FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended September 30, 2007.
Commission File Number: 0-19409
SYNERGY BRANDS, INC.
(Exact name of registrant as it appears in its charter)
elaware 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 November 1, 2007 there
were 9,913,700 shares outstanding of the registrant's common stock.
SYNERGY BRANDS, INC.
FORM 10-Q
SEPTEMBER 30, 2007
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and
December 31, 2006 2 - 3
Consolidated Statements of Operations for the nine
Months ended September 30, 2007 and 2006 (Unaudited) 4
Consolidated Statements of Operations for the three
months ended September 30, 2007 and 2006 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2007 and 2006 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-17
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-34
Item 4: Control and Procedures 35
PART II: OTHER INFORMATION
Item 1A: Risk Factors 36
Item 2: Unregistered Sales of Equity Securities and use of Proceeds 36
Item 4: Submission of Matters to a Vote of Security Holders 36
Item 6: Exhibits and Reports on Form 8-K 36
SIGNATURES AND CERTIFICATIONS
1
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
ASSETS September 30, 2007 DECEMBER 31, 2006
(Unaudited)
Current Assets:
Cash and cash equivalents $669,111 $644,870
Accounts receivable trade, less allowance for doubtful accounts of
$127,481 for both periods 4,090,189 11,165,980
Other receivables 4,580,717 2,453,705
Note Receivable - current 308,811 344,699
Inventory 5,195,113 1,289,221
Prepaid assets and other current assets 1,383,532 669,908
Assets of discontinued operations 88,364 127,182
--------- ----------
Total Current Assets 16,315,837 16,695,565
Property and Equipment, net 9,498,899 252,950
Other Assets 2,419,130 909,454
Notes Receivable 1,725,159 2,207,233
Intangible Assets, net of accumulated amortization of $434,163 and $389,226 243,360 288,297
Goodwill 514,297 514,297
--------- ----------
Total Assets $30,716,682 $20,867,796
========= ==========
The accompanying notes are an integral part of these statements.
2
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, 2007 December 31,
(Unaudited) 2006
Current Liabilities:
Notes Payable - Current $ 4,165,771 $ 4,196,757
Accounts Payable and Accrued Expenses 4,324,132 2,321,445
Accounts Payable - Related Party 5,583 23,706
Deferred income 1,104,697 755,503
Liabilities of Discontinued Operations 54,345 112,569
---------- ---------
Total Current Liabilities 9,654,528 7,409,980
Notes Payable, net of discount of $241,647 and $313,749, respectively 12,635,273 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;
9,894,950 and 6,484,275 shares issued 9,895 6,484
Additional paid-in capital 49,543,874 47,252,064
Deficit (41,114,006) (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 8,426,881 5,660,250
---------- ---------
Total Liabilities and Stockholders' Equity $ 30,716,682 $20,867,796
========== ==========
The accompanying notes are an integral part of these statements.
3
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2007 2006
Net Sales $ 59,608,981 $ 49,165,641
------------ ------------
Cost of Sales
Cost of product 52,562,722 44,918,725
Shipping and handling costs 892,740 736,136
53,455,462 45,654,861
Gross Profit 6,153,519 3,510,780
Operating expenses
Selling, general and Administrative Expenses 3,949,199 3,130,460
Depreciation and amortization 309,563 200,921
------------ ------------
4,258,762 3,331,381
------------ ------------
Operating Profit 1,894,757 179,399
Other Income (expense)
Interest Income 116,704 113,023
Other expense (429) (9,854)
Equity in earnings of investee 294,920 176,146
Interest and financing expense (1,748,936) (1,298,079)
------------ ------------
(1,337,741) (1,018,764)
------------ ------------
Profit (loss) from continuing operations before income taxes 557,016 (839,365)
Income tax expense 53,324 43,976
------------ ------------
Profit (loss) from continuing operatons 503,692 (883,341)
------------ ------------
Discontinued operations
Loss from operations of discontinued component (32,282) (166,253)
Income tax expense - 986
------------ ------------
Loss from discontinued operations (32,282) (167,239)
------------ ------------
Net Profit (loss) 471,410 (1,050,580)
Dividend-Preferred Stock (240,375) (266,250)
------------ ------------
Net Profit (loss) attributable to common stockholder $ 231,035 $ (1,316,830)
============ ============
Basic and diluted net profit (loss) per common share
from continuing operations: $ 0.03 $ (0.24)
Basic and diluted net loss per common share
from discontinued operations: $ (0.00) $ (0.03)
------------ ------------
$ 0.03 $ (0.27)
------------ ------------
The accompanying notes are an integral part of these statements.
4
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2007 2006
Net Sales $ 20,201,865 $ 18,607,807
------------ -------------
Cost of Sales
Cost of product 17,000,528 17,040,342
Shipping and handling costs 335,050 279,179
------------ -------------
17,335,578 17,319,521
Gross Profit 2,866,287 1,288,286
Operating expenses
Selling, general and Administrative Expenses 1,681,685 1,074,039
Depreciation and amortization 222,702 43,867
------------ -------------
1,904,387 1,117,906
------------ -------------
Operating Profit 961,900 170,380
Other Income (expense)
Interest Income 37,040 37,622
Other income (expense) 9 (4,361)
Equity in earnings of investee 108,513 71,730
Interest and financing expense (645,626) (517,247)
------------ -------------
(500,064) (412,256)
------------ -------------
Profit (loss) from continuing operations before income taxes 461,836 (241,876)
Income tax expense 6,106 6,048
------------ -------------
Profit (loss) from continuing operatons 455,730 (247,924)
------------ -------------
Discontinued operations
Loss from operations of discontinued component (13,206) (107,560)
Income tax expense - 746
------------ -------------
Loss from discontinued operations (13,206) (108,306)
------------ -------------
Net Profit (loss) 442,524 (356,230)
Dividend-Preferred Stock (80,125) (85,750)
------------ -------------
Net Profit (loss) attributable to common stockholder $ 362,399 $ (441,980)
============ =============
Basic and diluted net profit (loss) per common share
from continuing operations: $ 0.04 $ (0.06)
Basic and diluted net loss per common share
from discontinued operations: $ (0.00) $ (0.02
------------ -------------)
$ 0.04 $ (0.08)
------------ -------------
The accompanying notes are an integral part of these statements.
5
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2007 2006
---------- -----------
Cash Flows From Operating Activities:
Net profit (loss) $ 471,410 $ (1,050,580)
Adjustments to reconcile net profit (loss) to net cash
used in operating activities
Depreciation and Amortization 309,563 200,921
Amortization of financing cost 96,471 30,109
Equity in earnings of investee (294,920) (176,146)
Operating expenses paid with common stock 244,694 148,156
Changes in Operating Assets and Liabilities:
Net (increase) decrease in:
Accounts receivable and other receivables (1,370,025) (2,909,276)
Inventory (2,955,941) (962,985)
Prepaid assets, related party note receivable and other assets (39,986) 229,952
Net increase (decrease) in:
Accounts payable, related party note payable, accrued
expenses and other current liabilities 2,704,973 1,696,777
Deferred Income 357,131 195,265
Net assets of discontinued operations (19,406) (41,442)
---------- -----------
Net cash used in operating activities (496,036) (2,639,249)
---------- -----------
Cash Flows From Investing Activities:
Purchase of fixed assets (82,957) (11,912)
Payments received on notes receivable 542,312 367,695
Issuance of notes receivable (24,350) (25,995)
Investee dividend received 28,800 28,800
Investment in investee (50,000) -
---------- -----------
Net cash provided by investing activities 413,805 358,588
---------- -----------
Cash Flows From Financing Activities:
Borrowings under line of credit 375,751 30,557,213
Repayments under line of credit (6,025,679) (28,537,414)
Proceeds from the issuance of notes payable 10,385,000 4,493,819
Repayments of notes payable (4,395,319) (2,104,759)
Payment of dividends (240,375) (266,250)
Payment of financing costs - (67,750)
Proceeds from issuance of common stock 7,094 269,124
Net assets of discontinued operations - (319,531)
---------- -----------
Net cash provided by financing activities 106,472 4,024,452
---------- -----------
Net increase in cash 24,241 1,743,791
Cash and cash equivalents, beginning of period 644,870 255,483
---------- -----------
Cash and cash equivalents, end of period $ 669,111 $ 1,999,274
========== ===========
The accompanying notes are an integral part of these statements.
6
SYNERGY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2007 2006
----------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,194,712 $ 818,195
=========== =========
Cash paid for income taxes $53,324 $ 44,962
========== ==========
Supplement disclosures of non-cash operating, investing and
financing activities:
Debt conversion to common stock $ 710,000 $ 223,700
========== ==========
Common Stock issued for for services $ 244,694 $ 148,156
========== ==========
Commom Stock issued for financing costs $ 978,250 -
========== ==========
In May 2007, the Company acquired property and equipment valued at $9,398,000
and inventory valued at $1,002,000. 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
SEPTEMBER 30, 2007 and 2006
NOTE A - UNAUDITED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 2007, the consolidated
statements of operations for the nine months ended September 30, 2007 and 2006,
the consolidated statement of operations for the three months ended September
30, 2007 and 2006 and the condensed consolidated statements of cash flows for
nine months ended September 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 September 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 September 30, 2007 and 2006 are not necessarily indicative of the
operating results for the respective full years.
NOTE B - ADVERTISING EXPENSE
The Company expenses advertising and promotional costs as incurred. Advertising
and promotional costs were approximately $102,000 and $ 112,000 for the nine
months ended September 30, 2007 and 2006, respectively, and $17,000 and $11,000
for the three months ended September 30, 2007 and 2006, respectively.
8
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
NOTE C - VENDOR ALLOWANCES
The Company accounts for vendor allowances under the provisions of EITF No.
02-16 "Accounting by a Customer (including a reseller) for Certain Consideration
Received from a Vendor". The Company recognizes vendor allowances at the date
goods are purchased and recorded under fixed and determined arrangements. The
Company receives allowances and credits from suppliers for volume incentives,
promotional allowances and, to a lesser extent, new product introductions, which
are typically based on contractual arrangements covering a period of one year or
less. Volume incentives and promotional allowances earned based on quantities
purchased and new product allowances are recognized as a reduction to the cost
of purchased inventory and recognized when the related inventory is sold.
Promotional allowances that are based on the sell-through of products are
recognized as a reduction of cost of sales when the products are sold for which
the promotional allowances are given. For the nine months ended September 30,
2007, the Company recognized $4,970,694 in vendor allowances that met the
criteria for being fixed and determinable. Vendor allowances included in other
receivables in the accompanying consolidated balance sheet aggregated $4,580,717
and $2,453,705 at September 30, 2007 and December 31, 2006.
NOTE D - INVENTORY
Inventory, consisting of goods held for sale, as of September 30, 2007 consisted
of the following:
Grocery, health and beauty products $3,983,673
General Merchandise 469,717
Raw Materials 741,723
---------
$5,195,113
=========
NOTE E - 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. The balance of the note receivable at September 30, 2007 was $1,411,691.
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 September 30,
2007, the Company recognized $23,813 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. In 2007, $285,714 was paid by ITT to reduce the loan balance.
As of September 30, 2007 the outstanding loan balance was $571,429. As part of
the Company's agreement, the Company has paid $428,571 on the note payable. The
outstanding balance of the note payable at September 30, 2007 was $571,429
Note receivable from other parties, originating in the normal course of
business, approximated $51,000 at September 30, 2007.
9
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
NOTE F - 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 $294,920 and $176,146
during the nine months ended September 30, 2007 and September 30, 2006,
respectively. At September 30, 2007, the investment in ITT is $891,415 as
included in "Other Assets" on the accompanying balance sheet.
Summarized results of operations of this investee for the nine months ended
September 30, 2007 and 2006 is as follows:
2007 2006
Revenues $ 27,860,000 $ 24,949,000
Total expenses (26,000,000) (23,826,000)
Other income 265,000 195,000
Income before income taxes 2,125,000 1,318,000
Income tax expense (691,000) (487,000)
Net income $ 1,434,000 $ 831,000
NOTE G - ASSET ACQUISITION
On May 18, 2007, Quality Food Brands ("QFB") a wholly owned a subsidiary of
Synergy Brands Inc., leased a baking mix facility, and acquired associated
assets through a foreclosure sale contracted by a secured lender. The aggregate
purchase price approximated $10,400,000. The Lender 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,
and account payable of $720,000 were offset. Further the lender 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 $ 1,002,000
Property, equipment and leasehold $ 9,398,000
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.
Further the Company has issued the landlord 400,000 shares of Synergy's common
stock in lieu of a security deposit.
NOTE H - NOTES PAYABLE
The Company financed a series of secured notes with IIG (lender) since 2002. The
Company's largest shareholder Lloyd I. Miller has refinanced these notes during
2007.
The Company financed a series of secured notes with certain shareholders of ITT
since 2004. The outstanding balance as of September 30, 2007 was $850,000.
$250,000 matures in February 2008 and $600,000 matures in April 2008.
10
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
NOTE H (continued)
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
September 2007. Borrowing under the note bears interest at prime (7.25% at
September 30, 2007). The Company is not required to repay any principal until
the maturity date of the note, June 1, 2008. As security for the note, a pledge
agreement was entered by certain Shareholders of ITT. Borrowings at September
30, 2007 were $400,000.
In October 2005, the Company invested $1 million in a Private Placement Senior
Subordinated Debentures issued by ITT. The Company financed this investment with
a $1 million fully recourse 5 year, 8% note with a major shareholder. The
outstanding blance of the note at September 30, 2007 was $571,429.
The Company financed a series of secured Notes with Laurus Master Funds (LMF).
The Company has paid off certain series of notes through loan repayments and
equity conversions. The remaining note was originally issued in the amount of
$1.75 million on March 14, 2006 with a fixed rate of 10%. The note has a three
year term. The balance of the note at September 30, 2007, net of discount
approximated $1,190,000.
On April 15, 2007, Synergy Brands Inc. completed a $8.0 million secured
financing with Lloyd I. Miller, a major shareholder and a director of Synergy
Brands, for its main operating subsidiary PHS Group Inc. The financing consisted
of long term notes to be amortized over a 5 year period, with a balloon payment
of $4,000,000 in January 2012 at an interest rate of 11.75%. This financing
retired all of the Company's debt with IIG. The agreement further involved a
securities purchase agreement, under which there was issued 1,075,000 common
shares of Synergy Brands to Lloyd Miller as a financing cost and all warrants
beneficially owned by Mr. Miller were retired. The Company repaid $509,604 of
this debt at September 30, 2007. At September 30, 2007, the outstanding balance
was approximately $7,490,000.
The Company financed an asset acquisition through the issuance by QFB of a 9%
secured loan in the principle amount of $4,750,000 that matures on May 18, 2012,
with principle payment beginning December 1, 2007.
In the fourth quarter of 2006, the Company secured $1,800,000 from shareholders
for short term financing. The outstanding balance was paid in April 2007. In
July 2007, the Company secured $1,500,000 from shareholders of short term
financing bearing interest at 8% that matures in the first quarter of 2008. The
balance of the notes at September 30, 2007, net of discount approximated
$1,549,000.
NOTE I - STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2007, the Company issued 3,410,675
shares of common stock in connection with financing, the sale of securities,
conversions of debt to equity, services and dividends in connection with Class B
Preferred Stock valued at $2,580,595.
There are no options outstanding with employees at September 30, 2007.
11
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
NOTE J - SEGMENT AND GEOGRAPHICAL INFORMATION
The Company offers a broad range of Internet access services and related
products to businesses and consumers throughout the United States and Canada.
Management evaluates the various segments of the Company based on the types of
products being distributed, which were, as of September 30, 2007 and 2006, as
shown below the segment information does not include the discontinued segment of
Proset:
Nine Months Ended September 30, 2007 and 2006
PHS Group GRC Corporate Total
Revenue from external customers 2007 $ 58,354,145 $1,254,836 $ $59,608,981
Revenue from external customers 2006 $ 47,720,070 $1,445,571 $ - $49,165,641
Net Income (loss from continuing operation 2007 $ 1,981,926 $ (266,316) $(1,452,293) $ 263,317
attributable to common Stockholders 2006 $ 638,005 $ (222,716) $(1,564,880) $(1,149,591)
Interest & Finance Expenses 2007 $ 1,264,120 $ - $ 484,816 $ 1,748,936
2006 $ 871,995 $ - $ 426,084 $ 1,298,079
Depreciation & 2007 $ 207,881 $ 95,613 $ 6,069 $309,563
amortization 2006 $ 8,902 $ 117,342 $ 74,677 $200,921
Identifiable assets from continuing operations are as follows:
September 30, 2007 $ 24,576,139 $ 1,452,539 $ 4,599,640 $ 30,628,318
December 31, 2006 $ 15,609,833 $ 1,594,373 $ 3,536,408 $ 20,740,614
Three Months Ended September 30, 2007 and 2006
PHS Group GRC Corporate Total
Revenue from external customers 2007 $ 19,786,826 $ 415,039 $ - $ 20,201,865
Revenue from external customers 2006 $ 18,079,537 $ 528,270 $ - $ 18,607,807
Net Income (loss) from continuing operaitons 2007 $ 993,351 $ (81,927) $ (535,819) $ 375,605
attributable to common Stockholders 2006 $ 266,278 $ (52,092) $ (547,860) $ (333,674)
Interest & Finance Expenses 2007 $ 496,057 $ - $ 149,569 $ 645,626
2006 $ 324,438 $ - $ 192,809 $ 517,247
Depreciation & 2007 $ 200,639 $ 20,040 $ 2,023 $ 222,702
amortization 2006 $ 2,730 $ 39,114 $ 2,023 $ 43,867
12
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
NOTE K - 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 186,844
and 1,391,725 for the nine months ended September 30, 2006, and for the three
months ended September 30, 2006 respectively, have been excluded from the
calculation of diluted loss per share since their effect would be antidilutive.
Nine Months ended September 30,
2007 2006
------------ --------------
Net profit (loss) applicable to common stock $ 231,035 $ (1,316,830)
============= ==============
Weighted-average number of shares basic 8,473,619 4,825,426
============= ==============
Weighted-average number of shares - diluted 9,050,844 4,825,426
============= ==============
Three Months ended September 30,
2007 2006
------------ --------------
Net Profit (loss) applicable to common stock $ 362,399 $ (441,980)
============= ==============
Weighted-average number of shares basic 9,374,628 5,134,348
============= ==============
Weighted-average number of shares - diluted 9,634,914 5,134,348
============= ==============
13
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
L - DISCONTINUED OPERATIONS
In December 2006, the Company instituted a plan to discontinue the Pro-Set
segment. Accordingly, the operating results of Proset segment for September 30,
2007 and September 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 September
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:
Nine Months Ended
-----------------
September 30, 2007 September 30, 2006
------------------- ------------------
Net Sales $9,857 $ 1,223,561
Cost of sales
Cost of product 6,569 969,860
Shipping and handling costs 7,742 100,459
------- ----------
14,311 1,070,319
Gross Profit (4,454) 153,242
Operating expenses:
General and administrative 27,828 181,193
Depreciation and amortization - 74,628
------- ----------
27,828 255,821
Operating loss (32,282) (102,579)
Other Income (expenses):
Other income (expenses) - (958)
Interest and financing expenses - (62,716)
------- ----------
- (63,674)
------- ----------
Net loss before income taxes (32,282) (166,253)
Income tax expense - 986
------- ----------
Net loss from discontinued operations $ (32,282) $ (167,239)
======= ==========
14
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
Three Months Ended
------------------
September 30, 2007 September 30, 2006
------------------ ------------------
Net Sales $ - $ 230,535
Cost of sales
Cost of product - 213,454
Shipping and handling costs 7,742 23,612
------- ----------
7,742 237,066
Gross Profit (7,742) (6,531)
Operating expenses:
General and administrative 5,464 58,006
Depreciation and amortization - 24,876
------- ----------
5,464 82,882
Operating loss (13,206) (89,413)
Other Income (expenses):
Other income (expenses) - (508)
Interest and financing expenses - (17,639)
------- ----------
- (18,147)
Net loss before income taxes (13,206) (107,560)
Income tax expense - 746
------- ----------
Net loss from discontinued operations $ (13,206) $ (108,306)
======= ==========
15
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
NOTE L (continued)
September 30, 2007 Dec. 31, 2006
------------------ --------------
ASSETS:
CURRET ASSETS:
CASH AND CASH EQUIVALENTS $ - $ 1,782
ACCOUNTS RECEIVABLE TRADE, NET 14,165 44,632
OTHER RECEIVABLES 28,563 28,563
INVENTORY 45,636 52,205
-------- -----------
TOTAL ASSETS $ 88,364 $ 127,182
======== ===========
LIABILITIES:
ACCOUNTS PAYABLE $ 54,345 $ 112,569
-------- ---------
TOTAL LIABILITIES $ 54,345 $ 112,569
======== =========
NOTE M - 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 September, 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 and nine months ended September
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.
16
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2007 and 2006
NOTE M (continued)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of SFAS 115"
(SFAS No. 159). The new statement allows entities to choose, at specified
election dates, to measure eligible financial assets and liabilities at 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.
17
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 95% 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 wholly 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 for 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 the optimum
levels. This facility was already co-packing for PHS and the customers were
satisfied with the quality of the product.
18
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
provide higher margins to the retailer then 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 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 have reduced PHS future profits. This
facility enabled operations to likely continue more flawlessly.
Furthermore, controlling the facility will likely enables 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.
o 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. A 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.
19
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2006.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
NINE MONTHS ENDED 9/30/07
Revenue $59,608,981 21.24% $ 59,608,981 21.24%
Gross Profit 6,153,519 75.27% 6,153,519 75.27%
SG&A 2,864,613 37.26% 3,949,199 26.15%
Operating Profit 2,985,412 130.09% 1,894,757 956.17%
Net Profit (loss) from continuing operations
attributable to common shareholders 1,715,610 313.11% 263,317 122.91%
Per share continuing operations 0.21 0.03
Net loss from discontinued
operations (32,282) -80.70%
Per share discontinued operations (0.00)
Net profit (loss) attributable
to shareholders 231,035 117.54%
Net profit (loss) per common share 0.03
Interest and financing expense 1,264,120 44.97% 1,748,936 34.73%
NINE MONTHS ENDED 9/30/06
Revenue $49,165,641 $ 49,165,641
Gross Profit 3,510,780 3,510,780
SG&A 2,087,064 3,130,460
Operating Profit 1,297,472 179,399
Net Profit (loss) from continuing operations
attributable to common shareholders 415,289 (1,149,591)
Per share continuing operations 0.09 (0.24)
Net loss from discontinued
operations (167,239)
Per share discontinued operations (0.03)
Net loss attributable
to shareholders (1,316,830)
Net loss per common share (0.27)
Interest and financing expense 871,995 1,298,079
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 21% to $59,608,981 for the nine months ended
September 30,2007, as compared to $49,165,641 for the nine months ended
September 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 21% and gross profit increased by 75%. The
Company attained an operating profit of $1,894,757 for the nine months ended
September 30, 2007 as compared to a $179,399 operating profit for the nine
months ended September 30, 2006.
Selling General and Administrative expenses (SGA) increased by 26% to
$3,949,199 for the nine months ended September 30, 2007 as compared to
$3,130,460 for the nine months ended September 30, 2006. The increase in SG&A by
26% resulted from increases in certain variable costs that correlate to
increases in revenue. SG&A expense for PHS Group increased by 51% to $2,344,320
for the nine months ended September 30, 2007 as compared to $1,549,490 for the
nine months ended September 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. Management believes that it may be able to increase revenue with
a lower percentage of SG&A.
20
The net profit attributable to Common Stockholders of the Company was
$231,035 for the nine months ended September 30, 2007 as compared to a loss of
$1,316,830 for the nine months ended September 30, 2006. Synergy Brands earned
an operating profit of $2,985,412 from operations as compared to an operating
profit of $1,297,472 for the same period last year. Corporate expenses for the
nine months ended September 30, 2007 totaled $1,084,586, which include legal,
accounting, corporate employees, and regulatory expenses as compared to
$1,043,396 for the nine months ended September 30, 2006. 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.
Below is a summary of the results of operation by segment:
PHS Group: (Grocery and HBA operations)
Synergy's Grocery and HBA business known as PHS Group improved its
operation through an expansion of its direct store delivery and private label
wholesale and distribution operations. Sales for this segment during this period
improved by 22% to $58.3 million and operating profit increased by 115% to
$3,251,541. 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 nine months period decreased by
13% while operating loss increased by 23% to $266,129. 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
2008. 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.
21
Corporate Expenses:
The Company's allocation to corporate expenses increased by 4% to
$1,084,586 for the nine months ended September 30, 2007 as compared to
$1,043,396 for the nine months ended September 30, 2006. Corporate expenses
represent 27% of overall operating expense of the Company. Operating expenses
for all operations including corporate expenses totaled $3.9 million in the
first nine 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.
22
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
NINE MONTHS ENDED 9/30/07
Revenue 58,354,145 22.28%
Gross Profit 5,803,742 88.89%
SG&A 2,344,320 51.30%
Operating Profit 3,251,541 114.74%
Net Profit 1,981,926 210.64%
Interest and financing expenses 1,264,120 44.97%
NINE MONTHS ENDED 9/30/06
Revenue 47,720,070
Gross Profit 3,072,591
SG&A 1,549,490
Operating Profit 1,514,199
Net Profit 638,005
Interest and financing expenses 871,995
PHS increased its revenues by 22% to $58.3 million for nine months ended
September 30, 2007 as compared to $47.7 million for the nine months ended
September 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 6.4% to 9.9%. PHS has been able to maintain its
sales and customer base while increasing gross profit by 89%. 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. Any material changes in manufacturer
promotional rebate policies may have an adverse effect on PHS's cost of goods.
Continuing the development of private label grocery products produced for the
benefit of PHS customers is another objective currently being developed and
executed by PHS as well as designing brands labels controlled by PHS. Net profit
was $1,981,926 for the nine months ended September 30, 2007 as compared to a
profit of $638,005 for the nine months ended September 30, 2006. The increased
net profit resulted from a higher gross profit realized by PHS through the sale
of higher margin items and items with increased promotional allowances.
23
GRAN RESERVE SEGMENT
GRC CHANGE
NINE MONTHS ENDED 9/30/07
Revenue $ 1,254,836 -13.19%
Gross Profit 349,777 -20.18%
SG&A 520,293 -3.21%
Operating loss (266,129) 22.79%
Net loss (266,316) 19.58%
NINE MONTHS ENDED 9/30/06
Revenue 1,445,571
Gross Profit 438,189
SG&A 537,574
Operating loss (216,727)
Net loss (222,716)
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 September 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.
24
Revenues in the Company's cigar operation decreased by 13% for the nine
months ended September 30,2007 to $1,254,836 as compared to $1,445,571 for the
nine months ended September 30, 2006. CAW on a current operating basis
represents approximately 47% of cigar revenues for the nine months ended
September 30, 2007. Gross profit for the nine months ended September 30, 2007
decreased by 20% to $349,777 as compared to $438,189 for the nine months ended
September 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.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ -------------------
Net Sales $9,857 $1,223,561
Cost of sales
Cost of product 6,569 969,860
Shipping and handling costs 7,742 100,459
------- ----------
14,311 1,070,319
Gross Profit (4,454) 153,242
Operating expenses:
General and administrative 27,828 181,193
Depreciation and amortization - 74,628
------- ----------
27,828 255,821
Operating loss (32,282) (102,579)
Other Income (expenses):
Other income (expenses) - (958)
Interest and financing expenses - (62,716)
------- ----------
- (63,674)
Net loss before income taxes (32,282) (166,253)
Income tax expense - 986
------- ----------
Net loss from discontinued
operations $ (32,282) $(167,239)
========== ==========
25
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007
AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2006.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
THREE MONTHS ENDED 9/30/07
Revenue $20,201,865 8.57% $ 20,201,865 8.57%
Gross Profit 2,866,287 122.49% 2,866,287 122.49%
SG&A 1,235,768 75.69% 1,681,685 56.58%
Operating Profit 1,409,840 159.61% 961,900 464.56%
Net Profit (loss) from continuing operations
attributable to common shareholders 911,424 325.53% 375,605 212.57%
Per share continuing operations 0.10 0.04
Net loss from discontinued
operations (13,206) -87.81%
Per share discontinued operations (0.00)
Net Profit (loss) attributable
to shareholders 362,399 181.99%
Net Profit (loss) per common share 0.04
Interest and financing expense 496,057 52.90% 645,626 24.82%
THREE MONTHS ENDED 9/30/06
Revenue $18,607,807 $ 18,607,807
Gross Profit 1,288,286 1,288,286
SG&A 703,382 1,074,039
Operating Profit 543,060 170,380
Net Profit (loss) from continuing operations
attributable to common shareholders 214,186 (333,674)
Per share continuing operations 0.03 (0.06)
Net loss from discontinued
operations (108,306)
Per share discontinued operations (0.02)
Net loss attributable
to shareholders (441,980)
Net loss per common share (0.08)
Interest and financing expense 324,438 517,247
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 9% to $20,201,865 for the three months ended
September 30,2007, as compared to $18,607,807 for the three months ended
September 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 9% and gross profit increased by 122%. The
Company attained an operating profit of $961,900 for the three months ended
September 30, 2007 as compared to an operating profit of $170,380 for the three
months ended September 30, 2006.
Selling General and Administrative expenses (SGA) increased by 57% to
$1,681,685 for the three months ended September 30, 2007 as compared to
$1,074,039 for the three months ended September 30, 2006. The increase in SG&A
by 57% resulted from increases in certain variable costs that correlate to
increases in revenue. SG&A expense for PHS Group increased by 102% to $1,062,776
for the three months ended September 30, 2007 as compared to $525,773 for the
three months ended September 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.
26
The net profit attributable to Common Stockholders of the Company was
$362,399 for the three months ended September 30, 2007 as compared to a loss of
$441,980 for the three months ended September 30, 2006. Synergy Brands earned an
operating profit of $1,409,840 from operations as compared to an operating
profit of $543,060 for the same period last year. Corporate expenses for the
three months ended September 30, 2007 totaled $445,917, which include legal,
accounting, corporate employees, and regulatory expenses as compared to $370,657
for the three months ended September 30, 2006. 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.
Below is a summary of the results of operation by segment:
PHS Group: (Grocery and HBA operations)
Synergy's Grocery and HBA business known as PHS Group improved its
operation through an expansion of its direct store delivery and private label
wholesale and distribution operations. Sales improved by 9% to $19.8 million and
operating profit increased by 152% to $1,491,776. 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 three months period decreased by
21% while operating loss increased by 67% to $81,936. 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 2008. 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.
27
Corporate Expenses:
The Company's allocation to corporate expenses increased by 20% to $445,917
for the three months ended September 30, 2007 as compared to $370,657 for the
three months ended September 30, 2006. Corporate expenses represent 27% of
overall operating expense of the Company. Operating expenses for all operations
including corporate expenses totaled $1.7 million for the three months ended
September 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.
28
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
THREE MONTHS ENDED 9/30/07
Revenue 19,786,826 9.44%
Gross Profit 2,755,191 145.88%
SG&A 1,062,776 102.14%
Operating Profit 1,491,776 151.96%
Net Profit 993,351 273.05%
Interest and financing expenses 496,057 52.90%
THREE MONTHS ENDED 9/30/06
Revenue 18,079,537
Gross Profit 1,120,563
SG&A 525,773
Operating Profit 592,060
Net Profit 266,278
Interest and financing expenses 324,438
PHS increased its revenues by 9% to $19.8 million for three months ended
September 30, 2007 as compared to $18.0 million for the three months ended
September 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 6.2% to 13.9%. PHS has been able to maintain
its sales and customer base while increasing gross profit by 146%. 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. Any material changes in manufacturer
promotional rebate policies may have an adverse effect on PHS's cost of goods.
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 $993,351 for the three months ended September 30, 2007 as
compared to a profit of $266,278 for the three months ended September 30, 2006.
The increased net profit resulted from a higher gross profit realized by PHS
through the sale of higher margin items and items with increased promotional
allowances.
29
GRAN RESERVE SEGMENT
GRC CHANGE
THREE MONTHS ENDED 9/30/07
Revenue 415,039 -21.43%
Gross Profit 111,096 -33.76%
SG&A 172,992 -2.60%
Operating loss (81,936) 67.22%
Net loss (81,927) 57.27%
THREE MONTHS ENDED 9/30/06
Revenue 528,270
Gross Profit 167,723
SG&A 177,609
Operating loss (49,000)
Net loss (52,092)
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 September 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.
30
Revenues in the Company's cigar operation decreased by 21% for the three
months ended September 30,2007 to $415,039 as compared to $528,270 for the three
months ended September 30, 2006. CAW on a current operating basis represents
approximately 48% of cigar revenues for the three months ended September 30,
2007. Gross profit for the three months ended September 30, 2007 decreased by
34% to $111,096 as compared to $167,723 for the three months ended September 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
September 30, 2007 September 30, 2006
------------------ ------------------
Net Sales - $230,535
Cost of sales
Cost of product - 213,454
Shipping and handling costs 7,742 23,612
--------- ---------
7,742 237,066
Gross Profit (7,742) (6,531)
Operating expenses:
General and administrative 5,464 58,006
Depreciation and amortization - 24,876
--------- ---------
5,464 82,882
Operating loss (89,413)
Other Income (expenses):
Other income (expenses) - (508)
Interest and financing expenses - (17,639)
--------- ---------
- (18,147)
Net loss before income taxes (13,206) (107,560)
Income tax expense - 746
--------- ---------
Net loss from discontinued
operations $ (13,206) $(108,306)
=========== ==========
31
LIQUIDITY AND CAPITAL RESOURCES
September 30, 2007 2006
Working Capital $6,661,309 $ 4,681,656
Assets 30,716,682 22,780,204
Liabilities 22,289,801 15,863,401
Equity 8,426,881 6,916,803
Line of Credit Facility - 5,929,341
Receivable turnover (days) 19 56
Inventory Turnover (days) 24 12
Net cash provided by (used in) operating activies (496,036) (2,639,246)
Net cash provided by investing activites 413,805 358,588
Net cash (used in) provided by financing activites 106,472 4,024,452
The Company's working capital increased by $2.0 million at September 30,
2007 to $6.7 million due to a combination of several factors including
amortization of debt, refinancing of short term debt to long term debts and
operating profits from PHS Group. The Company plans to further improve its
working capital through conversion of short-term debt to long-term debt and
increasing its operating profit.
Liquidity for the Company predominately involves the need to finance
accounts receivables, inventory, and fixed costs. The cash flow realized from
the Company's gross profit has been sufficient to cover the Company's operating
expenses. However, the Company relies on debt and equity financing in order to
support the interest that it pays in support of financing its receivables and
inventory. The Company historically has not been able to date to completely
support its financing costs solely from operations and has relied on equity and
debt financing to bridge the gap. The Company improved its cash flow from
operating activities by $2.1 million. The Company generated a net profit
attributable of Common Shareholders of approximately $231,000 for the nine
months ended September 30, 2007. Financing costs totaled $1,748,936 and non-cash
charges totaled approximately $558,000 for the period. Reductions in certain
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 $12.6
million in long-term notes, $4.2 million in short term notes, $3.65 million of
non-redeemable preferred stock, as of September 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 19 days and the Company has turned its overall inventory on average
approximately every 24 days. The Company believes that its collection procedures
and procurement policies are consistent with industry standards. However, 30% 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 and
may cause a material problem for the company.
32
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 September
30, are as follows:
09/30/08 09/30/09 09/30/10 09/30/11 09/30/12 Total
$1,550,000 $1,420,000 $1,350,000 $1,300,000 $570,000 $6,190,000
Variable interest rate on note of $400,000 was 7.25%.
Principal repayments on notes payable for the period ended September 30,
are as follows:
9/30/08 $ 4,217,000
9/30/09 $ 2,069,000
9/30/10 $ 1,178,000
9/30/11 $ 1,779,000
9/30/12 $ 7,800,000
$17,043,000
Discounts and rounding $ (241,956)
Total $16,801,044
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.
33
VALUATION OF DEFERRED TAX ASSETS.
Deferred tax assets and liabilities represent temporary differences between
the basis of assets and liabilities for financial reporting purposes and tax
purposes. Deferred tax assets are primarily comprised of reserves, which have
been deducted for financial statement purposes, but have not been deducted for
income tax purposes as well as net operating loss carry forwards. The Company
annually reviews the deferred tax asset accounts to determine if is appears more
likely than not that the deferred tax assets will be fully realized. At
September 30, 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. 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.
34
Item 4-Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial
Officer, have evaluated our disclosure controls and procedures as of and have
found such to be effective as of the end of the period covered by this report.
Under rules promulgated by the SEC, disclosure controls and procedures are
defined as those controls or other procedures of an issuer that are designed to
ensure that information required to be disclosed by the issuer in the reports
filed or submitted by it under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Based on the evaluation of our disclosure controls and
procedures, management determined that such controls and procedures were
effective in timely alerting them to material information relating to the
Company (including its Consolidated Subsidiaries) required to be included in the
Company's periodic reports.
Further, there were no significant changes in the internal controls or in other
factors that could significantly affect these controls after September 30, 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.
35
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
There were no submissions of matters to a vote of security holders during the
three month fiscal period ended September 30, 2007 except for consent in writing
of a majority of shareholders authorizing the Company to increase its authorized
stock available for issuance by the Company signed September 10, 2007 by
shareholders holding 55% of then outstanding votes, followed by a shareholder
mailing of notice of such consent and the Company also filed a 14A Information
Statement with the Commission regarding such action.
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 February 2, 2007, the Company announced that it had received notice from
NASDAQ Stock Market, dated January 31, 2007, that for 30 consecutive business
days the bid price of the Registrant's common stock has closed below the minimum
$1.00 per share requirements for listing. On August 1, 2007, the Company was
granted a 180 day extension until January 28, 2008 to seek such compliance.
2) On August 14, 2007, the Company announced its second quarter, June 30, 2007
financial results disclosed in the 10Q filing for June 30, 2007.
3) On August 14, 2007, the Company announced that NASDAQ had notified the
Company that it has met all listing requirements for continued listing on the
NASDAQ Capital Market.
4) On October 2, 2007, the Company announced that it had received notice from
NASDAQ Stock Market dated September 28, 2007, that for 30 consecutive days, the
bid price of the Registrant's common stock has closed below the minimum $1.00
per share requirements for listing. The Registrant has been provided until March
26, 2008 to regain compliance. Subsequently the Company received NASDAQ notice
of compliance and filed a subsequent 8K on October 17, 2007.
36
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: November 14, 2007
/s/ Mitchell Gerstein
----------------------
Mitchell Gerstein
Chief Financial Officer
Date: November 14, 2007
37
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: November 14, 2007
/s/ Mair Faibish
Mair Faibish, Chief Executive Officer
38
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: November 14, 2007
/s/ Mitchell Gerstein
Mitchell Gerstein, Chief Financial Officer
39
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of
Synergy Brands Inc., (the "Company"), hereby certify that the Quarterly Report
on Form 10-Q of the Company for the quarterly period ended September 30, 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: November 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 September 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: Novemberr 14, 2007
/s/ Mitchell Gerstein
Mitchell Gerstein, Chief Financial Officer
40