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, 2007.
Commission File Number: 0-19409
SYNERGY BRANDS, INC.
(Exact name of registrant as it appears in its charter)
Delaware 22-2993066
(State of incorporation) (I.R.S. Employer identification no.)
223 Underhill Blvd. Syosset NY 11791
(Address of principal executive offices)
516-714-8200
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] YES [ ] NO
Indicate by check mark whether the registrant is 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 14, 2007 there were
8,365,042 shares outstanding of the registrant's common stock.
SYNERGY BRANDS, INC.
FORM 10-Q
MARCH 31, 2007
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and
December 31, 2006 2 - 3
Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2006 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2007 and 2006 (Unaudited) 5-6
Notes to Consolidated Financial Statements (Unaudited) 7-14
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-24
Item 4: Control and Procedures 25
PART II: OTHER INFORMATION
Item 1A: Risk Factors 26
Item 2: Unregistered Sales of Equity Securities and use of Proceeds 26
Item 4: Submission of Matters to a Vote of Security Holders 26
Item 6: Exhibits and Reports on Form 8-K 26
SIGNATURES AND CERTIFICATIONS
1
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND DECEMBER 31, 2006
ASSETS March 31, 2007 DECEMBER 31, 2006
(Unaudited)
Current Assets:
Cash and cash equivalents $451,498 $644,870
Accounts receivable trade, less allowance for doubtful accounts of
$127,481 for both periods 8,190,675 11,165,980
Other receivables 2,664,162 2,453,705
Note Receivable - current 347,706 344,699
Inventory 4,946,772 1,289,221
Prepaid assets and other current assets 317,937 669,908
Assets of discontinued operations 89,098 127,182
-------------- -----------------
Total Current Assets 17,007,848 16,695,565
Property and Equipment, Net 246,382 252,950
Other Assets 2,083,690 909,454
Notes Receivable 1,991,813 2,207,233
Intangible Assets, net of accumulated amortization of $404,205 and
$389,226 273,318 288,297
Goodwill 514,297 514,297
-------------- -----------------
Total Assets $22,117,348 $20,867,796
============== =================
The accompanying notes are an integral part of these statements.
2
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND DECEMBER 31, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2007 December 31,
(Unaudited) 2006
Current Liabilities:
Notes Payable - Current $ 2,490,667 $ 4,196,757
Accounts Payable and Accrued Expenses 2,292,404 2,321,445
Related Party Note Payable 38,987 23,706
Deferred income 1,470,940 755,503
Liabilities of Discontinued Operations 55,823 112,569
------------ -----------
Total Current Liabilities 6,348,821 7,409,980
Notes Payable, net of discount of $236,640 and $313,749, respectively 8,026,646 1,960,638
Lines of credit 1,104,610 5,836,928
Stockholders' Equity:
Class A Preferred stock - $.001 par value; 100,000 shares authorized, 93,213 and 93,213 shares issued
and outstanding; liquidation preference of $10.50 per share 93 93
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;
285,000 and 285,000 shares issued and outstanding; liquidation preference of $10.00 per share 285 285
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;
7,908,292 and 6,484,275 shares issued 7,908 6,484
Additional paid-in capital 48,438,579 47,252,064
Deficit (41,796,334) (41,585,416)
Accumulated other comprehensive loss (8,340) (8,340)
Less treasury stock, at cost, 1,000 shares (5,000) (5,000)
------------ -----------
Total stockholders' equity 6,637,271 5,660,250
------------ -----------
Total Liabilities and Stockholders' Equity $ 22,117,348 $20,867,796
============ ===========
The accompanying notes are an integral part of these statements.
3
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2007 2006
-------------- -------------
Net Sales $ 17,613,713 $ 14,878,155
Cost of Sales
Cost of product 15,963,709 13,576,348
Shipping and handling costs 236,228 227,436
-------------- -------------
16,199,937 13,803,784
Gross Profit 1,413,776 1,074,371
Operating expenses
Selling, general and Administrative Expenses 1,065,673 1,007,214
Depreciation and amortization 44,758 78,634
-------------- -------------
1,110,431 1,085,848
-------------- -------------
Operating Profit (loss) 303,345 (11,477)
Other Income (expense)
Interest Income 34,095 37,170
Other expense (446) (205)
Equity in earnings of investee 91,141 15,465
Interest and financing expense (586,058) (378,397)
-------------- -------------
(461,268) (325,967)
-------------- -------------
Loss from continuing operations before income taxes (157,923) (337,444)
Income tax expense 46,782 37,828
-------------- -------------
Loss from continuing operatons (204,705) (375,272)
-------------- -------------
Discontinued operations
Loss from operations of discontinued component (6,213) (3,174)
Income tax expense - 240
-------------- -------------
Loss from discontinued operations ( 6,213) ( 3,414)
-------------- -------------
Net loss (210,918) (378,686)
Dividend-Preferred Stock 84,625 90,250
-------------- -------------
Net loss attributable to common stockholder $ (295,543) $ (468,936)
============== =============
Basic and diluted net loss per common share
from continuing operations: $ ( 0.04) $ ( 0.10)
Basic and diluted net loss per common share
from discontinued operations: $ 0.00 $ 0.00
-------------- -------------
$ ( 0.04) $ ( 0.10)
-------------- -------------
The accompanying notes are an integral part of these statements.
4
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2007 2006
---------- -----------
Cash Flows From Operating Activities:
Net loss $(210,918) $ (378,686)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and Amortization 44,758 78,634
Amortization of financing cost 46,943 14,209
Equity in earnings of investee (91,141) (15,465)
Operating expenses paid with common stock 40,970 33,000
Changes in Operating Assets and Liabilities:
Net (increase) decrease in:
Accounts receivable and other receivables 2,764,848 955,844
Inventory (3,657,551) (1,355,006)
Prepaid assets, related party note receivable and other assets 531,957 16,258
Net increase (decrease) in:
Accounts payable, related party note payable, accrued
expenses and other current liabilities (13,760) (556,145)
Deferred Income 715,437 649,418
Net assets of discontinued operations (18,662) 10,454
---------- -----------
Net cash provided by (used in) operating activities 152,881 (547,485)
Cash Flows From Investing Activities:
Purchase of fixed assets (8,627) (2,527)
Payments received on notes receivable 220,913 75,262
Issuance of notes receivable (8,500) 14,995
---------- -----------
Net cash provided by investing activities 203,786 57,740
---------- -----------
Cash Flows From Financing Activities:
Borrowings under line of credit 291,610 10,918,314
Repayments under line of credit (4,836,928) (10,580,572
Proceeds from the issuance of notes payable 6,690,000 1,882,500
Repayments of notes payable (2,617,190) (624,000)
Payment of dividends (84,625) (90,250)
Payment of financing costs - (46,707)
Proceeds from issuance of common stock 7,094 90,094
---------- -----------
Net cash (used in) provided by financing activities (550,039) 1,549,379
---------- -----------
Net (decrease) increase in cash (193,372) 1,059,634
Cash and cash equivalents, beginning of period 644,870 255,483
---------- -----------
Cash and cash equivalents, end of period $ 451,498 1,315,117
=========== ===========
The accompanying notes are an integral part of these statements.
5
SYNERGY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2007 2006
------------ -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 364,564 $ 249,094
=========== ===========
Cash paid for income taxes $ 46,782 $ 38,068
=========== ===========
Supplement disclosures of non-cash operating, investing and
financing activities:
Debt conversion to common stock $ 187,000 $ 60,000
=========== ==========
Common Stock issued for services $ 40,970 $ 33,000
=========== ==========
Common Stock issued for financing cost $ 978,250 -
========== ==========
The accompanying notes are an integral part of these statements.
6
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2007 and 2006
NOTE A - UNAUDITED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 2007, the consolidated statements
of operations for the three months ended March 31, 2007 and 2006, and the
condensed consolidated statements of cash flows for three months ended March 31,
2007 and 2006, have been prepared by Synergy Brands, Inc. ("Synergy" or the
"Company") without audit. The balance sheet at December 31, 2006 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, 2007 (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, 2006 filed by the Company. The results of
operations for the periods ended March 31, 2007 and 2006 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.
NOTE C - ADVERTISING EXPENSE
The Company expenses advertising and promotional costs as incurred. Advertising
and promotional costs were approximately $22,000 and $53,000 for the three
months ended March 31, 2007 and 2006, respectively.
7
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2007 and 2006
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, 2007,
the Company recognized approximately $817,000 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 $2,664,162
and $2,453,705 at March 31, 2007 and December 31, 2006.
NOTE E - INVENTORY
Inventory, consisting of goods held for sale, as of March 31, 2007 consisted of
the following:
Grocery, health and beauty products $4,490,389
General merchandies 456,383
---------
$4,946,772
==========
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 issued 150,000 shares of common
stock to the note holder. The value of the shares ($200,000) was treated as a
reduction of the sales price. The balance of the note receivable at March 31,
2007 was $1,561,533.
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. In 2006, $142,857
was paid by ITT to reduce the loan balance. On March 30, 2007 $142,857 was paid
by ITT to reduce the loan balance. As of March 31, 2007 the outstanding loan
balance was $714,286. As part of the Company's agreement, the Company has paid
$285,714 on the note payable. The outstanding balance of the note payable at
March 31, 2007 was $714,286.
8
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2007 and 2006
NOTE G - INVESTMENT
The Company holds a 20% 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 $ 91,141 and $15,465
during the three months ended March 31, 2007 and March 31, 2006, respectively.
At March 31, 2007, the investment in ITT is $653,734 as included in "Other
Assets" on the accompanying balance sheet.
Summarized results of operations of this investee for the three months ended
March 31, 2007 and 2006 is as follows:
2007 2006
------------ -------------
Revenues $ 8,920,000 $ 6,970,000
Total expenses (8,294,000) (6,846,000)
Other income 42,000 89,000
------------ -------------
Income before income taxes 668,000 213,000
Income tax expense (252,000) (113,000)
------------ -------------
Net income $ 416,000 $ 100,000
============ =============
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 July 2006, allow for the borrowing of up to
$6,000,000 based on the sum of 85% of the net face amount of eligible accounts
receivable, as defined, plus the lesser of (1) $2,750,000 or (2) eligible
inventory and eligible goods in transit, as defined. $1,104,610 was outstanding
under the agreements at March 31, 2007. The Company did refinance its secured
financing (See Note N). This agreement was terminated in April 2007. 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, 2007, the interest rate
on outstanding borrowings was 13.25%. 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. During the three months of 2007,
the Lender converted $187,000 of outstanding debt into 202,120 shares of common
stock. In 2006 the Lender converted $331,200 of outstanding debt into 289,080
shares of common stock.
9
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2007 and 2006
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 2006, the
Company converted $150,000 of this outstanding debt into 159,754 shares of
common stock. The Company repaid $275,000 of this debt at March 31, 2007. At
March 31, 2007 the outstanding balance was $50,000.
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. In 2006, the Company converted $90,000 of this outstanding debt
into 93,478 shares of common stock. The Company repaid $243,000 of this debt at
March 31, 2007. 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, 2007, the outstanding
balance was $166,667.
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.
The Company is not required to repay any principal until the maturity date of
the note, September 1, 2007. As security for the note, a pledge agreement was
entered by certain Shareholders of ITT. There were no borrowings as of March 31,
2007.
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. In 2006, the Company converted $90,000 of this outstanding
debt into 93,478 shares of common stock. The Company repaid $176,667 of this
debt at March 31, 2007. 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, 2007, the
outstanding balance was $233,333.
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. The lender was
issued a warrant to acquire 270,000 shares of the Company's common stock valued
at $362,000. The relative fair value of the warrant of $362,000 is being charged
to operations as additional interest over the term of the loan. The Company
repaid $192,000 of this debt at March 31, 2007. At March 31, 2007, the
outstanding balance was $1,558,000.
On January 19, 2007, Synergy Brands Inc. completed a $6.5 million secured
financing with Lloyd I. Miller, a major shareholder and a director of Synergy
Brands for its main operating subsidiary PHS Group Inc. The financing consisted
of $6.5 million in secured term notes to be amortized over a 5 year period, with
a balloon payment of $3,250,000 in January 2012 at an interest rate of 11.75%.
The agreement further involved a securities purchase agreement, issued 1,075,000
common shares of Synergy Brands to Lloyd Miller as a financing cost and retired
all warrants beneficially owned by Mr. Miller. The Company repaid $108,333 of
this debt at March 31, 2007. At March 31, 2007, the outstanding balance was
$6,391,667.
In the fourth quarter of 2006, the Company secured $1,800,000 from shareholders
of short term financing. At March 31, 2007 the outstanding balance was $550,000,
which was paid in April 2007.
10
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2007 and 2006
NOTE I - STOCKHOLDERS' EQUITY
During the three months ended March 31, 2007, the Company converted $187,000 of
debt of IIG into 202,120 shares of common stock (see Note H).
During the three months ended March 31, 2007, the Company issued 136,897 shares
of common stock as compensation for services under existing agreements and
recorded a charge to operations of $40,970. During the three months ended March
31, 2007, the Company issued 1,085,000 shares of common stock in connection with
financing or the sale of securities and the satisfaction of certain obligations.
There are no options outstanding with employees at March 31, 2007.
NOTE J - SEGMENT AND GEOGRAPHICAL INFORMATION
The Company offers a broad range of Internet access services and related
products to businesses and consumers throughout the United States and Canada.
Management evaluates the various segments of the Company based on the types of
products being distributed which were, as of March 31, 2007 and 2006, as shown
below the segment information does not include the discontinued segment of
Proset:
Three Months Ended March 31, 2007 and 2006
PHS Group GRC Corporate Total
Revenue from external customers 2007 $ 17,225,884 $ 387,829 $ - $ 17,613,713
2006 $ 14,487,003 $ 391,152 $ - $ 14,878,155
Net Income (loss) from continuing operations 2007 $ 259,002 $ (96,301) $ (452,031) $ (289,330)
attributable to common Stockholders 2006 $ 93,599 $ (145,449) $ (413,672) $ (465,522)
Interest and Finance Expense 2007 $ 408,905 $ - $ 177,153 $ 586,058
2006 $ 293,133 $ - $ 85,264 $ 378,397
Depreciation & 2007 $ 3,621 $ 39,114 $ 2,023 $ 44,758
amortization 2006 $ 3,204 $ 39,114 $ 36,316 $ 78,634
Identifiable assets from continuing operations are as follows:
March 31, 2007 $ 16,048,533 $ 1,480,599 $ 4,499,118 $ 22,028,250
December 31, 2006 $ 15,609,833 $ 1,594,373 $ 3,536,408 $ 20,740,614
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 convertible debt and equity securities of 693,808
and 1,232,930 for the three months ended March 31, 2007 and 2006, respectively,
have been excluded from the calculation of diluted loss per share since their
effect would be antidilutive.
Three Months ended March 31,
2007 2006
----------- ----------
Net loss applicable to common stock $( 295,543) $(468,936)
============ ==========
Weighted-average number of shares in basic 7,616,174 4,563,651
and diluted EPS =========== ==========
11
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2007 and 2006
NOTE L - DISCONTINUED OPERATIONS
In December 2006, the Company instituted a plan to discontinue the Pro-Set
segment. Accordingly, the operating results of Pro-set segment for March 31,
2007 and March 31, 2006 has been presented as Discontinued operations. Net
assets and liabilities to be disposed of or liquidated, at their book value,
have been separately classified in the accompanying balance sheets at March
31,2007 and December 31, 2006 and statement of cash flows.
Summarized financial information of the Pro-Set segment as discontinued
operations for each of the two periods ended as follows:
Three Months Ended
March 31, 2007 March 31, 2006
-------------- ---------------
Net Sales $ 5,405 $ 492,522
Cost of sales
Cost of product 3,170 330,067
Shipping and handling costs - 34,539
-------------- ---------------
3,170 364,606
-------------- ---------------
Gross Profit 2,235 127,916
Operating expenses:
General and administrative 8,448 83,213
Depreciation and amortization - 24,876
-------------- ---------------
8,448 108,089
Operating loss (profit) (6,213) 19,827
Other Income (expenses):
Other income (expenses) - (450)
-------------- ---------------
Interest and financing expenses - (22,551)
-------------- ---------------
- (23,001)
-------------- ---------------
Net loss before income taxes (6,213) (3,174)
Income tax expense - 240
-------------- ---------------
Net loss from discontinued operations $(6,213) $ (3,414)
============== ===============
12
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2007 and 2006
NOTE L (continued)
March 31, 2007 Dec. 31, 2006
ASSETS:
CURRET ASSETS:
CASH AND CASH EQUIVALENTS $ 1,787 $ 1,782
ACCOUNTS RECEIVABLE TRADE 9,713 44,632
OTHER RECEIVABLES 28,563 28,563
INVENTORY 49,035 52,205
---------- ----------
TOTAL ASSETS $ 89,098 $ 127,182
========== ===========
LIABILITIES:
ACCOUNTS PAYABLE $ 55,823 $ 112,569
---------- ----------
TOTAL LIABILITIES $ 55,823 $ 112,569
========== ===========
NOTE M - RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments - An Amendment of
FASB No. 133 and 140. The purpose of SFAS statement No. 155 is to simplify the
accounting for certain hybrid financial instruments by permitting fair value
re-measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. SFAS No. 155 also
eliminates the restriction on passive derivative instruments that a qualifying
special-purpose entity may hold. The adoption of this standard on January 1,
2007 did not have a material effect on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
requires enhanced disclosures about fair value measurements. SFAS No. 157
requires companies to disclose the fair value of their financial instruments
according to a fair value hierarchy as defined in the standard. Additionally,
companies are required to provide enhanced disclosure regarding financial
instruments in one of the categories (level 3), including a reconciliation of
the beginning and ending balances separately for each major category of assets
and liabilities. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We believe that the adoption of SFAS No. 157 will not have a
material impact on our consolidated financial statements.
In June, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for
Income Taxes (FIN48), to create a single model to address accounting for
uncertainty in tax portions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest, and penalties,
accounting in interim periods, disclosure and transition. The Company adopted
FIN 48 as of January 1, 2007 and the adoption did not have a material impact to
the Company's consolidated financial statements or effective tax rate and did
not result in any unrecognized tax benefits.
Interest costs and penalties related to income taxes are classified as interest
expense and general and administrative costs, respectably, in the Company's
consolidated financial statements. For the three months ended March 31, 2007 and
2006, the Company did not recognize and interest or penalty expense related to
income taxes. It is determined not to be reasonably possible for the amounts of
unrecognized tax benefits to significantly increase or decrease within the next
12 months. The Company is currently subject to a three year status of
limitations by major tax jurisdictions. The Company and its subsidiaries file
income tax returns in the U.S. federal jurisdiction.
13
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2007 and 2006
NOTE M (continued)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of SFAS 115"
(SFAS No. 159). The new statement allows entities to choose, at specified
election dates, to measure eligible financial assets and liabilities at fare
value that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item's fair
value in subsequent reporting periods must be recognized in current earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We
are currently evaluating the potential impact of SFAS No. 159 on our financial
position and results of operations.
NOTE N - SUBSEQUENT EVENTS
Effective April 5, 2007, Synergy Brands Inc. completed an amendment to a secured
financing agreement with Lloyd I. Miller, a major Shareholder and Director of
Synergy Brands for its main operating subsidiary, PHS Group to increase its $6.5
million loan balance to $8.0 million. The financing consisted of long term notes
to be amortized over a 5 year period, with a balloon payment of $4,000,000 in
January 2012 at an interest rate of 11.75%. This financing supplements the $6.5
term notes previously announced in January 2007. This supplemental financing has
no additional equity component. This financing retired all of the Company's debt
with its primary Lender (See Note H).
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Synergy Brands Inc. (SYBR or the Company) is a holding company that
principally operates through a wholly owned subsidiary, PHS Group Inc. ("PHS")
in the wholesale distribution of nationally known brands and proprietary private
label Groceries and Health and Beauty Aid (HBA) products as well as wholesale
luxury goods. It principally focuses on the sale of nationally known brand name
consumer products manufactured by major U.S. manufacturers and has begun
focusing on the grocery private label market in FY 2006. The Company uses
logistics based distribution programs to optimize its costs on both wholesale
and retail levels.
The Company also owns a wholly owned subsidiary Gran Reserve Corporation
that principally operates in the wholesale, retail and online sales of Premium
hand made cigars and accessories.
The Company also owns 20% of the outstanding common stock of Interline
Travel and Tours, Inc. (aka: PERX.com). 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 should
provide for material future capital appreciation. Synergy Brands does not manage
PERX's day-to-day operations.
For further information please visit the Company's corporate website at
www.sybr.com.
PHS GROUP (GROCERY & HBA OPERATIONS)
PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately located in the Northeastern United States. PHS is the largest
business segment of the Company's business operations, representing about 98% of
the overall Company sales and 92% of gross profit. PHS's core sales base remains
the distribution of nationally branded consumer products in the grocery and
health and beauty (HBA) sectors. PHS has positioned itself as a distributor for
major manufacturers as opposed to a full line wholesaler. A full line wholesaler
has the responsibility of servicing the entire needs of a retail operation,
whereas a distributor caters to specific merchandising categories. As a result,
PHS is able to better plan for the needs of its specific customers and at the
same time benefit the manufacturer as the direct supply source and in turn
increase sales to its customers at optimized pricing through this unique
strategy. PHS concentrates on what it perceives to be faster moving promotional
items such as: Tide, Bounty, Nyquil, Pantene, Clorox bleach, Scott tissues,
Marcal tissues among many others, and uses promotions, logistics and
distribution savings to streamline and reduce its sale prices and increase gross
profit thereby. The second business segment within the sector wherein PHS
participates was previously Proset Hair Systems (Proset) but Proset discontinued
its operations in the 4th quarter of FY 2006.
In the third quarter of 2006 PHS entered the private label grocery market
specializing in the distribution of baking mixes and spices to national chains
on a proprietary basis. PHS hopes to develop private label programs for national
accounts by creating proprietary baking mix products and spice plan-o-grams
specifically designed for particular retail needs. PHS further hopes to expand
its grocery distribution business by complementing the distribution of its
promotional grocery and HBA items with higher margin secondary items that would
blend a higher margin into PHS operations.
GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS)
The Company's premium cigar operations are conducted through its wholly
owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following
businesses (under the business names stated)
o Cigars Around the World (CAW) sells premium cigars to restaurants,
hotels, casinos, country clubs and many other leisure related destinations.
This company was acquired in June 2003. CAW opened a retail store and
lounge in Miami Lakes, Florida selling premium cigars and accessories in
March 2006 as well as established and furthered a web site related to its
operations, www.cigarsaroundtheworld.com.
o CigarGold.com sells premium cigars through the Internet directly to the
consumer and through partnership online affiliations.
o BeautyBuys.com sells salon hair care products directly to the consumer
via the Internet and through partnership online affiliations.
15
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007
AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2006.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
THREE MONTHS ENDED 3/31/07
Revenue $17,613,713 18.39% $ 17,613,713 18.39%
Gross Profit 1,413,776 31.59% 1,413,776 31.59%
SG&A 796,104 0.72% 1,065,673 5.80%
Operating Profit 574,937 137.92% 303,345 2743.07%
Net Profit (loss) from continuing operations
attributable to common shareholders 162,701 413.79% (289,330) -37.85%
Per share continuing operations 0.02 (0.04)
Net loss from discontinued
operations (6,213) 81.99%
Per share discontinued operations (0.00)
Net loss attributable
to shareholders (295,543) -36.98%
Net loss per common share (0.04)
Interest and financing expense 408,905 39.49% 586,058 54.88%
THREE MONTHS ENDED 3/31/06
Revenue $14,878,155 $ 14,878,155
Gross Profit 1,074,371 1,074,371
SG&A 790,405 1,007,214
Operating Profit (loss) 241,648 (11,477)
Net Profit (loss) from continuing operations
attributable to common shareholders (51,850) (465,522)
Per share continuing operations (0.01) (0.10)
Net loss from discontinued
operations (3,414)
Per share discontinued operations 0.00
Net loss attributable
to shareholders (468,936)
Net loss per common share (0.10)
Interest and financing expense 293,133 378,397
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 18% to $17,613,713 for the three months ended March
31,2007, as compared to $14,878,155 for the three months ended March 31, 2006.
The increase in sales was predominately from the sale of PHS private label
products and an increase in the Company's PHS wholesale distribution operations.
The Company has been able to diversify its products selection both in
national brand and private label to achieve better operating margins. The
Company was able to grow revenue by 18% and gross profit increased by 32%. The
Company attained an operating profit of $303,345 at March 31, 2007 as compared
to a $11,477 operating loss at March 31, 2006.
Selling General and Administrative expenses (SGA) increased by 6% to
$1,065,673 for the three months ended March 31, 2007 as compared to $1,007,214
for the three months ended March 31, 2006. 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. SG&A expense for PHS Group increased by 9% to $623,990 for
the three months ended March 31, 2007 as compared to $571,191 for the three
months ended March 31, 2006. 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.
16
The net loss attributable to Common Stockholders of the Company was
$295,543 for the three months ended March 31, 2007 as compared to $468,936 for
the three months ended March 31, 2006. Interest and financing costs represents
199% of the total loss attributable to common shareholders. Synergy Brands
earned $162,701 from operations as compared to a loss of $289,330 for the same
period last year. 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, 2007 totaled $269,569, which include legal, accounting, corporate
employees, and regulatory expenses as compared to $216,809 for the three months
ended March 31, 2006.
Below is a summary of the results of operation by segment:
PHS Group: (Grocery and HBA operations)
Synergy's Grocery and HBA business improved its operation through an
expansion of its direct store delivery and private label wholesale and
distribution operations. Sales improved by 19% to $17.2 million and operating
profit increased by 73% to $671,034. PHS represented 98% of the Company's
overall revenues and provides 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 DSD operations, expand its private label programs, and
increase its international sales which are anticipated to help continue its
direction toward greater profitability.
GRAN RESERVE CORPORATION (Cigar operations)
Gran Reserve segment operations headed by GRC consist of subcategories
www.CigarGold.com, www.CigarsAroundtheWorld.com, www.BeautyBuys.com, and the
retail store operation in Miami Lakes, Florida as well as online partnership
programs such as www.Overstock.com and www.Google.com. The principal operation
was relocated in March 2006 to a 6,000 square foot facility in Miami Lakes,
Florida, which handles order flow for the operation as well as retail
operations. Sales for this segment during this period remained flat while
operating loss was reduced by 34% to $96,097. 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 2007. The
combination of online sales as well as retail store sales is expected to be the
focus for growth in FY 2007. 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 be shifting the Cigar business
to be a complete destination business as opposed to a leisurely activity which
GRC has commenced focus upon through its retail store operations.
17
Corporate Expenses:
The Company's allocation to corporate expenses was increased by 24% to
$269,569 for the three months ended March 31, 2007 as compared to the three
months ended March 31, 2006. Corporate expenses represent 25% of overall
operating expense of the Company. Operating expenses for all operations
including corporate expenses totaled $1.1 million in the first three months of
2007. Corporate expenses reflected the charges needed to operate the public
corporation, Synergy Brands Inc. These included all the regulatory costs, board
fees, governance fees, legal and accounting expenses and employees that oversee
the operations of the Company's assets.
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;
PHS GROUP (Grocery and HBA operations)
PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately located in the Northeastern United States as well as in Canada.
PHS constitutes the largest segment of the Company's operations from a financial
prospective, representing about 98% of the overall Company sales. PHS's core
sales base remains the distribution of nationally branded consumer products in
the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a
distributor for major manufacturers as opposed to a full line wholesaler. A full
line wholesaler has the responsibility of servicing the entire needs of a retail
operation, where as a distributor caters to specific merchandising categories.
As a result, PHS is able to plan the needs of its customers directly from the
source of supply which in turn is designed to increase sales to its customers
through this unique focus. PHS concentrates on what it perceives to be the
fastest moving consumer product items and uses promotional savings to streamline
and reduce their sale prices. PHS focuses on approximately 1,000 products
manufactured by the top Grocery and HBA Companies in the United States and as a
result the Company believes that they have a competitive advantage in comparison
to the traditional wholesaler, which may concentrate on over 10,000 different
items.
18
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
THREE MONTHS ENDED 3/31/07
Revenue 17,225,884 18.91%
Gross Profit 1,298,645 35.06%
SG&A 623,990 9.24%
Operating Profit 671,034 73.34%
Net Profit 259,002 176.71%
Interest and financing expenses 408,905 39.49%
THREE MONTHS ENDED 3/31/06
Revenue 14,487,003
Gross Profit 961,519
SG&A 571,191
Operating Profit 387,124
Net Profit 93,599
Interest and financing expenses 293,133
PHS increased its revenues by 19% to $17.2 million for three months ended
March 31, 2007 as compared to $14.5 million for the three months ended March 31,
2006. The increase in PHS business is attributable to the utilization of
additional vendors, development of a private label grocery program designed to
sell proprietary products, more specifically in the baking mix and spice market,
to national chains in the United States and Canada, and organic growth in sales
to its customers in the Northeastern section of the United States. PHS increased
its gross profit by increasing Direct Store Delivery sales, developing a private
label market to national chains as well as focusing on promotional merchandise
offered by its vendors. The overall gross profit percentage increased from 6.6%
to 7.5%. PHS has been able to maintain its sales and customer base while
increasing gross profit 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. Continuing the development of grocery products produced
for the benefit of PHS customers is another objective currently being developed
and executed by PHS. Net profit was $259,002 for the three months ended March
31, 2007 as compared to a profit of $93,599 for the three months ended March 31,
2006.
19
GRAN RESERVE SEGMENT
GRC CHANGE
THREE MONTHS ENDED 3/31/07
Revenue 387,829 -0.85%
Gross Profit 115,131 2.02%
SG&A 172,114 -21.49%
Operating Profit(loss) (96,097) -33.94%
Net loss (96,301) -33.79%
THREE MONTHS ENDED 3/31/06
Revenue 391,152
Gross Profit 112,852
SG&A 219,214
Operating Profit(loss) (145,476)
Net loss (145,449)
The Company's direct to consumers 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 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., 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.
20
Revenues in the Company's cigar operation remained flat for the three
months ended March 31,2007 at $387,829 as compared to $391,152 for the three
months ended March 31, 2006. CAW on a current operating basis represents
approximately 47% of cigar revenues for the three months ended March 31, 2007.
Gross profit for the three months ended March 31, 2007 increased by 2% to
$115,131 as compared to $112,852 for the three months ended March 31, 2006.
DISCONTINUED OPERATIONS
The Company discontinued Proset's operation in the fourth quarter of 2006
and such discontinuance is reflected in the financial statements hereinafter
provided. The prior Proset segment of the Company's business has never been
considered a significant component thereof. After review of the relevant
components required for measuring the importance of and particulars of the
Proset segment, the Company determined that the lessened value of the Company of
Proset's revenues did not warrant continuing its operations because such
revenues (because of the cost factor) had not become sufficient to sustain the
costs of its operations. Proset has not been able to acquire and sell salon hair
care products at costs needed to market those products profitably. In addition,
Proset's inventory could not be replenished at appropriate levels to accommodate
customers' needs as determined by the Company. Proset has continued to operate
at a loss and management believed that there was little likelihood of
establishing a plan to make such segment profitable. Management further believes
that the expansion of its profitable grocery operations will provide for
vertical growth that may require additional capital that would be better
invested in PHS operations rather then Proset operations.
The table below summarizes the historical financial operations of Proset
for the periods being discussed.
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
------------------ -----------------
Net Sales $ 5,405 $492,522
Cost of sales
Cost of product 3,170 330,067
Shipping and handling costs - 34,539
------------------ -----------------
3,170 364,606
Gross Profit 2,235 127,916
Operating expenses:
General and administrative 8,448 83,213
Depreciation and amortization - 24,876
------------------ -----------------
8,448 108,089
Operating profit (loss) (6,213) 19,827
Other Income (expenses):
Other income (expenses) - (450)
Interest and financing expenses - (22,551)
------------------ -----------------
- (23,001)
Net loss before income taxes (6,213) (3,174)
Income tax expense - 240
------------------ -----------------
Net loss from discontinued $ (6,213) $(3,414)
operations ------------------ -----------------
21
LIQUIDITY AND CAPITAL RESOURCES
March 31 2007 2006
Working Capital $ 10,659,027 $ 5,643,868
Assets 22,117,348 18,824,285
Liabilities 15,480,077 12,116,104
Equity 6,637,271 6,708,181
Line of Credit Facility 1,104,610 4,310,983
Receivable turnover (days) 43 38
Inventory Turnover (days) 25 16
Net cash provided by (used in) operating activies 152,881 (547,485)
Net cash provided by investing activites 203,786 57,740
Net cash (used in) provided by financing activites (550,039) 1,549,379
The Company's working capital increased by $5.0 million at March 31, 2007
to $10.7 million due to a combination of several factors including amortization
of debt, refinancing of short term debt to long term debts and operating profits
from PHS Group. The Company plans to further improve its working capital through
conversion of short-term debt to long-term debt and increasing its operating
profit.
Liquidity for the Company predominately involves the need to finance
accounts receivables, inventory, and fixed costs. The cash flow realized from
the Company's gross profit has been sufficient to cover the Company's operating
expenses. However, the Company relies on debt and equity financing in order to
support the interest that it pays in support of financing its receivables and
inventory. The Company historically has not been able to date to completely
support its financing costs solely from operations and has relied on equity and
debt financing to bridge the gap. However, the Company was able to support its
business through cash flow from operations, which totaled $152,881 as compared
to a cash deficit of $547,485 for the prior period. The Company generated a net
loss attributable of Common Shareholders of approximately $296,000 for the first
quarter ended March 31, 2007. Financing costs totaled $586,058 and non-cash
charges totaled approximately $88,000 for the period. Reductions in financing
expenses through equity conversions and debt repayments through operating or
capital transactions have been and should continue to be beneficial to the
Company's performance.
The capital resources that were available to the Company consisted of $8.0
million in long-term notes, $2.5 million in short term notes, $3.65 million of
non-redeemable preferred stock, as of March 31, 2007. The Company's objectives
are to reduce its debt through the issuance of equity, cash flow from operation,
dispositions of assets as well as refinancing its current obligations with lower
rates. In the first quarter of 2007, the Company refinanced its $6 million
dollar senior line of credit with a $6.5 million 10 year term facility and
materially reduced its interest rate to 11.75%. However, there is no assurance
that the Company will be able to achieve its stated objectives. The Company
completed its debt refinancing in April, 2007 by paying off its short term
revolving line of credit with the additional $1.5 million note proceeds of
senior long term debt.
The Company's liquidity relies in material part on the turnover of it
inventory and accounts receivable. The Company turns its receivables on average
every 43 days and the Company has turned its overall inventory on average
approximately every 25 days. The Company believes that its collection procedures
and procurement policies are consistent with industry standards. However, nearly
60% of the Company's assets consist of trade receivables and inventory. The
Company must maintain a strict policy on insuring collections of receivables and
adequate procurement based upon customer demands to optimize its profit
potential. The Company's sales are reliant in significant part on extending
credit that ranges from 30 to 60 days. As a result, the Company must have
financing facilities that will continue to allow the Company to procure
inventory and extend accounts receivable credits. The Company has strict credit
policies and reviews; however credit extensions may pose material financial
risks to the Company. In addition the Company relies on performance incentives
from its manufacturers that are based upon sales. Provided the Company maintains
its performance standards with the Manufacturers with whom it contracts for
procurement of goods its estimates of incentives that are due should remain
accurate. However, if the respective manufactures change their policies or the
Company does not meet the manufacturers standards, incentives may be reduced.
22
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 likely continue to be subject to financial, economic and other factors
likely to be 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 and continues to be reliant
on equity and debt financing, including the Company's exchange of notes payable
for common shares and its issuance of further common and preferred stock in
private placements and the Company is hopeful that the market will continue to
recognize the Company's stature so that such financing method will continue to
be available in the future because, at least in the near future, the Company is
likely to continue to use such financing opportunities to maintain adequate cash
flow.
Expected interest payments on notes payable for the period ended March 31,
are as follows:
03/31/08 03/31/09 03/31/10 03/31/11 03/31/12 Total
$985,000 $750,000 $590,000 $486,000 $350,000 $3,161,000
Variable interest rate on notes of $450,000 was 11.25%.
Principle repayments on notes payable for the period ended March 31, are as
follows:
3/31/08 $ 2,491,000
3/31/09 $ 2,457,000
3/31/10 $ 650,000
3/31/11 $ 1,365,000
3/31/12 $ 3,791,000
------------
$10,754,000
Discounts $ (236,687)
------------
Total $10,517,313
------------
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 - 90 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, 2007, the Company has established a full valuation allowance.
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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.
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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,
2007, 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.
25
Part II - OTHER INFORMATION
Item 1A - Risk Factors
There have been no material changes to the Company's risk factors as previously
disclosed in Item 1A "Risk Factors" in our 2006 Form 10-K for the fiscal year
ended December 31, 2006.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
In January 2007, the Company issued 1,075,000 shares of common stock to Lloyd
Miller in compliance with security purchase agreement dated January 19, 2007.
Item 4 - Submission of Matters to a Vote of Security Holders There were no
submission of matters to a vote of security holders to be reported during the
three month fiscal period ended March 31, 2007.
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 were three reports filed on 8-K for the relevant period.
1) On January 22, 2007, the Company announced its entering the January 19,
2007 financing made reference to supra whereby the Company completed a $6.5
million secured financing with Lloyd I. Miller, a major shareholder and a
director of Synergy Brands for its main operating subsidiary PHS Group Inc.
The financing consisted of $6.5 million in secured term notes to be
amortized over a 5 year period, with a balloon payment of $3,250,000 in
January 2012.
2) On February 2, 2007, the Company announced that it had received notice from
NASDAQ Stock market, dated January 31, 2007 that for 30 consecutive
business days the bid price of the Registrant's common stock has closed
below the minimum $1.00 per share requirements for listing. The Registrant
has been provided until July 30, 2007 to regain compliance.
3) On April 5, 2007, the Company announced its 2006 year end financial results
disclosed in the 10K filing for 2006.
26
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Synergy Brands, Inc.
/s/ Mair Faibish
- --------------------
By: Mair Faibish
Chief Executive Officer
Date: May 15, 2007
/s/ Mitchell Gerstein
- ----------------------
By: Mitchell Gerstein
Chief Financial Officer
27
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, 2007
/s/ Mair Faibish
Mair Faibish, Chief Executive Officer
28
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, 2007
/s/ Mitchell Gerstein
Mitchell Gerstein, Chief Financial Officer
29
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, 2007 (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, 2007
/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, 2007 (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, 2007
/s/ Mitchell Gerstein
- ---------------------
Mitchell Gerstein, Chief Financial Officer
30