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 June 30, 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 August 6, 2007 there were
8,705,082 shares outstanding of the registrant's common stock.
SYNERGY BRANDS, INC.
FORM 10-Q
JUNE 30, 2007
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and
December 31, 2006 2 - 3
Consolidated Statements of Operations for the six
Months ended June 30, 2007 and 2006 (Unaudited) 4
Consolidated Statements of Operations for the three
months ended June 30, 2007 and 2006 (Unaudited) 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2007 and 2006 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-18
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-35
Item 4: Control and Procedures 36
PART II: OTHER INFORMATION
Item 1A: Risk Factors 37
Item 2: Unregistered Sales of Equity Securities and use of Proceeds 37
Item 4: Submission of Matters to a Vote of Security Holders 37
Item 6: Exhibits and Reports on Form 8-K 37
SIGNATURES AND CERTIFICATIONS
1
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2007 AND DECEMBER 31, 2006
ASSETS June 30, 2007 DECEMBER 31, 2006
(Unaudited)
Current Assets:
Cash and cash equivalents $16,554 $644,870
Accounts receivable trade, less allowance for doubtful accounts of
$127,481 for both periods 3,806,672 11,165,980
Other receivables 3,411,592 2,453,705
Note Receivable - current 305,743 344,699
Inventory 5,615,316 1,289,221
Prepaid assets and other current assets 924,905 669,908
Assets of discontinued operations 90,151 127,182
----------- -----------
Total Current Assets 14,170,933 16,695,565
Property and Equipment, net 9,648,813 252,950
Other Assets 2,111,092 909,454
Notes Receivable 1,948,929 2,207,233
Intangible Assets, net of accumulated amortization of $419,184 and $389,226 258,339 288,297
Goodwill 514,297 514,297
----------- -----------
Total Assets $28,652,403 $20,867,796
=========== ===========
The accompanying notes are an integral part of these statements.
2
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2007 AND DECEMBER 31, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 2007 December 31, 2006
(Unaudited)
Current Liabilities:
Notes Payable - Current $ 2,655,450 $ 4,196,757
Accounts Payable and Accrued Expenses 4,757,577 2,321,445
Related Party Note Payable 86,193 23,706
Deferred income 753,196 755,503
Liabilities of Discontinued Operations 47,729 112,569
------------ -----------
Total Current Liabilities 8,300,145 7,409,980
Notes Payable, net of discount of $206,175 and $313,749, respectively 13,105,692 1,960,638
Lines of credit - 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;
8,655,082 and 6,484,275 shares issued 8,655 6,484
Additional paid-in capital 48,807,323 47,252,064
Deficit (41,556,530) (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 7,246,566 5,660,250
------------ -----------
Total Liabilities and Stockholders' Equity $ 28,652,403 $ 20,867,796
============ ===========
The accompanying notes are an integral part of these statements.
3
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2007 2006
Net Sales $39,407,116 $30,557,834
----------- -----------
Cost of Sales
Cost of product 35,562,194 27,878,383
Shipping and handling costs 557,690 456,957
----------- -----------
36,119,884 28,335,340
Gross Profit 3,287,232 2,222,494
Operating expenses
Selling, general and Administrative Expenses 2,267,514 2,056,421
Depreciation and amortization 86,861 157,054
----------- -----------
2,354,375 2,213,475
----------- -----------
Operating Profit (loss) 932,857 9,019
Other Income (expense)
Interest Income 79,664 75,401
Other expense (438) (5,493)
Equity in earnings of investee 186,407 104,416
Interest and financing expense (1,103,310) (780,832)
----------- -----------
(837,677) (606,508)
----------- -----------
Profit (loss) from continuing operations before income taxes 95,180 (597,489)
Income tax expense 47,218 37,928
----------- -----------
Profit (loss) from continuing operatons 47,962 (635,417)
----------- -----------
Discontinued operations
Loss from operations of discontinued component (19,076) (58,693)
Income tax expense - 240
----------- -----------
Loss from discontinued operations (19,076) (58,933)
----------- -----------
Net Profit (loss) 28,886 (694,350)
Dividend-Preferred Stock 160,250 180,500
----------- -----------
Net loss attributable to common stockholder $ (131,364) $ (874,850)
=========== ===========
Basic and diluted net loss per common share
from continuing operations: $ ( 0.02) $ ( 0.17)
Basic and diluted net loss per common share
from discontinued operations: $ ( 0.00) $ ( 0.02)
----------- -----------
$ ( 0.02) $ ( 0.19)
----------- -----------
The accompanying notes are an integral part of these statements.
4
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
(UNAUDITED)
2007 2006
Net Sales $21,793,403 $15,679,679
----------- -----------
Cost of Sales
Cost of product 19,598,485 14,302,035
Shipping and handling costs 321,462 229,521
----------- -----------
19,919,947 14,531,556
Gross Profit 1,873,456 1,148,123
Operating expenses
Selling, general and Administrative Expenses 1,201,841 1,049,207
Depreciation and amortization 42,103 78,420
----------- -----------
1,243,944 1,127,627
----------- -----------
Operating Profit (loss) 629,512 20,496
Other Income (expense)
Interest Income 45,569 38,231
Other expense 8 (5,288)
Equity in earnings of investee 95,266 88,951
Interest and financing expense (517,252) (402,435)
----------- -----------
(376,409) (280,541)
----------- -----------
Profit (loss) from continuing operations before income taxes 253,103 (260,045)
Income tax expense 436 100
----------- -----------
Profit (loss) from continuing operatons 252,667 (260,145)
Discontinued operations
Loss from operations of discontinued component (12,863) (55,519)
Income tax expense - -
----------- -----------
Loss from discontinued operations (12,863) (55,519)
----------- -----------
Net Profit (loss) 239,804 (315,664)
Dividend-Preferred Stock 75,625 90,250
----------- -----------
Net Profit (loss) attributable to common stockholder $ 164,179 $ (405,914)
=========== ===========
Basic and diluted net profit (loss) per common share
from continuing operations: $ 0.02 $ ( 0.07)
Basic and diluted net loss per common share
from discontinued operations: $ 0.00 $ ( 0.02)
----------- -----------
$ 0.02 $ ( 0.09)
----------- -----------
The accompanying notes are an integral part of these statements.
5
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2007 2006
----------- ---------
Cash Flows From Operating Activities:
Net profit (loss) $28,886 $(694,350)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and Amortization 86,861 157,350
Amortization of financing cost 47,243 22,159
Equity in earnings of investee (186,407) (104,416)
Operating expenses paid with common stock 120,053 109,765
Changes in Operating Assets and Liabilities:
Net (increase) decrease in:
Accounts receivable and other receivables 82,617 (714,906)
Inventory (3,376,144) (1,618,803)
Prepaid assets, related party note receivable and other assets 48,327 1,851
Net increase (decrease) in:
Accounts payable, related party note payable, accrued
expenses and other current liabilities 3,219,028 2,061,507
Deferred Income (2,307) 182,874
Net assets of discontinued operations (27,809) (173,643
----------- ---------
Net cash provided by (used in) operating activities 46,348 (770,908)
Cash Flows From Investing Activities:
Purchase of fixed assets (25,148) (10,674)
Payments received on notes receivable 312,610 151,541
Issuance of notes receivable (15,350) (20,995)
Investee dividend received 28,800 28,800
Investment in investee (50,000) -
----------- ---------
Net cash provided by investing activities 250,912 148,672
----------- ---------
Cash Flows From Financing Activities:
Borrowings under line of credit 375,751 20,350,190
Repayments under line of credit (6,025,679) (19,408,345)
Proceeds from the issuance of notes payable 8,500 000 2,230,069
Repayments of notes payable (3,622,492) (724,000)
Payment of dividends (160,250) (180,500)
Payment of financing costs - (20,020)
Proceeds from issuance of common stock 7,094 226,005
----------- ---------
Net cash (used in) provided by financing activities (925,576) 2,473,399
----------- ---------
Net (decrease) increase in cash (628,316) 1,851,163
Cash and cash equivalents, beginning of period 644,870 255,483
----------- ---------
Cash and cash equivalents, end of period $ 16,554 $2,106,646
=========== =========
The accompanying notes are an integral part of these statements.
6
SYNERGY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2007 2006
------------ -------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 673,776 $ 522,261
=========== ===========
Cash paid for income taxes $ 47,218 38,168
=========== ===========
Supplement disclosures of non-cash operating, investing and
financing activities:
Debt conversion to common stock $ 543,333 $ 72,700
=========== ==========
Common Stock issued for services $ 126,053 $ 109,765
=========== ==========
Common Stock issued for financing cost $ 978,250 -
=========== ==========
In May 2007, the Company acquired property and equipment valued at $9,113,000
and inventory valued at $1,287,000. Consideration consisted of the issuance of a
$4,750,000 note and the offset of accounts receivable of $6,318,804 and accounts
payable of $720,409.
The accompanying notes are an integral part of these statements.
7
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2007 and 2006
NOTE A - UNAUDITED FINANCIAL STATEMENTS
The consolidated balance sheet as of June 30, 2007, the consolidated statements
of operations for the six months ended June 30, 2007 and 2006, the consolidated
statement of operations for the three months ended June 30, 2007 and 2006 and
the condensed consolidated statements of cash flows for six months ended June
30, 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 June 30, 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 June 30, 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 $85,000 and $ 101,000 for the six
months ended June 30, 2007 and 2006, respectively, and $63,000 and $48,000 for
the three months ended June 30, 2007 and 2006, respectively.
8
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 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 six months ended June 30, 2007,
the Company recognized $2,299,045 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 $
3,411,592 and $2,453,705 at June 30, 2007 and December 31, 2006.
NOTE E - INVENTORY
Inventory, consisting of goods held for sale, as of June 30, 2007 consisted of
the following:
Grocery, health and beauty products $5,132,272
General Merchandise 483,044
-----------
$5,615,316
============
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 June 30,
2007 was $1,486,986.
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. At June 30, 2007,
the Company recognized $15,875 of the deferred income. In May 2007, the Company
exercised 10,000 Warrants. 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 June 30, 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 June 30, 2007 was $714,286.
9
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 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 $186,407 and $104,416
during the six months ended June 30, 2007 and June 30, 2006, respectively. At
June 30, 2007, the investment in ITT is $782,902 as included in "Other Assets"
on the accompanying balance sheet.
Summarized results of operations of this investee for the six months ended June
30, 2007 and 2006 is as follows:
2007 2006
Revenues $18,149,000 $ 15,959,000
Total expenses (16,882,000) (15,292,000)
Other income 110,000 207,000
------------ -------------
Income before income taxes 1,377,000 874,000
Income tax expense (485,000) (369,000)
------------ -------------
Net income $ 892,000 $ 505,000
============ =============
NOTE H - ACQUISITION
On May 18, 2007, Quality Food Brands ("QFB") a subsidiary of Synergy Brands
Inc., leased a baking mix facility, and acquired associated assets through a
foreclosure sale contracted by Laurus Master Funds, Ltd. The aggregate purchase
price approximated $10,400,000. Laurus financed the purchase through the
issuance by QFB of a 9% secured term note in the principal amount of $4,750,000
that matures on May 18, 2012, with principal payment beginning December 1, 2007.
In addition, net accounts receivable approximating $6,300,000 were offset.
Further Laurus received a warrant to acquire up to 30% of QFB's common stock.
The tentative allocation of the assets acquired (see table below) provide QFB
with a facility to produce baking mix products to supply existing customers of
PHS.
Inventory $ 1,287,000
Property and equimpment $ 9,113,000
-----------
Total $ 10,400,000
============
In addition, the Company entered into a 20 year lease with monthly payments of
$22,833 for the first year with 5% annual increments to the end of the lease.
NOTE I - 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, allowed 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. This agreement was
terminated in April 2007. Interest accrued on outstanding borrowings at the
greater of (i) 5% per annum in excess of the prime rate or (ii) 10.50% per
annum. Outstanding borrowings were 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 six 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.
10
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2007 and 2006
NOTE I (continued)
In 2004, the Company received $490,000 pursuant to the issuance of secured
promissory notes from certain shareholders of ITT (see Note G). In April 2007,
the Company converted $198,000 of this debt into 330,000 shares of common stock.
The Company repaid $42,000 of this debt at June 30, 2007. At June 30, 2007, the
outstanding balance was $250,000.
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 $325,000 of this debt at June 30, 2007. At June
30, 2007 there is no outstanding balance.
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. In May 2007, the Company converted $133,333
of this debt into 190,476 shares of common stock. The Company repaid $276,667 of
this debt at June 30, 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 June 30, 2007,
there is no outstanding balance.
In January 2005, the Company entered into a promissory note with a major
regional bank for $1,000,000, which has been increased to $1,500,000 in June
2007. Borrowing under the note bears interest at prime (7.75% at June 30, 2007).
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. Borrowings at June 30, 2007 were
$325,000.
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. In May 2007, the Company converted
$25,000 of this debt into 35,714 shares of common stock. The Company repaid
$210,000 of this debt at June 30, 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
June 30, 2007, the outstanding balance was $175,000.
11
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 are
being 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 $288,000 of this debt at June 30, 2007. At June 30, 2007, the
outstanding balance was $1,462,000.
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. Effective April 5,
2007, Synergy Brands Inc. completed an amendment to a secured financing
agreement with Lloyd I. Miller, 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 supplemental financing has no additional equity
component. This financing retired all of the Company's debt with its primary
Lender. 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
$308,969 of this debt at June 30, 2007. At June 30, 2007, the outstanding
balance was $7,691,031.
In the fourth quarter of 2006, the Company secured $1,800,000 from shareholders
of short term financing. The outstanding balance was paid in April 2007.
NOTE J - STOCKHOLDERS' EQUITY
During the six months ended June 30, 2007, the Company converted $187,000 of
debt of the Lender into 202,120 shares of common stock. Also in 2007 Laurus
Masters Funds converted $158,333 outstanding debt into 226,190 shares of common
stock and certain shareholders of ITT converted $198,000 of debt into 330,000
shares of common stock (see Note H).
During the six months ended June 30, 2007, the Company issued 278,747 shares of
common stock as compensation for services under existing agreements and recorded
a charge to operations of $126,053. During the six months ended June 30, 2007,
the Company issued 1,103,750 shares of common stock in connection with financing
or the sale of securities and the satisfaction of certain obligations. In April
2007, 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.
There are no options outstanding with employees at June 30, 2007.
12
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2007 and 2006
NOTE K - 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 June 30, 2007 and 2006, as shown
below the segment information does not include the discontinued segment of
Proset:
Six Months Ended June 30, 2007 and 2006
PHS Group GRC Corporate Total
Revenue from external customers 2007 $ 38,567,319 $ 839,797 $ - $39,407,116
2006 $ 29,640,533 $ 917,301 $ - $30,557,834
Net Income (loss) from continuing operations 2007 $ 988,575 $ (184,389) $ (916,474) $ (112,288)
attributable to common Stockholders 2006 $ 371,727 $ (170,624) $(1,017,020) $ (815,917)
Interst & Finance Expenses 2007 $ 768,063 $ - $ 335,247 $ 1,103,310
2006 $ 547,557 $ - $ 233,275 $ 780,832
Depreciation & 2007 $ 7,242 $ 75,573 $ 4,046 $ 86,861
amortization 2006 $ 6,172 $ 78,228 $ 72,654 $ 157,054
Identifiable assets from continuing operations are as follows:
June 30, 2007 $ 22,556,337 $ 1,506,337 $ 4,499,578 $ 28,562,252
December 31, 2006 $ 15,609,833 $ 1,594,373 $ 3,536,408 $ 20,740,614
Three Months Ended June 30, 2007 and 2006
PHS Group GRC Corporate Total
Revenue from external customers 2007 $ 21,341,435 $ 451,968 $ - $ 21,793,403
2006 $ 15,153,530 $ 526,149 $ - $ 15,679,679
Net Income (loss) from continuing operations 2007 $ 729,573 $ (88,088) $ (464,443) $ 177,042
attributable to common Stockholders 2006 $ 278,128 $ (25,175) $ (603,348) $ (350,395)
Interest & Finance Expense 2007 $ 359,158 $ - $ 158,094 $ 517,252
2006 $ 254,424 $ - $ 148,011 $ 402,435
Depreciation 2007 $ 3,621 $ 36,459 $ 2,023 $ 42,103
amortization 2006 $ 2,968 $ 39,114 $ 36,338 $ 78,420
13
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2007 and 2006
NOTE L - NET INCOME (LOSS) PER SHARE
Basic and diluted income (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 536,666
and 1,410,787 for the six months ended June 30, 2007 and 2006, and for the three
months ended June 30, 2006 respectively, have been excluded from the calculation
of diluted loss per share since their effect would be antidilutive.
Six Months ended June 30,
2007 2006
Net loss applicable to common stock $ ( 131,364) $ (874,850)
Weighted-average number of shares in basic 8,015,482 4,668,406
and diluted EPS
Three Months ended June 30,
2007 2006
Net Profit (loss) applicable to common stock $ 164,179 $ (405,914)
Weighted-average number of shares basic 8,410,401 4,772,009
Weighted-average number of shares diluted 8,947,067 4,772,009
=========== ==========
14
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2007 and 2006
NOTE M - DISCONTINUED OPERATIONS
In December 2006, the Company instituted a plan to discontinue the Pro-Set
segment. Accordingly, the operating results of Proset segment for June 30, 2007
and June 30, 2006 have 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 June 30, 2007 and
December 31, 2006 and statement of cash flows.
Summarized financial information of the Proset segment as discontinued
operations for each of the periods ended as follows:
Six Months Ended
----------------
June 30, 2007 June 30, 2006
------------- -------------
Net Sales $ 9,857 $ 993,026
Cost of sales
Cost of product 6,569 756,406
Shipping and handling costs - 76,847
------------- -------------
6,569 833,253
------------- -------------
Gross Profit 3,288 159,773
Operating expenses:
General and administrative 22,364 123,187
Depreciation and amortization - 49,752
------------- -------------
22,364 172,939
Operating loss (19,076) (13,166)
Other Income (expenses):
Other income (expenses) - (450)
Interest and financing expenses - (45,077)
------------- -------------
- (45,527)
------------- -------------
Net loss before income taxes (19,076) (58,693)
Income tax expense - 240
------------- -------------
Net loss from discontinued operations $ (19,076) $ (58,933)
------------- -------------
15
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2007 and 2006
Three Months Ended
-------------------
June 30, 2007 June 30, 2006
------------- -------------
Net Sales $ 4,452 $ 500,504
Cost of sales
Cost of product 3,399 426,339
Shipping and handling costs - 42,308
------------- -------------
3,399 468,647
------------- -------------
Gross Profit 1,053 31,857
Operating expenses:
General and administrative 13,916 39,974
Depreciation and amortization - 24,876
------------- -------------
13,916 64,850
Operating loss (12,863) (32,993)
Other Income (expenses):
Interest and financing expenses - (22,526)
------------- -------------
- (22,526)
------------- -------------
Net loss before income taxes (12,863) (55,519)
Income tax expense - -
------------- -------------
Net loss from discontinued operations $ (12,863) $ (55,519)
------------- -------------
16
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2007 and 2006
NOTE M (continued)
June 30, 2007 Dec. 31, 2006
ASSETS:
CURRET ASSETS:
CASH AND CASH EQUIVALENTS $ 1,787 $ 1,782
ACCOUNTS RECEIVABLE TRADE, NET 14,165 44,632
OTHER RECEIVABLES 28,563 28,563
INVENTORY 45,636 52,205
---------- -----------
TOTAL ASSETS $ 90,151 $ 127,182
========== ============
LIABILITIES:
ACCOUNTS PAYABLE $ 47,729 $ 112,569
--------- ----------
TOTAL LIABILITIES $ 47,729 $ 112,569
--------- ----------
NOTE N - RECENT ACCOUNTING PRONOUNCEMENTS
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 June 30, 2007 and
2006, the Company did not recognize any 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 statue of
limitations by major tax jurisdictions. The Company and its subsidiaries file
income tax returns in the U.S. federal jurisdiction.
17
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2007 and 2006
NOTE N (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 fair
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.
18
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 93% 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.
On May 18, 2007 PHS acquired the assets of a baking mix manufacturing facility
through a whooly owned subsidiary that was known as Loretta Baking Mix Products
(LBMP) for a combined cost of $10.4 million.
The factors that were involved in PHS and Synergy decision to acquire LBMP
manufacturing facility consisted of many business factors including:
o PHS has secured and established business with several national chains that
have been generating substantial orders for PHS of products produced by
LBMP and there was no available replacement capability perceived by the
Company for this business. Although PHS did not own the private label
brands, the factory had the artwork, the packaging, the recipes, (inventory
assets) the configurations, governmental approvals, logistics, line design
and many strategic capabilities that allowed PHS to have a turnkey solution
and uninterrupted business. The artwork, packaging and recipes were
formulated and are owned by PHS customers.
o Baking mix facilities have to be American Baking Association (ABA)
approved. The ABA approval process and subsequent FDA approval are tedious
and time consuming. The LBMP plant was already certified for all regulatory
baking mix needs and has certifications and quality control at theoptimum
levels. This facility was already co-packing for PHS and the customers were
satisfied with the quality of the product.
19
o PHS has started to develop proprietary brands under the County Fare,
Country Value and Rich and Moist Labels. PHS has started the process of
seeking customers that may not have their own private label brands, but are
only selling baking mix national brands such as Duncan Hines. PHS has
positioned the brands that it has developed as value brands that could be
provide higher margins to the retailer than national brands, but do not
have the costs of development that a private label brand might otherwise
have. Synergy Brands believes that its market capitalization suffers
because there is no proprietary brand that Synergy Brands owns whereas
presently the Company merely distributes. Synergy believes that building
brand value may enhance shareholder value. Gaining direct manufacturing
capabilities with no delays or other possible financial hardship is
believed to be valuable.
o PHS started to develop a broker network, distributed presentations to
several national chains, and hired sales support for co-packing expansion.
Interruption of this progress would likely have reduced PHS future profits.
This facility enabled operations to continue more flawlessly. Furthermore,
controlling the facility will likely enable PHS to expand, bring new lines
into activation, run more shifts and PHS strong credit should allow it to
close deals with customers that were tenuous about the co-packing
relationship as opposed to full PHS production and manufacturing control.
o PHS plans on expanding the business in the existing facility. Since all
process approvals that have been granted are for the use of this facility,
any expansion would likely be modular and cost effective. The facility
already has the regulatory certifications to operate a baking mix
manufacturing plant and would therefore ease the process of future
expansion. The anticipated expansion is being ascertained for existing PHS
customers that PHS has been servicing for 12 months and expansion
opportunities that PHS has been developing internally.
The information systems needed to support this operation already existed within
the manufacturing process. The IT requirements as well as logistical
requirements were already in place to support PHS customers. Customers have
their own product mix that is customized to the line. Customer basically
programs the manufacturing line. This integrated process is an important part of
the manufacturing process, job order costing, quality control and motion time
study that determines capacity.
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.
20
CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007
AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2006.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
SIX MONTHS ENDED 6/30/07
Revenue $39,407,116 28.96% $ 39,407,116 28.96%
Gross Profit 3,287,232 47.91% 3,287,232 47.91%
SG&A 1,628,845 17.72% 2,267,514 10.27%
Operating Profit 1,575,572 108.85% 932,857 10243.24%
Net Profit (loss) from continuing operations
attributable to common shareholders 804,186 299.89% (112,288) -86.24%
Per share continuing operations 0.10 (0.01)
Net loss from discontinued
operations
Per share discontinued operations (19,076) -67.63
Net loss attributable (0.00)
to shareholders (131,364) -84.98%
Net loss per common share (0.02)
Interest and financing expense 768,063 40.27% 1,103,310 41.30%
SIX MONTHS ENDED 6/30/06
Revenue $30,557,834 $ 30,557,834
Gross Profit 2,222,494 2,222,494
SG&A 1,383,682 2,056,421
Operating Profit 754,412 9,019
Net Profit (loss) from continuing operations
attributable to common shareholders 201,103 (815,917)
Per share continuing operations 0.05 (0.17)
Net loss from discontinued
operations (58,933)
Per share discontinued operations (0.02)
Net loss attributable
to shareholders (874,850)
Net loss per common share (0.19)
Interest and financing expense 547,557 780,832
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 29% to $39,407,116 for the six months ended June 30,2007,
as compared to $30,557,834 for the six months ended June 30, 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 29% and gross profit increased by 48%. The Company
attained an operating profit of $932,857 for the six months ended June 30, 2007
as compared to a $9,019 operating profit for the six months ended June 30, 2006.
Selling General and Administrative expenses (SGA) increased by 10% to $2,267,514
for the six months ended June 30, 2007 as compared to $2,056,421 for the six
months ended June 30, 2006. The increase of SG&A was marginal as compared to
increased sales as well as an increase in regulatory costs on a corporate level.
SG&A expense for PHS Group increased by 25% to $1,281,544 for the six months
ended June 30, 2007 as compared to $1,023,717 for the six months ended June 30,
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. However,
revenues increased by 29% while SG&A only increased by 10% for the period.
Management believes that it may be able to increase revenue with a lower
percentage of SG&A.
21
The net loss attributable to Common Stockholders of the Company was $131,364 for
the six months ended June 30, 2007 as compared to a loss of $874,850 for the six
months ended June 30, 2006. Interest and financing costs represents 840% of the
total loss attributable to common shareholders for the six months ended June 30,
2007. Synergy Brands earned a profit of $804,186 from operations as compared to
a profit of $201,103 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 six months ended June 30, 2007 totaled $638,669,
which include legal, accounting, corporate employees, and regulatory expenses as
compared to $672,739 for the six months ended June 30, 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 30% to $38.6 million and operating profit
increased by 91% to $1,759,765. 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 decreased by 8% while
operating loss increased by 10% to $184,193. 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
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.
22
Corporate Expenses:
The Company's allocation to corporate expenses decreased by 5% to $638,669 for
the six months ended June 30, 2007 as compared to $672,739 for the six months
ended June 30, 2006. Corporate expenses represent 28% of overall operating
expense of the Company. Operating expenses for all operations including
corporate expenses totaled $2.3 million in the first six 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.
23
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
SIX MONTHS ENDED 6/30/07
Revenue $38,567,319 30.12%
Gross Profit 3,048,551 56.17%
SG&A 1,281,544 25.19%
Operating Profit 1,759,765 90.84%
Net Profit 988,575 165.94%
Interest and financing expenses 768,063 40.27%
SIX MONTHS ENDED 6/30/06
Revenue $29,640,533
Gross Profit 1,952,028
SG&A 1,023,717
Operating Profit 922,139
Net Profit 371,727
Interest and financing expenses 547,557
PHS increased its revenues by 30% to $38.6 million for six months ended June 30,
2007 as compared to $29.6 million for the six months ended June 30, 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 7.9%. PHS has been able to maintain its sales and customer base while
increasing gross profit by 56%. 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 manufacturer promotions 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 $988,575 for the six months ended June 30,
2007 as compared to a profit of $371,727 for the six months ended June 30, 2006.
24
GRAN RESERVE SEGMENT
GRC CHANGE
SIX MONTHS ENDED 6/30/07
Revenue 839,797 -8.45%
Gross Profit 238,681 -11.75%
SG&A 347,301 -3.52%
Operating loss (184,193) 9.82%
Net loss (184,389) 8.07%
SIX MONTHS ENDED 6/30/06
Revenue 917,301
Gross Profit 270,466
SG&A 359,965
Operating loss (167,727)
Net loss (170,624)
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.
25
Revenues in the Company's cigar operation decreased by 8% for the six months
ended June 30,2007 to $839,797 as compared to $917,301 for the six months ended
June 30, 2006. CAW on a current operating basis represents approximately 46% of
cigar revenues for the six months ended June 30, 2007. Gross profit for the six
months ended June 30, 2007 decreased by 12% to $238,681 as compared to $270,466
for the six months ended June 30, 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.
Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
-------------- --------------
Net Sales $9,857 $993,026
Cost of sales
Cost of product 6,569 756,406
Shipping and handling costs - 76,847
-------------- --------------
6,569 833,253
Gross Profit 3,288 159,773
Operating expenses:
General and administrative 22,364 123,187
Depreciation and amortization - 49,752
-------------- --------------
22,364 172,939
Operating loss (19,076) (13,166)
Other Income (expenses):
Other income (expenses) - (450)
Interest and financing expenses - (45,077)
-------------- --------------
- (45,527)
Net loss before income taxes (19,076) (58,693)
Income tax expense - 240
-------------- --------------
Net loss from discontinued $(19,076) $(58,933)
operations =============== =============
26
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007
AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2006.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
THREE MONTHS ENDED 6/30/07
Revenue $21,793,403 38.99% $ 21,793,403 38.99%
Gross Profit 1,873,456 63.18% 1,873,456 63.18%
SG&A 832,741 40.36% 1,201,841 14.55%
Operating Profit 1,000,635 95.15% 629,512 2971.39%
Net Profit (loss) from continuing operations
attributable to common shareholders 641,485 153.60% 177,042 150.53%
Per share continuing operations .008 0.02
Net loss from discontinued
operations (12,863) -76.83
Per share discontinued operations 0.00
Net Profit (loss) attributable
to shareholders 164,179 140.45%
Net Profit (loss) per common share 0.02
Interest and financing expense 359,158 41.17% 517,252 28.53%
THREE MONTHS ENDED 6/30/06
Revenue $15,679,679 $ 15,679,679
Gross Profit 1,148,123 1,148,123
SG&A 593,277 1,049,207
Operating Profit 512,764 20,496
Net Profit (loss) from continuing operations
attributable to common shareholders 252,953 (350,395)
Per share continuing operations 0.06 (0.07)
Net loss from discontinued
operations (55,519)
Per share discontinued operations (0.02)
Net loss attributable
to shareholders (405,914)
Net loss per common share (0.09)
Interest and financing expense 254,424 402,435
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 39% to $21,793,403 for the three months ended June
30,2007, as compared to $15,679,679 for the three months ended June 30, 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 39% and gross profit increased by 63%. The Company
attained an operating profit of $629,512 at June 30, 2007 as compared to a
operating profit of $20,496 at June 30, 2006.
Selling General and Administrative expenses (SGA) increased by 15% to $1,201,841
for the three months ended June 30, 2007 as compared to $1,049,207 for the three
months ended June 30, 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 45% to $657,554 for the
three months ended June 30, 2007 as compared to $452,526 for the three months
ended June 30, 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.
27
The net profit attributable to Common Stockholders of the Company was $164,179
for the three months ended June 30, 2007 as compared to a loss of $405,914 for
the three months ended June 30, 2006. Synergy Brands earned a profit of $641,485
from operations as compared to a profit of $252,953 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
June 30, 2007 totaled $369,100, which include legal, accounting, corporate
employees, and regulatory expenses as compared to $455,930 for the three months
ended June 30, 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 41% to $21.3 million and operating profit
increased by 104% to $1,088,731. 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 decreased by 14% while
operating loss increased by 296% to $88,096. 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.
28
Corporate Expenses:
The Company's allocation to corporate expenses was decreased by 19% to $369,100
for the three months ended June 30, 2007 as compared to $455,930 for the three
months ended June 30, 2006. Corporate expenses represent 30% of overall
operating expense of the Company. Operating expenses for all operations
including corporate expenses totaled $1.2 million for the three months ended
June 30, 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.
29
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
THREE MONTHS ENDED 6/30/07
Revenue $21,341,435 40.83%
Gross Profit 1,749,906 76.67%
SG&A 657,554 45.31%
Operating Profit 1,088,731 103.50%
Net Profit 729,573 162.32%
Interest and financing expenses 359,158 41.17%
THREE MONTHS ENDED 6/30/06
Revenue $15,153,530
Gross Profit 990,509
SG&A 452,526
Operating Profit 535,015
Net Profit 278,128
Interest and financing expenses 254,424
PHS increased its revenues by 41% to $21.3 million for three months ended June
30, 2007 as compared to $15.2 million for the three months ended June 30, 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 6.5%
to 8.2%. PHS has been able to maintain its sales and customer base while
increasing gross profit by 77%. 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 manufacturer promotions 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 $729,573 for the three months ended June 30,
2007 as compared to a profit of $278,128 for the three months ended June 30,
2006.
30
GRAN RESERVE SEGMENT
GRC CHANGE
THREE MONTHS ENDED 6/30/07
Revenue 451,968 -14.10%
Gross Profit 123,550 -21.61%
SG&A 175,187 24.47%
Operating loss (88,096) 295.92%
Net loss (88,088) 249.90%
THREE MONTHS ENDED 6/30/06
Revenue 526,149
Gross Profit 157,614
SG&A 140,751
Operating loss (22,251)
Net loss (25,175)
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.
31
Revenues in the Company's cigar operation decreased by 14% for the three months
ended June 30,2007 to $451,968 as compared to $526,149 for the three months
ended June 30, 2006. CAW on a current operating basis represents approximately
47% of cigar revenues for the three months ended June 30, 2007. Gross profit for
the three months ended June 30, 2007 decreased by 22% to $123,550 as compared to
$157,614 for the three months ended June 30, 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
June 30, 2007 June 30, 2006
----------------- ---------------
Net Sales $4,452 $500,504
Cost of sales
Cost of product 3,399 426,339
Shipping and handling costs - 42,308
----------------- ---------------
3,399 468,647
Gross Profit 1,053 31,857
Operating expenses:
General and administrative 13,916 39,974
Depreciation and amortization - 24,876
----------------- ---------------
13,916 64,850
Operating loss (12,863) (32,993)
Other Income (expenses):
Interest and financing expenses - (22,526)
----------------- ---------------
- (22,526)
----------------- ---------------
Net loss before income taxes (12,863) (55,519)
Income tax expense - -
----------------- ---------------
Net loss from discontinued $(12,863) $(55,519)
operations ================= ===============
32
LIQUIDITY AND CAPITAL RESOURCES
30-Jun 2007 2006
Working Capital $5,870,788 $ 4,836,919
Assets 28,652,403 21,603,550
Liabilities 21,405,837 14,673,887
Equity 7,246,566 6,929,663
Line of Credit Facility - 4,902,387
Receivable turnover (days) 18 46
Inventory Turnover (days) 26 17
Net cash provided by (used in) operating activies 46,348 (770,908)
Net cash provided by investing activites 250,912 148,672
Net cash (used in) provided by financing activites (925,576) 2,473,399
The Company's working capital increased by $1.0 million at June 30, 2007 to $5.9
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 $46,348 as compared to
a cash deficit of $770,908 for the prior period. The Company generated a net
loss attributable of Common Shareholders of approximately $132,000 for the six
months ended June 30, 2007. Financing costs totaled $1,103,310 and non-cash
charges totaled approximately $217,000 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 $13.1
million in long-term notes, $2.7 million in short term notes, $3.65 million of
non-redeemable preferred stock, as of June 30, 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 2007, the Company refinanced its $6 million dollar senior line of
credit with a $8.0 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's liquidity relies in material part on the turnover of it inventory
and accounts receivable. The Company turns its receivables on average every 18
days and the Company has turned its overall inventory on average approximately
every 26 days. The Company believes that its collection procedures and
procurement policies are consistent with industry standards. However, 35% 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
manufacturer change their policies or the Company does not meet the
manufacturers standards, incentives may be reduced.
33
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 June 30, are as
follows:
06/30/08 06/30/09 06/30/10 06/30/11 06/30/12 Total
$1,629,000 $1,491,000 $1,395,000 $1,353,000 $840,000 $6,708,000
Variable interest rate on note of $325,000 was 7.75%. Variable interest rate on
note of $175,000 was 11.25%.
Principal repayments on notes payable for the period ended June 30, are as
follows:
6/30/08 $ 2,657,000
6/30/09 $ 2,151,000
6/30/10 $ 1,268,000
6/30/11 $ 1,936,000
6/30/12 $ 7,956,000
-----------
$15,968,000
Discounts$ (206,858)
-----------
Total $15,761,142
=============
In April 2007 the Company entered into a 20 year lease with monthly payments of
$22,833 for the first year with annual increments to the end of the lease.
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.
34
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 June 30,
2007, the Company has established a full valuation allowance.
VALUATION OF LONG-LIVED ASSETS.
The Company reviews its long-lived assets periodically to determine potential
impairment by comparing the carrying value of the assets with expected net cash
flows expected to be provided by the operating activities of the business or
related products. Should the sum of the expected future net cash flows be less
than the carrying value, the Company would determine whether an impairment loss
should be recognized. An impairment loss would be measured by comparing the
amount by which the carrying value exceeds the fair value of the Asset.
Long-lived assets and intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. Impairment is measured by comparing the carrying value of the
long-lived assets to the estimated undiscounted future cash flows expected to
result from use of the assets and their ultimate disposition. To the extent
impairment has occurred, the carrying amount of the asset would be written down
to an amount to reflect the fair value of the asset.
SEASONALITY
Sales by PHS Group 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 a reduced operating profit.
35
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 June 30, 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.
36
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
None
Item 4 - Submission of Matters to a Vote of Security Holders
At the Company's annual meeting on June 29, 2007 the following matters were
submitted.
a) Election of the Company's board of directors, where in the following person's
were elected, such persons being all of the same persons acting as directors.
For Withheld
1. Mair Faibish 7,227,432 346,841
2. Randall Perry 7,244,608 329,665
3. Frank Bellis,Jr. 7,246,123 328,150
4. Lloyd Miller 7,245,323 328,950
5. Joel Sebastion 7,244,623 329,650
6. Bill Rancic 7,246,108 328,165
b) To elect auditors.
Where Holtz Rubenstein Reminick, LLP was elected for December 31, 2007.
For Against Abstain
7,307,131 186,596 80,544
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 four reports filed on 8-K for the relevant period.
(1) On April 10, 2007, the Company announced its amendment to its January
19, 2007 secured financing agreement with Lloyd I. Miller, a major
shareholder of Synergy Brands, Inc. whereby the Company increased its $6.5
million loan to $8.0 million.
(2) On May 15, 2007, the Company announced its first quarter, March 31,
2007 financial results disclosed in the 10Q filing for March 31, 2007.
(3) On May 23, 2007, the Company announced effective May 18, 2007, its
subsidiary Quality Foods Brands ("QFB") leased a baking mix facility from
MB Monroe Properties Inc., a Michigan corporation and acquired associated
assets of Loretta Baking Mix Products Ltd. ("LBMP") a Michigan corporation.
The aggregate purchase price paid by QFB was $4.75 million, through
issuance by QFB of a 9% secured term note in the principle amount of $4.75
million.
(4) On June 8, 2007, the Company announced its business forecasts for
fiscal 2007 at an investor conference in Boca Raton, Florida.
37
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: August 14, 2007
/s/ Mitchell Gerstein
- ----------------------------------------
By: Mitchell Gerstein
Chief Financial Officer
- -----------------------------------------
Date: August 14, 2007
38
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: August 14, 2007
/s/ Mair Faibish
Mair Faibish, Chief Executive Officer
39
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: August 14, 2007
/s/ Mitchell Gerstein
Mitchell Gerstein, Chief Financial Officer
40
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 June 30, 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: August 14, 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 June 30, 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: August 14, 2007
/s/ Mitchell Gerstein
Mitchell Gerstein, Chief Financial Officer
41