FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended March 31, 2008.
Commission File Number: 0-19409
SYNERGY BRANDS, INC.
(Exact name of registrant as it appears in its charter)
Delaware 22-2993066
(State of incorporation) (I.R.S. Employer identification no.)
223 Underhill Blvd. Syosset NY 11791
(Address of principal executive offices)
516-714-8200
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] YES [ ] NO
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Smaller Reporting Company [x]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
[ ] YES [ x ] NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. N/A
[ ] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On May 9, 2008 there were
11,894,838 shares outstanding of the registrant's common stock.
SYNERGY BRANDS, INC.
FORM 10-Q
MARCH 31, 2008
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and
December 31, 2007 2 - 3
Consolidated Statements of Operations for the three
Months ended March 31, 2008 and 2007 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2008 and 2007 (Unaudited) 5 - 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 14
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 - 23
Item 4: Control and Procedures 24
PART II: OTHER INFORMATION
Item 1A: Risk Factors 25
Item 2: Unregistered Sales of Equity Securities and use of Proceeds 25
Item 4: Submission of Matters to a Vote of Security Holders 25
Item 6: Exhibits and Reports on Form 8-K 25
SIGNATURES AND CERTIFICATIONS 26
1
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 AND DECEMBER 31, 2007
ASSETS March 31, 2008 December 31, 2007
(Unaudited)
Current Assets:
Cash and cash equivalents $455,652 $488,475
Accounts receivable trade, less allowance for doubtful
accounts of $127,481 4,580,857 3,798,291
Other receivables 5,751,703 5,038,607
Note Receivable - current 357,539 356,909
Inventory 3,674,074 2,983,770
Prepaid assets and other current assets 1,257,361 3,231,673
Assets of discontinued operations 605,900 848,778
----------- -------------
Total Current Assets 16,683,086 16,746,503
Property and Equipment, net 10,031,564 10,109,139
Other Assets 2,982,244 2,979,188
Notes Receivable 1,405,360 1,605,260
----------- -------------
Total Assets $31,102,254 $31,440,090
=========== =============
The accompanying notes are an integral part of these statements.
2
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 AND DECEMBER 31, 2007
LIABILITIES AND STOCKHOLDERS' EQUITY March 31,2008 December 31, 2007
(Unaudited)
Current Liabilities:
Notes Payable - Current $ 5,444,516 $ 4,199,348
Accounts Payable and Accrued Expenses 4,989,404 5,573,914
Deferred income 968,021 437,776
Liabilities of Discontinued Operations 205,900 181,766
------------ -----------------
Total Current Liabilities 11,607,841 10,392,804
Notes Payable, net of discount $506,217 and $587,105, respectively 10,847,267 12,027,080
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;
11,846,088 and 11,328,764 shares issued 11,846 11,329
Additional paid-in capital 50,875,869 50,712,481
Deficit (42,227,687) (41,690,722)
Accumulated other comprehensive loss (8,340) (8,340)
Less treasury stock, at cost, 1,000 shares (5,000) (5,000)
------------ -----------------
Total stockholders' equity 8,647,146 9,020,206
------------ -----------------
Total Liabilities and Stockholders' Equity $31,102,254 $31,440,090
============ =================
The accompanying notes are an integral part of these statements.
3
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2008 2007
Net Sales $ 20,425,149 $ 17,197,190
------------ -------------
Cost of Sales
Cost of product 17,970,738 15,698,047
Shipping and handling costs 409,810 216,535
------------ -------------
18,380,548 15,914,582
Gross Profit 2,044,601 1,282,608
Operating expenses
Selling, general and Administrative Expenses 1,668,837 883,776
Depreciation and amortization 151,228 5,644
------------ -------------
1,820,065 889,420
------------ -------------
Operating Profit 224,536 393,188
Other Income (expense)
Interest Income 32,395 34,095
Other expense - (242)
Equity in earnings of investee 81,710 91,141
Interest and financing expense (596,741) (586,058)
------------ -------------
(482,636) (461,064)
------------ -------------
Loss from continuing operations before income taxes (258,100) (67,876)
Income tax expense 20,766 46,782
------------ -------------
Loss from continuing operatons (278,866) (114,658)
------------ -------------
Discontinued operations
Loss from operations of discontinued components (including impairment loss of $200,367 in 2008) (258,099) (96,260)
Income tax expense - -
------------ -------------
Loss from discontinued operations (258,099) (96,260)
------------ -------------
Net loss (536,965) (210,918)
Dividend-Preferred Stock 80,125 84,625
------------ -------------
Net loss attributable to common stockholder $ (617,090) $ (295,543)
============ =============
Basic and diluted net loss per common share
from continuing operations: $ (0.03) $ (0.03)
Basic and diluted net loss per common share
from discontinued operations: $ (0.02) $ (0.01)
------------ -------------
$ (0.05) $ (0.04)
------------ -------------
The accompanying notes are an integral part of these statements.
4
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
2008 2007
---------- ----------
Cash Flows From Operating Activities:
Net loss $ (536,965) $ (210,918
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and Amortization 151,228 5,644
Amortization of financing cost 67,194 46,943
Equity in earnings ofinvestee (81,710) (91,141)
Operating expenses paid with common stock 47,744 40,970
Changes in Operating Assets and Liabilities:
Net (increase) decrease in:
Accounts receivable and other receivables (1,622,162) 2,747,470
Inventory (690,304) (3,629,131)
Prepaid assets, related party note receivable and other assets 2,492,503 529,875
Net increase (decrease) in:
Accounts payable, related party note payable, accrued
expenses and other current liabilities (584,510) 13,530
Deferred Income 538,182 715,437
Net assets of discontinued operations 66,645 (216,086)
---------- ----------
Net cash used in operating activities (152,155) (47,4070
---------- ----------
Cash Flows From Investing Activities:
Purchase of fixed assets (73,653) (8,627)
Payments received on notes receivable 222,470 220,913
Issuance of notes receivable (23,200) (8,500)
---------- ----------
Net cash provided by investing activities 125,617 203,786
---------- ----------
Cash Flows From Financing Activities:
Borrowings under line of credit - 291,610
Repayments under line of credit - (4,836,928)
Proceeds from the issuance of notes payable 775,000 6,690,000
Repayments of notes payable (703,539) (2,617,190)
Payment of dividends (80,125) (84,625)
Proceeds from issuance of common stock 2,379 7,094
---------- ----------
Net cash used in financing activities (6,285) (550,039)
---------- ----------
Net decrease in cash (32,823) (393,660)
Cash and cash equivalents, beginning of period 488,475 624,740
---------- ----------
Cash and cash equilvalents, end of period 455,652 231,080
========== ==========
The accompanying notes are an integral part of these statements.
5
SYNERGY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2008 2007
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 430,532 $ 364,564
=========== ===========
Cash paid for income taxes $ 20,766 $ 46,782
=========== ===========
Supplement disclosures of non-cash operating, investing
and financing activities:
Debt conversion to common stock $119,800 $ 187,000
========== ==========
Common Stock issued for services $ 47,744 $ 40,970
========== ==========
Common Stock issued for financing cost $ - $ 978,250
========== ==========
The accompanying notes are an integral part of these statements.
6
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2008 AND 2007
(Unaudited)
NOTE A - UNAUDITED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 2008, the consolidated statements
of operations for the three months ended March 31, 2008 and 2007, and the
condensed consolidated statements of cash flows for three months ended March 31,
2008 and 2007, have been prepared by Synergy Brands, Inc. ("Synergy" or the
"Company") without audit. The balance sheet at December 31, 2007 has been
derived from the audited financial statements as of that date. In the opinion of
management, all adjustments (which include only normally recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 2008 (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, 2007 filed by the Company. The results of
operations for the periods ended March 31, 2008 and 2007 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 $13,000 and $16,500 for the three
months ended March 31, 2008 and 2007, respectively.
7
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2008 AND 2007
(Unaudited)
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 three months ended March 31, 2008,
the Company recognized $1,361,008 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 $5,751,703 at March 31,
2008 and $5,038,607 at December 31, 2007.
NOTE D - INVENTORY
Inventory, consisting of goods held for sale, as of March 31, 2008 consisted of
the following:
Grocery, general merchandise and health and beauty products $3,174,730
Raw Materials 499,344
----------
$3,674,074
==========
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 March 31, 2008 was $1,258,827.
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 March 31, 2008,
the Company recognized $39,689 of the deferred income. As part of the Company's
agreement, the Company has paid $571,429 on the note payable. The outstanding
balance of the note payable at March 31, 2008 was $428,571.
Note receivable from other parties, originating in the normal course of
business, approximated $75,500 at March 31, 2008.
8
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2008 AND 2007
(Unaudited)
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 $81,710 and $91,141
during the three months ended March 31, 2008 and March 31, 2007, respectively.
At March 31, 2008, the investment in ITT is $1,020,887 as included in "Other
Assets" on the accompanying balance sheet.
Summarized results of operations of this investee for the three months ended
March 31, 2008 and 2007 is as follows:
2008 2007
------------- -------------
Revenues $ 10,547,000 $ 8,920,000
Total expenses (9,945,000) (8,294,000)
Other income 33,000 42,000
------------- -------------
Income before income taxes 635,000 668,000
Income tax expense (227,000) (252,000)
------------- -------------
Net income $ 408,000 $ 416,000
============= =============
NOTE G - NOTES PAYABLE
The Company financed a series of secured notes with certain shareholders of ITT
since 2004. In February 2008, $119,800 of the outstanding debt was converted.
The outstanding balance as of March 31, 2008 was $730,200, which matures in
January 2009.
9
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2008 AND 2007
(Unaudited)
NOTE G (continued)
In January 2005, the Company entered into a promissory note with a major
regional bank for $1,000,000, which was increased to $1,500,000 in September
2007. Borrowing under the note bears interest at prime (4.75% at March 31,
2008). 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 a certain Shareholder of ITT. Borrowings at March 31, 2008 were
$377,850.
In October 2005, the Company invested $1 million in a Private Placement of
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 balance of the note at March 31, 2008 was $428,571.
The Company financed a series of secured Notes with Laurus Master Funds (LMF).
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 March 31, 2008, net of discount approximated $1,058,320.
On April 15, 2007, Synergy Brands Inc. completed a $8.0 million secured
financing with a major shareholder and a director 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%. The agreement further involved a securities
purchase agreement, under which there was issued 1,075,000 common shares of
Synergy Brands issued to this shareholder as a financing cost and all warrants
beneficially owned by this shareholder were retired. The Company repaid $843,995
of this debt at March 31, 2008. At March 31, 2008, the outstanding balance was
approximately $7,156,005.
The Company financed an asset acquisition through the issuance by QFB of two 9%
secured loan in the principle amount of $4,750,000 that matures on May 18, 2012,
with principle payment that began December 1, 2007. In addition, in December
2007, the Company issued 480,000 shares valued at $393,600. The relative fair
value of these shares is being charged to operations as additional interest over
the term of the loan. Total repayments at March 31, 2008 were $83,443. The
balance of the notes net of discount approximated $4,295,235 at March 31, 2008.
In July 2007, the Company secured $1,500,000 from shareholders of short term
financing bearing interest at 8% that matures on July 1, 2008. The balance of
the notes at March 31, 2008, net of discount approximated $1,445,600. In the
first quarter of 2008 the Company secured $800,000 bearing interest at 15%, from
shareholders of short term financing which matures on October 31, 2008.
NOTE H - STOCKHOLDERS' EQUITY
During the three months ended March 31, 2008, the Company issued 517,324 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 $344,981.
10
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2008 AND 2007
(Unaudited)
NOTE I - SEGMENT AND GEOGRAPHICAL INFORMATION
Management evaluates the various segments of the Company based on the types of
products being distributed, which were, as of March 31, 2008 and 2007, as shown
below the segment information does not include the discontinued segment of
Proset and GRC.
Three Months Ended March 31, 2008 and 2007
-------------------------------------------
Grocery
Operations Corporate Total
Revenue from external customers 2008 $ 20,425,149 $ - $ 20,425,149
2007 $ 17,197,190 $ - $ 17,197,190
Net Income (loss) from continuing operations 2008 $ 136,125 $ (495,116) $ (358,991)
attributable to common Stockholders 2007 $ 252,748 $ (452,031) $ (199,283)
Interest & Finance Expenses 2008 $ 467,543 $ 129,198 $ 596,741
2007 $ 408,905 $ 177,153 $ 586,058
Depreciation & 2008 $ 149,205 $ 2,023 $ 151,228
amortization 2007 $ 3,621 $ 2,023 $ 5,644
Identifiable assets from continuing operations are as follows:
March 31, 2008 $ 26,385,837 $ 4,110,517 $ 30,496,354
11
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2008 AND 2007
(Unaudited)
NOTE J - 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 1,087,177
and 693,808 for the three months ended March 31, 2008, and for the three months
ended March 31, 2007 respectively, have been excluded from the calculation of
diluted loss per share since their effect would be antidilutive.
Three Months ended March 31,
2008 2007
Net profit (loss) applicable to common stock $ (617,090) $ (295,543)
Weighted-average number of shares basic
and diluted EPS 11,518,476 7,616,174
12
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2008 AND 2007
(Unaudited)
K - DISCONTINUED OPERATIONS
In December 2006, the Company instituted a plan to discontinue the Pro-Set
segment. In the first quarter of 2008 the Company instituted a plan to sell the
Company's cigar segment. Accordingly, the operating results of Pro-Set and the
cigar segment have been presented as discontinued operations. Net assets and
liabilities to be disposed of or liquidated, at their book value after recording
a loss on the impairment of the cigar segment of $200,367, have been separately
classified in the accompanying balance sheets at March 31, 2008 and March 31,
2007 and statement of cash flows.
Summarized financial information of the Proset and GRC segment as discontinued
operations for each of the periods ended is as follows:
Three Months Ended
---------------------------
March 31, 2008 March 31, 2007
--------------- ---------------
Net Sales $ 289,059 $ 421,928
Cost of sales
Cost of product 157,814 268,832
Shipping and handling costs 22,727 19,693
--------------- ---------------
180,541 288,525
--------------- ---------------
Gross Profit 108,518 133,403
Operating expenses:
General and administrative 161,120 190,345
Depreciation and amortization 5,136 39,114
--------------- ---------------
166,256 229,459
Operating loss (57,738) (96,056)
Other Income (expenses):
Loss on disposal (200,367) -
Other income (expenses) 6 (204)
--------------- ---------------
(200,361) (204)
--------------- ---------------
Net loss before income taxes (258,099) (96,260)
Income tax expense - -
--------------- ---------------
Net loss from discontinued operations $ (258,099) $ (96,260)
=============== ===============
13
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MARCH 31, 2008 AND 2007
(Unaudited)
NOTE K (continued)
March 31, 2008 Dec. 31, 2007
ASSETS:
CURRET ASSETS:
CASH AND CASH EQUIVALENTS $ 21,335 $ 13,277
ACCOUNTS RECEIVABLE TRADE, NET 178,736 202,514
INVENTORY 405,829 541,865
PROPERTY AND EQUIPMENT, NET - 71,122
OTHER ASSETS - 20,000
--------- ---------
TOTAL ASSETS $ 605,900 $ 848,778
========= =========
LIABILITIES:
ACCOUNTS PAYABLE $ 205,900 $ 181,766
--------- ---------
TOTAL LIABILITIES $ 205,900 $ 181,766
========= =========
NOTE L - 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. The adoption of SFAS No. 157 did not have a material impact on our
consolidated financial statements.
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.
The adoption of SFAS No. 159 did not have material impact on our consolidated
financial statements.
In December 2007, the FASB issued Statements No. 141 (R), "Business
Combinations", and No. 160, "Noncontrolling Interests in Consolidated Financial
Statements." Effective for fiscal years beginning after December 15, 2008, these
statements revise and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The adoption of these statements is not expected to have a
material impact on the Company's financial statements.
In March 2008, FASB issued SFAS 161, "Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133". This Statement
applies to all entities. This Statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company does not believe this pronouncement will have a material
effect on its financial statement.
NOTE M - SUBSUQUENT EVENTS
On April 14, 2008, the Company entered in an agreement to sell the cigar segment
of its business. The sale price consisted of a cash down payment of $50,000 and
a $350,000 five year promissory note with principal and interest payments at a
rate of 5%.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
The core operations of Synergy Brands include the baking mix manufacturing
operation in Michigan, operated by Quality Food Brands, which is owned by PHS
Group. The Company's spice business, is nationally distributed through the
Michigan facilities and manufactured for PHS group through a co-packing
arrangement in China. The Company's proprietary packaged meal business, which is
also distributed through the Company's Michigan distribution center and
manufactured under a co-packing arrangement in North Dakota. The Company
expanded its Michigan operations to 110,000 square feet in two facilities
located in Monroe, Michigan.
In addition to its Michigan operations, the Company continues to grow its
wholesaling business in New York. The Company believes that it is one of the
largest independent wholesalers for P&G products based in the Long Island region
of New York and continues to grow and expand its distribution of other
nationally branded products, which include Clorox, Kimberley Clark, and
Smuckers, among others, in the northeastern region of the United States. The
Company's wholesaling focus is the distribution of nationally recognized
consumer products in large quantities through retail based promotional programs.
Key products distributed by the Company include Bounty, Tide, Folgers, Gillette,
Pringles, Clorox, Scott and Duracell. The Company limits its distribution to
about 1,000 nationally recognized brands and uses its logistical advantages to
streamline its costs to its customers. The Company is creating a logistical
corridor between its New York and Michigan operations that has allowed for
efficient distribution that offset shipping and warehousing costs. In addition,
the Company's New York operation began distributing the products that are
directly manufactured by the Company in Michigan to its customers in the New
York region. Leveraging upon its newly formulated operating structure is
critical to the Company's efficiency and profitability and the benefits of this
synergy can clearly be seen through expanding operating margins.
The Company believes that as it expands its Michigan operation, and especially
as it builds traction in its manufactured goods, this should add franchise value
to labels and trademarks that the Company owns. The Company currently
manufactures baking mixes under the "Rich & Moist", "Rich & Fluffy", "Country
Value", "County fare", "Merit Selection" and "County pride" labels. It
manufactures spices under the "Loretta" and "Gourmet Select" labels. It further
manufactures packaged meals under the "Loretta" label. The Company believes that
it is well positioned to expand its operations with the infrastructure that it
has developed over the past few years in the United States and Canada as well as
enter into licensing arrangements in other parts of the world.
PHS GROUP AND QUALITY FOOD BRANDS (GROCERY & HBA OPERATIONS)
PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately in the United States. 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
benefits 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, Duracell, Folgers, Crest, 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.
15
In the third quarter of 2006, PHS entered the private label grocery market
specializing in the distribution of baking mixes and spices to grocery and Drug
chains as well as wholesalers and distributors on a proprietary basis through a
wholly owned subsidiary, Quality Food Brands (QFB), based in Michigan. QFB 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 and positioned these assets in QFB.
The factors that were involved in PHS and Synergy decision to acquire LBMP
manufacturing facility consisted of many business factors including:
o PHS has secured and established business with several national chains
that have been generating substantial orders for PHS of products produced
by LBMP and there was no immediate 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.
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 to expand 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. The customer's
formula 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.
16
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008
AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2007.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENT CORPORATE SEGMENTS
THREE MONTHS ENDED 3/31/08
Revenue $20,425,149 $ 20,425,149 18.77%
Gross Profit 2,044,601 2,044,601 59.41%
SG&A 1,285,900 1,668,837 88.83%
Operating Profit 609,496 224,536 -42.89%
Net Profit (loss) from continuing operations
attributable to common shareholders 136,125 (358,991) 80.14%
Per share continuing operations 0.01 (0.03)
Net loss from discontinued
operations (258,099) 168.13%
Per share discontinued operations (0.02)
Net profit (loss) attributable
to shareholders (617,090) 108.80%
Net profit (loss) per common share (0.05)
Interest and financing expense 467,543 596,741 1.82%
THREE MONTHS ENDED 3/31/07
Revenue $17,197,190 $ 17,197,190
Gross Profit 1,282,608 1,282,608
SG&A 614,207 883,776
Operating Profit 664,780 393,188
Net Profit (loss) from continuing operations
attributable to common shareholders 252,748 (199,283)
Per share continuing operations 0.03 (0.03)
Net loss from discontinued
operations (96,260)
Per share discontinued operations (0.01)
Net loss attributable
to shareholders (295,543)
Net loss per common share (0.04)
Interest and financing expense 408,905 586,058
Synergy Brands
The Company reported its first combined results of operations as a pure Grocery
Manufacturer and Distributor for the three months ended March 31, 2008 as
compared to the three months ended March 31, 2007. Synergy Brands Inc. operates
as a holding Company, which owns PHS Group and its related grocery businesses
(QFB), as well as the 20% stake it owns in Interline Travel and Tours (aka
PERX). In addition, Synergy Brands continues to report the disposition of its
discontinued operations. Revenues increased by 19% to $20,425,149 for the three
months ended March 31, 2008 while gross profit increased by 59% to $2,044,601
for the three months ended March 31, 2008 as compared to the same comparable
period in 2007. The increase of sales is directly attributable to the Michigan
operation, which nearly doubled from the prior period, as well as an increase in
sales into Canada. SG&A increase by 89% to $1,668,837 for the three months ended
March 31, 2008 as compared to the same comparable period in 2007. It is
important to note that in the first quarter of 2007, the Company co-packed its
production in Michigan, while in the first quarter of 2008, the Company directly
manufactured its goods in Michigan. The manufacturing process as well as
increased costs contributed to the increase in SG&A on a comparable basis. Net
loss from continuing operations increased to $358,991 for the three month ended
March 31, 2008 from $199,283 in the comparable period in 2007. The increase in
loss is directly related to an increase of non-cash charges and corporate
expenses related to additionally required regulatory filings. The Company
further expanded its Michigan operations by adding packaging lines, increasing
its space by 60,000 square feet and creating a distribution center for its
products. Costs associated with this expansion were charged in the first quarter
of 2008.
17
Corporate Expenses:
The Company's allocation to corporate expenses increased by 42% to $382,937 for
the three months ended March 31, 2008 as compared to $269,569 for the three
months ended March 31, 2007. Corporate expenses represent 23% of overall
operating expense of the Company. Operating expenses for all operations
including corporate expenses totaled $1.7 million in the first three months of
2008. 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.
PHS and QFB (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's core sales base remains the distribution of nationally branded consumer
products in the grocery and health and beauty (HBA) sectors. PHS has positioned
itself as a distributor for major manufacturers as opposed to a full line
wholesaler. A full line wholesaler has the responsibility of servicing the
entire needs of a retail operation, where as a distributor caters to specific
merchandising categories. As a result, PHS is able to plan the needs of its
customers directly from the source of supply which in turn is designed to
increase sales to its customers through this unique focus. PHS concentrates on
what it perceives to be the fastest moving consumer product items and uses
promotional savings to streamline and reduce their sale prices. PHS focuses on
approximately 1,000 products manufactured by the top Grocery and HBA Companies
in the United States and as a result the Company believes that they have a
competitive advantage in comparison to the traditional wholesaler, which may
concentrate on over 10,000 different items.
18
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
THREE MONTHS ENDED 3/31/08
Revenue 20,425,149 18.77%
Gross Profit 2,044,601 59.41%
SG&A 1,285,900 109.36%
Operating Profit 609,496 -8.32%
Net Profit 136,125 -46.14%
Interest and financing expenses 467,543 14.34%
THREE MONTHS ENDED 3/31/07
Revenue 17,197,190
Gross Profit 1,282,608
SG&A 614,207
Operating Profit 664,780
Net Profit 252,748
Interest and financing expenses 408,905
PHS increased its revenues by 19% to $20.4 million for three months ended March
31, 2008 as compared to $17.2 million for the three months ended March 31, 2007.
The increase in PHS business is attributable to additional vendors and
customers, a growing private label and Company 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 7.5%
to 10.0%. PHS has been able to maintain its sales and customer base while
increasing gross profit by 59%. 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 $136,125 for
the three months ended March 31, 2008 as compared to a profit of $252,748 for
the three months ended March 31, 2007. The decrease in profit is attributable to
higher non cash charges such as depreciation and amortization in connection with
the acquisition of QFB which did not operate in the comparable period. Profit
for PHS would have increased before the non cash charges that were attributable
to the acquisition of QFB.
19
DISCONTINUED OPERATIONS
In December 2006, the Company instituted a plan to discontinue the Pro-Set
segment. In the first quarter of 2008, the Company instituted a plan to sell the
Company's cigar segment. Accordingly, the results of Pro-Set, and the cigar
segment have been presented as discontinued operations. The Company recorded a
charge of $200,367 on the disposal of the cigar segment at March 31, 2008.
The table below summarizes the historical financial operations of Proset and GRC
segment for the periods being discussed.
Three Months Ended Three Months Ended
March 31, 2008 March 31, 2007
---------------- -------------------
Net Sales $289,059 $421,928
Cost of sales
Cost of product 157,814 268,832
Shipping and handling costs 22,727 19,693
---------------- -------------------
180,541 288,525
---------------- -------------------
Gross Profit 108,518 133,403
Operating expenses:
General and administrative 161,120 190,345
Depreciation and amortization 5,136 39,114
---------------- -------------------
166,256 229,459
Operating loss (57,738) (96,056)
Other Income (expenses):
Loss on disposal (200,367) -
Other income (expenses) 6 (204)
---------------- -------------------
(200,361) (204)
Net loss before income taxes (258,099) (96,260)
Income tax expense - -
---------------- -------------------
Net loss from discontinued operations $(258,099) $(96,260)
================ ===================
20
LIQUIDITY AND CAPITAL RESOURCES
March 31, 2008 2007
Working Capital $5,075,245 $ 11,566,502
Assets 31,102,254 22,117,348
Liabilities 22,455,108 15,480,077
Equity 8,647,146 6,637,271
Line of Credit Facility - 1,104,610
Receivable turnover (days) 21 43
Inventory Turnover (days) 16 23
Net cash provided by (used in) operating activies (152,155) (47,407)
Net cash provided by investing activites 125,617 203,786
Net cash (used in) provided by financing activites (6,285) (550,039)
The Company's working capital decreased by $6.5 million at March 31, 2008 to
$5.1 million due to a combination of several factors including amortization of
debt and the purchase of the baking mix plant. 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 generated a net loss attributable of Common Shareholders of
approximately $617,000 for the three months ended March 31, 2008. Financing
costs totaled $596,741 and non-cash charges totaled approximately $338,000 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 utilized to the Company consisted of $8.0
million in long-term notes, $2.5 million in short term notes, $3.65 million of
non-redeemable preferred stock, as of March 31, 2008. 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 21
days and the Company has turned its overall inventory on average approximately
every 16 days. The Company believes that its collection procedures and
procurement policies are consistent with industry standards. However, 26% 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 10 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 changes their policies or the Company does not meet the
manufacturer standards, incentives may be reduced and may cause a material
problem for the company.
21
Management believes that continued cost containment, improved financial and
operating controls, debt reduction, and a focused sales and marketing effort
should provide sufficient cash flow from operations in the near term and the
Company is working toward reliance on such financial sources and attributes to
cover its cash flow requirements but achievement of these goals, however, will
likely continue to be dependent upon the Company's attainment of increased
revenues, improved operating costs, reduced financing cost and trade support
levels that are consistent with management's plans. Such operating performance
will likely continue to be subject to financial, economic and other factors
likely to be beyond its control, and there can be no assurance that the
Company's goals will be achieved. In the interim while such goals are being
pursued achievement of positive cash flow has been and continues to be reliant
on equity and debt financing, including the Company's exchange of notes payable
for common shares and its issuance of further common and preferred stock in
private placements and the Company is hopeful that the market will continue to
recognize the Company's stature so that such financing method will continue to
be available in the future because, at least in the near future, the Company is
likely to continue to use such financing opportunities to maintain adequate cash
flow.
Expected interest payments on notes payable for the period ended March 31, 2008,
are as follows:
03/31/09 03/31/10 03/31/11 03/31/12 03/31/13 Total
$1,270,000 $860,000 $1,020,000 $250,000 $60,000 $3,460,000
Principal repayments on notes payable for the period ended March 31, are as
follows:
03/31/09 $ 5,585,000
03/31/10 $ 1,083,000
03/31/11 $ 1,641,000
03/31/12 $ 5,168,000
03/31/13 $ 3,321,000
-----------
$16,798,000
Discounts and rounding $ (506,217)
-----------
Total $16,291,783
===========
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. Credit is extended based on evaluation
of a customers' financial condition and, generally, collateral may be required.
Accounts receivable are due within 10 - 60 days and are stated at amounts due
from customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the contractual payment terms are considered past due. Estimates are
used in determining the allowance for doubtful accounts based on the Company's
historical collections experience, current trends, credit policy and a
percentage of its accounts receivable by aging category. In determining these
percentages, the Company looks at historical write-offs of its receivables. The
Company also looks at the credit quality of its customer base as well as changes
in its credit policies. The Company continuously monitors collections and
payments from its customers. The Company writes off accounts receivable when
they become uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts.
VALUATION OF DEFERRED TAX ASSETS.
Deferred tax assets and liabilities represent temporary differences between the
basis of assets and liabilities for financial reporting purposes and tax
purposes. Deferred tax assets are primarily comprised of reserves, which have
been deducted for financial statement purposes, but have not been deducted for
income tax purposes as well as net operating loss carry forwards. The Company
annually reviews the deferred tax asset accounts to determine if is appears more
likely than not that the deferred tax assets will be fully realized. At March
31, 2008, the Company has established a full valuation allowance.
22
VALUATION OF LONG-LIVED ASSETS.
The Company reviews its long-lived assets periodically to determine potential
impairment by comparing the carrying value of the assets with expected net cash
flows expected to be provided by the operating activities of the business or
related products. Should the sum of the expected future net cash flows be less
than the carrying value, the Company would determine whether an impairment loss
should be recognized. An impairment loss would be measured by comparing the
amount by which the carrying value exceeds the fair value of the Asset.
Long-lived assets and intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. Impairment is measured by comparing the carrying value of the
long-lived assets to the estimated undiscounted future cash flows expected to
result from use of the assets and their ultimate disposition. To the extent
impairment has occurred, the carrying amount of the asset would be written down
to an amount to reflect the fair value of the asset.
SEASONALITY
Sales by PHS Group 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.
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. Because of the Company's entry
into the baking mix market, spice business and packaged meals it relies on
commodities such as wheat, corn, flour and sugar. In addition, rise in fuel
causes additional freight and shipping costs. Inflationary trends in these
commodities may cause price increases as well as supply problems. The Company
believes it has adequate systems in place to insure supply, but inflationary
trends may make the Company's products less attractive to its customers.
23
Item 4-Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial
Officer, have evaluated our disclosure controls and procedures as of and have
found such to be effective as of the end of the period covered by this report.
Under rules promulgated by the SEC, disclosure controls and procedures are
defined as those controls or other procedures of an issuer that are designed to
ensure that information required to be disclosed by the issuer in the reports
filed or submitted by it under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Based on the evaluation of our disclosure controls and
procedures, management determined that such controls and procedures were
effective in timely alerting them to material information relating to the
Company (including its Consolidated Subsidiaries) required to be included in the
Company's periodic reports.
Further, there were no significant changes in the internal controls or in other
factors that significantly affected these controls, except for the
implementation of new acounting record software at our PHS headquarters, during
the period ended March 31, 2008, the date of the conclusion of the evaluation of
disclosure controls and procedures.
The Company's management, including its principal executive officer and the
principal financial officer, does not expect that the Company's disclosure
controls and procedures and its internal control processes will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected. The
Company monitors its disclosure controls and procedures and internal controls
and makes modifications as necessary; the Company's intent in this regard is
that the disclosure controls and procedures and the internal controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
24
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 2007 Form 10-K for the fiscal year
ended December 31, 2007.
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 months fiscal period ended March 31, 2008.
Item 6- Exhibits and Reports on Form 8-K
(1) 31.1 Certification Pursuant to Exchange Act Rule 13a - 14(a) / 15d-14(a)
signed by the Chief Executive Officer.
31.2 Certification Pursuant to Exchange Act Rule 13a - 14(a) / 15d-14(a)
signed by the Chief Financial Officer.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief
Executive Officer.
32.2 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002, signed by Chief Financial
Officer.
(2) There was one report filed on 8-k for the relevant period.
1) On January 29, 2008, the Company announced that it had received a notice from
NASDAQ Stock Market dated January 25, 2008, 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 the listing. The Registrant has been provided until
July 23, 2008 to regain compliance.
25
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Synergy Brands, Inc.
/s/ Mair Faibish
Date: May 15, 2008
- ----------------------------------------
By: Mair Faibish
Chief Executive Officer
/s/ Mitchell Gerstein
Date: May 15, 2008
- ----------------------------------------
By: Mitchell Gerstein
Chief Financial Officer
26
Exhibit 31.1
Certification Pursuant
To Exchange Act Rule 13-a-14(a)/-15d-14(a)
I, Mair Faibish, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15 (e) and internal control over financial
reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for
the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and to the audit committee of the registrant's board of
directors (or persons fulfilling the equivalent function):
(a) All significant deficiencies and material weaknesses we find in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 15, 2008
/s/ Mair Faibish
Mair Faibish, Chief Executive Officer
27
Exhibit 31.2
Certification Pursuant
To Exchange Act Rule 13-a-14(a)/-15d-14(a)
I, Mitchell Gerstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial
reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for
the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and to the audit committee of the registrant's board of
directors (or persons fulfilling the equivalent function):
(a) All significant deficiencies and material weaknesses we find in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 15, 2008
/s/ Mitchell Gerstein
Mitchell Gerstein, Chief Financial Officer
28
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of
Synergy Brands Inc., (the "Company"), hereby certify that the Quarterly Report
on Form 10-Q of the Company for the quarterly period ended March 31, 2008 (the
"Report") fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and that information contained in
the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: May 15, 2008
/s/ Mair Faibish
Mair Faibish, Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002), I, the undersigned Chief Financial Officer of
Synergy Brands, Inc. (the "Company"), hereby certify that the Quarterly Report
on Form 10-Q of the Company for the quarterly period ended March 31, 2008 (the
"Report") fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and that information contained in
the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: May 15, 2008
/s/ Mitchell Gerstein
Mitchell Gerstein, Chief Financial Officer
29