISK FACTORS
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, its need for and availability of
financing to sustain its operations and expand thereon; and the future value of
its common stock;
The anticipated size or and trends in 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 and continued availability of
logistics and financial support therefore. 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.
25
1. THE COMPANY HAS INCURRED OPERATING LOSSES, HAS MATERIAL DEBT, AND HAS BEEN
AND IS RELIANT UPON FINANCING.
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 is a direct result of fees and expenses associated with stock
and/or other working capital financing. The Company believes that Financing
costs must be reduced in order to improve operating results. Failure to reduce
financing costs will likely inhibit the Company's growth. There is no assurance
that further financing will not be needed for operating purposes, and where
needed there can be no assurances of continued availability of financing at
affordable levels of expense.
THE COMPANY HAS SIGNIFICANT INDEBTEDNESS
As of March 31, 2006 the Company had long-term indebtedness of $3.5 million.
Although the Company made debt principal reduction payments over the last two
years, it may incur substantial additional debt in the future, and in any event
a significant portion of the Company's future cash flow from operating
activities is likely to remain dedicated to the payment of interest and the
repayment of principal on its indebtedness. The Company's indebtedness could
limit its ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions or other purposes in the
future, as needed; to plan for, or react to, changes in technology and in its
business and competition; and to react in the event of an economic downturn.
There is no guarantee that the Company will be able to meet its debt service
obligations. If the Company is unable to generate sufficient cash flow or obtain
funds for required payments, or it we fail to comply with covenants in its
indebtedness, the Company will be in default. In addition, the Company may not
be able to refinance its indebtedness on terms acceptable to the Company, or at
all.
Due to the Company's limited operating history, its evolving business model, and
the unpredictability of its industries, the Company may not be able to
accurately forecast its rate of growth. The Company bases its current and future
expense levels and its investment plans on estimates of future net sales and
rate of growth. Its expenses and investments are to a large extent fixed, and
the Company may not be able to adjust its spending quickly enough if its net
sales fall short of its expectations.
The Company's revenue and operating profit growth depends on the continued
growth of demand for the products offered by the Company or its sellers, and its
business is affected by general economic and business conditions throughout the
world. A softening of demand, whether caused by changes in consumer preferences
or a weakening of the U.S. or global economies, may result in decreased revenue
or growth. Terrorist attacks and armed hostilities create economic and consumer
uncertainty that could adversely affect its revenue or growth. Such events could
create delays in, and increase the cost of, product shipments, which may
decrease demand. Revenue growth may not be sustainable and its company-wide
percentage growth rate may decrease in the future.
The Company's net sales and operating results will also fluctuate for many other
reasons, including:
- - its ability to expand its network of purchasers and suppliers, and to enter
into, maintain, renew, and amend on favorable terms its commercial agreements
and strategic alliances;
- - its ability to acquire merchandise, manage inventory, and fulfill orders;
- - the introduction by the Company's current or future competitors of websites,
products, services, price decreases, or improvements;
- - changes in usage of the Internet and e-commerce, including in non-U.S.
markets;
- - timing, effectiveness, and costs of upgrades and developments in the Company's
systems and infrastructure;
- - the effects of commercial agreements and strategic alliances and the Company's
ability to successfully implement the underlying relationships and integrate
them into its business;
26
- - the effects of acquisitions, and other business combinations and the Company's
ability to successfully integrate them into its business;
- - the success of the Company's geographic and product line expansions;
- - technical difficulties, system downtime, or interruptions;
- - variations in the mix of products and services the Company sells;
- - variations in the Company's level of merchandise and vendor returns;
- - disruptions in service by shipping carriers;
- - the extent to which the Company offers free shipping, continues to reduce
product prices worldwide, and provides additional benefits to its customers,
which reduce its gross or operating profits;
- - the extent the Company invests in technology and content, fulfillment,
marketing and other expense categories;
- - the extent to which the Company provides for and pays taxes; and
- - an increase in the prices of fuel and gasoline, which are used in the
transportation of packages, as well as an increase in the prices of other energy
products, primarily natural gas and electricity, and commodities like paper and
packing supplies, all of which are used in the Company's operating facilities.
2. 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.
3. 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 claims from its own funds.
Any such payment could have a material adverse impact on the Company.
4. 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 purchased, 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 or otherwise trucking services are curtailed because of any
other case, the Company will likely incur higher freight costs due to the
limited availability of trucks during any such period that transportation lanes
are restricted.
5. 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.
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The food industry is sensitive to a number of economic conditions such as: (i)
food price deflation or inflation, (ii) softness in local and national
economies, (iii) increases in commodity prices, (iv) the availability of
favorable credit and trade terms, and (v) other economic conditions that may
affect consumer buying habits. Any one or more of these economic conditions can
affect the demand for products PHS distributes to its customers.
The industries in which PHS competes in are extremely competitive. Both the
wholesale grocery operation and supply chain services to businesses are subject
to competitive practices that may affect: (i) the prices at which PHS is able to
sell products to its service area, (ii) sales volume, (iii) the ability of our
traditional food distribution customers to sell products PHS supplies, which may
affect future orders, and (iv) ability to attract and retain customers. In
addition, the nature and extent of consolidation in the food and traditional
food distribution industries could affect the competitive position. PHS competes
with larger distributors and retailers that have greater resources then the
Company.
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 would not be perceived as superior to those of the Company
by either businesses or consumers.
6. 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.
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7. 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 in the past been reduced below
the minimum NASDAQ standard of $1 and had been below such level for an
appreciable period of time, as well as the Company also being notified in the
past that stockholders' equity had fallen below minimum NASDAQ continued listing
standard of $2,500,000. NASDAQ has established, and the Commission has approved,
certain maintenance requirements to 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 had been below $1.00 in the past and the Common Stock has
remained on the NASDAQ Small Cap System because Synergy had 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 delisting from the
NASDAQ Small Cap System and thereafter trading would likely be reported in the
NASDAQ's OTC Bulletin Board or in the "pink sheets." 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 might 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.
8. RISKS OF BUSINESS DEVELOPMENT-INTERNET MARKETING -THE COMPANY DEPENDS ON
CONTINUED USE OF THE INTERNET AND GROWTH OF THE ONLINE PRODUCT PURCHASE MARKET.
Because still the lines of product and product distribution established for the
Company regarding its e-commerce marketing 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 equity offerings or out of generated revenues and Company
profits and will likely be a drain on Company capital if revenues and revenue
collection do not keep pace with Company expenses. There can be no assurance as
to the continued availability of funds from revenues or from any other sources.
The Company's future potential revenues and profits substantially depend to a
great extent 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.
As a result, acceptance and use continue to develop, and a sufficiently broad
base of consumers have adopted, and continue to use, the Internet and other
online services as a medium of commerce but there can be no assurance of
continued use at the levels anticipated by the Company to sustain its internet
business segments.
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, ease of use restrictions,
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 and education
regarding and ease of use thereof as necessary for reliable Internet access and
services and hopeful continued shifting of potential customers shopping
preferences to the internet.
29
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.
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, the Company believes that these market participants must accept and
use the novel ways of conducting business and the Internet provides exchanging
information as is provided by the Internet.
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 and product review
attendant to Internet sales, different from that 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.
30
The Internet is still relatively new and rapidly changing technology and
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 and/or that the Company may be able to keep pace
therewith. 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 or sustain as a viable
commercial marketplace, the Company will have to adapt its business model to any
resulting new environment, which would materially adversely affect its results
of operations and financial condition.
9. 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 continuously develop, change and
implement as and where necessary an appropriate marketing strategy for its
various 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.
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10. EXTENSIVE AND INCREASING REGULATIONS 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.
11. 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 but the Company does have outstanding preferred
stock upon which dividends are paid current.
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12. 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 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, unauthorized personnel could expose the Company 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. The
Company is not aware of any present claim of such nature or any current basis
therefore but because of the nature of the product marketing techniques utilized
by the Company with application of the Internet, likelihood of claims of such
nature arising in the future cannot be predicted.
13. 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.
14. 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.
15. 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 maintain and re sell to current customers and to increase
its number of customers in the future. 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 Internet
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 that aspect of its
business.
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16. 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 so as to
effectively compete.
17. 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.
18. 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 continue 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.
19. 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.
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20. 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.
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 agreements
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.
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.
21. THE COMPANY MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT
IN DILUTION TO ITS STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIESWHICH
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.
35
22. GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE IS EVOLVING AND
UNFAVORABLE CHANGES COULD HARM THE COMPANY'S BUSINESS
The Company is subject to general business regulations and laws, as well as
regulations and laws specifically governing the Internet and e-commerce. Such
existing and future laws and regulations may impede the growth of the Internet
or other online services. These regulations and laws may cover taxation, user
privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, the provision of online
payment services, broadband residential Internet access, and the characteristics
and quality of products and services. It is not clear how existing laws
governing issues such as property ownership, sales and other taxes, libel, and
personal privacy apply to the Internet and e-commerce. Unfavorable resolution of
these issues may harm the Company's business.
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.
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.
36
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.
23. 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. Currently, decisions of the U.S.
Supreme Court restrict the imposition of obligations to collect state and local
sales and use taxes with respect to sales made over the Internet. However, a
number of States, as well as the U.S. Congress, have been considering various
initiatives that could limit or supersede the Supreme Court's position regarding
sales and use taxes on Internet sales. If any of these initiatives addressed the
Supreme Court's constitutional concerns and resulted in a reversal of its
current position, the Company could be required to collect sales and use taxes.
The imposition by State and local governments of various taxes upon Internet
commerce could create administrative burdens for the Company and could decrease
its future sales. 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.
24. 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.
37
25. 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.
26. OUR VENDOR RELATIONSHIPS SUBJECT US TO A NUMBER OF RISKS
Although we continue to increase the number of vendors that supply products to
us and only two vendors account for 10% or more of our inventory purchases, we
have significant vendors that are important to our sourcing. We do not have
long-term contracts or arrangements with most of our vendors to guarantee the
availability of merchandise, particular payment terms, or the extension of
credit limits. If our current vendors were to stop selling merchandise to us on
acceptable terms, we may not be able to acquire merchandise from other suppliers
in a timely and efficient manner and on acceptable terms.
27. 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:
- - actual or anticipated variations in the Company's quarterly operating results
and expected future results;
- - changes in, or failure to meet, financial estimates by securities analysts;
- - unscheduled system downtime;
- - additions or departures of key personnel;
- - announcements of technological innovations or new services by the Company or
its competitors;
- - initiation of or developments in litigation affecting the Company;
- - conditions or trends in the Internet and online commerce industries;
- - changes in the market valuations of other Internet, online commerce, or
technology companies;
- - developments in regulation;
- - announcements by the Company or its competitors of significant acquisitions,
strategic partnerships, joint ventures, new product of capital commitments;
- - unanticipated economic or political events;
- - sales of the Company's common stock or other securities in the open market;
and
- - other events or factors, including those described in the "Risk Factors",
section and others that may be beyond the Company's control.
- - 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.
38
Item 2- Unregistered Sales of Equity Securities and use of Proceeds
In March 2006 the Company secured a $1.75 million debt financing with Laurus
Master Fund, Ltd. With warrants, which debt amortizes based on a five year
amortization period and carries an annual interest rate of 10%. The involved
warrants were issued pursuant to exemption from registration under the
Securities Act of 1933 as amended as allowed under Section 4(2) thereof and the
stock underlying the warrants is by the terms of the financing to be sought
registration under the Act by the Company.
Item 5- Other Information
The Company has increased its authorized stock to a total of 15,000,000 shares,
14,000,000 of those being Common Stock and the balance of 1,000,000 shares being
Preferred Stock, such Preferred Stock being further designated as 100,000 Class
A Preferred and 900,000 Class B Preferred with 500,000 of such Class B Preferred
continuing to be designated as Series A Class B Preferred and 250,000 of such
Class B Preferred continuing to be designated as Series B of Class B Preferred.
The balance sheet of the Company presented in this report reflects such increase
authorized although such became effective after the end of the first quarter.
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 on 8-K for the relevant period. On March 30, 2006
the Company reported its 2005 year end financial results.
39
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
---------------------------
Date: May 15, 2006
- -----------------------
By: Mair Faibish
Chief Executive Officer
/s/ Mitchell Gerstein
---------------------------
Date: May 15, 2006
- -----------------------
By: Mitchell Gerstein
Chief Financial Officer
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) 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
(c) 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 we find 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: May 15, 2006
/s/ Mair Faibish
- -------------------------------------
Mair Faibish, Chief Executive Officer
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) 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
(c) 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 we find 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: May 15, 2006
/s/ Mitchell Gerstein
- ------------------------------------------
Mitchell Gerstein, Chief Financial Officer
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 March 31, 2006 (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: May 15, 2006
/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 March 31, 2006 (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: May 15, 2006
/s/ Mitchell Gerstein
- ------------------------------------------
Mitchell Gerstein, Chief Financial Officer