FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended June 30, 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. August 4, 2008 there were
12,153,437 shares outstanding of the registrant's common stock.
SYNERGY BRANDS, INC.
FORM 10-Q
JUNE 30, 2008
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and
December 31, 2007 2 - 3
Consolidated Statements of Operations for the six
Months ended June 30, 2008 and 2007 (Unaudited) 4
Consolidated Statements of Operations for the three
Months ended June 30, 2008 and 2007 (Unaudited) 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2008 and 2007 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-15
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-28
Item 4: Control and Procedures 28
PART II: OTHER INFORMATION
Item 1A: Risk Factors 30
Item 2: Unregistered Sales of Equity Securities and use of Proceeds 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 6: Exhibits and Reports on Form 8-K 30
SIGNATURES AND CERTIFICATIONS 31
1
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 AND DECEMBER 31, 2007
ASSETS June 30, 2008 December 31, 2007
(Unaudited)
Current Assets:
Cash and cash equivalents $ - $488,475
Accounts receivable trade, less allowance for doubtful
accounts of $127,481 4,949,678 3,798,291
Other receivables 6,316,349 5,038,607
Note Receivable - current 423,894 356,909
Inventory 2,996,122 2,983,770
Prepaid assets and other current assets 1,562,885 3,231,673
Assets of discontinued operations - 848,778
---------------- ---------------
Total Current Assets 16,248,928 16,746,503
Property and Equipment, net 9,927,595 10,109,139
Other Assets 2,960,614 2,979,188
Notes Receivable 1,603,004 1,605,260
---------------- ---------------
Total Assets $30,740,141 $31,440,090
================ ===============
The accompanying notes are an integral part of these statements.
2
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 AND DECEMBER 31, 2007
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 2008 December 31, 2007
(Unaudited)
Current Liabilities:
Notes Payable - Current $ 5,407,533 $ 4,199,348
Accounts Payable and Accrued Expenses 5,138,006 5,573,914
Deferred income 976,590 437,776
Liabilities of Discontinued Operations - 181,766
---------------- -----------------
Total Current Liabilities 11,522,129 10,392,804
Notes Payable, net of discount $434,559 and $587,105, respectively 10,632,352 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 $10.00 285 285
per share
Class B Series B preferred stock - $.001 par value, 250,000 shares authorized, 80,000
and 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;
12,063,437 and 11,328,764 shares issued 12,063 11,329
Additional paid-in capital 50,979,457 50,712,481
Deficit (42,392,978) (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 8,585,660 9,020,206
---------------- -----------------
Total Liabilities and Stockholders' Equity $30,740,141 $31,440,090
================ =================
The accompanying notes are an integral part of these statements.
3
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2008 2007
Net Sales $44,535,305 $38,481,250
----------- -----------
Cost of Sales
Cost of product 39,238,113 34,965,092
Shipping and handling costs 830,323 514,219
----------- -----------
40,068,436 35,479,311
Gross Profit 4,466,869 3,001,939
Operating expenses
Selling, general and Administrative Expenses 3,649,529 1,898,148
Depreciation and amortization 302,456 11,288
----------- -----------
3,951,985 1,909,436
----------- -----------
Operating Profit 514,884 1,092,503
Other Income (expense)
Interest Income 62,741 79,664
Other expense - (242)
Equity in earnings of investee 168,534 186,407
Interest and financing expense (1,169,550) (1,103,310)
----------- -----------
(938,275) (837,481)
----------- -----------
(Loss) profit from continuing operations before income taxes (423,391) 255,022
Income tax expense 20,766 47,218
----------- -----------
(Loss) profit from continuing operatons (444,157) 207,804
----------- -----------
Discontinued operations
Loss from operations of discontinued components (including impairment loss of $200,367 in 2008) (258,099) (178,918)
Income tax expense - -
----------- -----------
Loss from discontinued operations (258,099) (178,918)
----------- -----------
Net (loss) profit (702,256) 28,886
Dividend-Preferred Stock 155,750 160,250
----------- -----------
Net (loss) attributable to common stockholder $(858,006) $(131,364)
=========== ===========
Basic and diluted net (loss) profit per common share
from continuing operations: $ (0.05) $ 0.00
Basic and diluted net loss per common share
from discontinued operations: $ (0.02) $ (0.02)
----------- -----------
$ (0.07) $ (0.02)
----------- -----------
The accompanying notes are an integral part of these statements.
4
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
(UNAUDITED)
2008 2007
Net Sales $ 24,110,156 $ 21,284,060
--------------- ---------------
Cost of Sales
Cost of product 21,267,375 19.267,045
Shipping and handling costs 420,513 297,684
--------------- ---------------
21,687,888 19,564,729
Gross Profit 2,422,268 1,719,331
Operating expenses
Selling, general and Administrative Expenses 1,980,692 1,014,372
Depreciation and amortization 151,228 5,644
--------------- ---------------
2,131,920 1,020,016
--------------- ---------------
Operating Profit 290,348 699,315
Other Income (expense)
Interest Income 30,346 45,569
Equity in earnings of investee 86,824 95,266
Interest and financing expense (572,809) (517,252)
--------------- ---------------
(455,639) (376,417)
--------------- ---------------
(Loss) profit from continuing operations before income taxes (165,291) 322,898
Income tax expense - 436
--------------- ---------------
(Loss) profit from continuing operatons (165,291) 322,462
--------------- ---------------
Discontinued operations
Loss from operations of discontinued components - (82,658)
Income tax expense - -
--------------- ---------------
Loss from discontinued operations - (82,658)
--------------- ---------------
Net (loss) profit (165,291) 239,804
Dividend-Preferred Stock 75,625 75,625
--------------- ---------------
Net (loss) profit attributable to common stockholder $ (240,916) $ 164,179
=============== ===============
Basic and diluted net (loss) profit per common share
from continuing operations: $ (0.02) $ 0.03
Basic and diluted net profit (loss) per common share
from discontinued operations: $ 0.00 $ (0.01)
--------------- ---------------
$ (0.02) $ 0.02
--------------- ---------------
The accompanying notes are an integral part of these statements.
5
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2008 2007
----------- ---------
Cash Flows From Operating Activities:
Net Profit (loss) $ (702,256) $ 28,886
Adjustments to reconcile net (loss) profit to net cash
(used in) provided by operating activities
Depreciation and Amortization 302,456 11,288
Amortization of financing cost 86,046 47,243
Equity in earnings of investee (168,534) (186,407)
Operating expenses paid with common stock 212,448 126,053
Changes in Operating Assets and Liabilities:
Net (increase) decrease in:
Accounts receivable and other receivables (2,429,129) 161,085
Inventory (12,352) (3,284,240)
Prepaid assets, related party note receivable and other assets 2,212,863 44,150
Net increase (decrease) in:
Accounts payable, related party note payable, accrued
expenses and other current liabilities (435,908) 3,176,903
Deferred Income 554,689 (2,307)
Net assets of discontinued operations 66,645 (72,642)
----------- ---------
Net cash (used in) provided by operating activities (313,032) 50,012
----------- ---------
Cash Flows From Investing Activities:
Purchase of fixed assets (120,912) (22,259)
Payments received on notes receivable 368,521 312,610
Issuance of notes receivable (33,250) (15,350)
Investee dividend received 29,800 28,800
Investment in investee - (50,000)
----------- ---------
Net cash provided by investing activities 244,159 253,801
----------- ---------
Cash Flows From Financing Activities:
Borrowings under line of credit - 375,751
Repayments under line of credit - (6,025,679)
Proceeds from the issuance of notes payable 750,000 8,500,000
Repayments of notes payable (1,026,731) (3,622,492)
Payment of dividends (155,750) (160,250)
Proceeds from issuance of common stock 12,879 7,094
----------- ---------
Net cash (used in) financing activities (419,602) (925,576)
----------- ---------
Net (decrease) in cash (488,475) (621,763)
Cash and cash equivalents, beginning of period 488,475 624,740
----------- ---------
Cash and cash equivalents, end of period $ 0 $ 2,977
=========== =========
The accompanying notes are an integral part of these statements.
6
SYNERGY BRANDS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2008 2007
Supplemental disclosure of cash flow information:
Cash paid for interest $ 886,548 $ 673,776
=========== ===========
Cash paid for income taxes $ 20,776 $ 47,218
=========== ===========
Supplement disclosures of non-cash operating, investing and
financing activities:
Debt conversion to common stock $ 150,743 $ 543,333
========== ==========
Common Stock issued for services $ 212,448 $ 126,053
========== ==========
Common Stock issued for financing cost - $ 978,250
========== ==========
On April 14, 2008, the Company entered in an agreement to sell the cigar
segment of the business. The sale price consisted of a cash down payment of
$50,000 and a $350,000 promissory note, with principal and interest at a rate of
5%.
The accompanying notes are an integral part of these statements.
7
SYNERGY BRANDS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2008 AND 2007
(Unaudited)
NOTE A - UNAUDITED FINANCIAL STATEMENTS
The consolidated balance sheet as of June 30, 2008, the consolidated statements
of operations for the six months ended June 30, 2008 and 2007, the consolidated
statement of operations for the three months ended June 30, 2008 and 2007, and
the consolidated statements of cash flows for six months ended June 30, 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
June 30, 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 June 30, 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 $23,000 and $75,000 for the six months
ended June 30, 2008 and 2007, respectively, and $10,000 and $58,500 for the
three months ended June 30, 2008 and 2007, respectively.
8
SYNERGY BRANDS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 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 six months ended June 30, 2008,
the Company recognized $2,534,785 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 $6,316,349 at June 30,
2008 and $5,038,607 at December 31, 2007.
NOTE D - INVENTORY
Inventory, consisting of goods held for sale, as of June 30, 2008 consisted of
the following:
Grocery, general merchandise and health and beauty products $ 2,568,201
Raw Materials 427,921
-------------
$ 2,996,122
=============
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 June 30, 2008 was $1,181,243.
In October 2005 SYBR.com Inc., a wholly owned subsidiary of the Company,
invested $1 million in a Private Placement of Senior Subordinated Debentures
issued by ITT. The investment consists of a five year 8% Note (ITT Note), and
200,000 warrants exercisable into 200,000 common shares of ITT stock at $5.00
per share (ITT Warrants). The Company financed this investment with a $1 million
fully recourse note with a major Shareholder under the same terms and conditions
as the ITT Note and assigned to such shareholder the ITT Warrants. As
consideration for the financing, the Company has retained the benefit to be
derived from 100,000 of the warrants received from ITT. In relation to the ITT
warrants, Company has recorded deferred income of $127,000. At June 30, 2008,
the Company recognized $47,625 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 June 30, 2008 was $428,571.
On April 14, 2008, the Company entered in an agreement to sell the cigar segment
of the business. The sale price consisted of a cash down payment of $50,000 and
a $350,000 promissory note with principal and interest payments at a rate of 5%.
The balance of the note receivable at June 30, 2008 was $350,000.
Note receivable from other parties, originating in the normal course of
business, approximated $67,084 at June 30, 2008.
9
SYNERGY BRANDS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 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 $168,534 and $186,407
during the six months ended June 30, 2008 and June 30, 2007, respectively. At
June 30, 2008, the investment in ITT is $1,077,911 as included in "Other Assets"
on the accompanying balance sheet.
Summarized results of operations of this investee for the six months ended June
30, 2008 and 2007 is as follows:
2008 2007
Revenues $ 21,434,000 $ 18,149,000
Total expenses (20,189,000) (16,882,000)
Other income 63,500 110,000
------------- -------------
Income before income taxes 1,308,500 1,377,000
Income tax expense (466,000) (485,000)
------------- -------------
Net income $ 842,500 $ 892,000
============= =============
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 June 30, 2008 was $730,200, which matures in
January 2009.
10
SYNERGY BRANDS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 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 minus .5% (4.50% at June
30, 2008). The Company is not required to repay any principal until the maturity
date of the note, June 1, 2009. As security for the note, a pledge agreement was
entered by a certain Shareholder of ITT. Borrowings at June 30, 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 June 30, 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 June 30, 2008, net of discount approximated $992,485.
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
$1,044,629 of this debt at June 30, 2008. At June 30, 2008, the outstanding
balance was approximately $6,955,371.
The Company financed an asset acquisition through the issuance by QFB of two 9%
secured loan in the principal amount of $4,750,000 that matures on May 18, 2012,
with principal 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 June 30, 2008 were $110,000. The
balance of the notes net of discount approximated $4,290,956 at June 30, 2008.
In July 2007, the Company secured $1,500,000 from shareholders of short term
financing bearing interest at 8% that matures on October 1, 2008. The balance of
the notes at June 30, 2008, was $1,464,454. 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 six months ended June 30, 2008, the Company issued 734,673 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 $266,976.
11
SYNERGY BRANDS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2008 AND 2007
(Unaudited)
NOTE I - 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 536,666 for the six months ended June 30, 2008 and 2007, and for the three
months ended June 30, 2008 respectively, have been excluded from the calculation
of diluted loss per share since their effect would be antidilutive.
Six Months ended June 30,
2008 2007
------------- -------------
Net loss applicable to common stockholder $ (858,006) $ (131,364)
============= =============
Weighted-average number of shares basic
and diluted EPS 11,741,736 8,015,482
============= =============
Three Months ended June 30,
2008 2007
------------- -------------
Net profit (loss) applicable to common stockholder $ (240,916) $ 164,179
============= =============
Weighted-average number of shares basic 11,960,446 8,410,401
============= =============
Weighted-average number of shares diluted 11,960,446 8,947,067
============= =============
12
SYNERGY BRANDS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2008 AND 2007
(Unaudited)
J - 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 June 30, 2008 and June 30, 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:
Six Months Ended
June 30, 2008 June 30, 2007
------------- --------------
Net Sales $289,059 $ 935,723
Cost of sales
Cost of product 157,814 603,671
Shipping and handling costs 22,727 43,471
------------- --------------
180,541 647,142
Gross Profit 108,518 288,581
Operating expenses:
General and administrative 161,120 391,926
Depreciation and amortization 5,136 75,573
------------- --------------
166,256 467,499
Operating loss (57,738) (178,918)
Other Income (expenses):
Loss on disposal (200,367) -
Other income (expenses) 6 -
------------- --------------
(200,361) -
------------- --------------
Net loss before income taxes (258,099) (178,918)
Income tax expense - -
------------- --------------
Net loss from discontinued operations $ (258,099) $(178,918)
============= ==============
13
SYNERGY BRANDS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2008 AND 2007
(Unaudited)
NOTE J(continued)
Three Months Ended
June 30, 2008 June 30, 2007
------------- --------------
Net Sales - $ 513,795
Cost of sales
Cost of product - 334,839
Shipping and handling costs - 23,778
------------- --------------
- 358,617
------------- --------------
Gross Profit 155,178
Operating expenses:
General and administrative - 201,377
Depreciation and amortization - 36,459
------------- --------------
- 237,836
Operating loss - (82,658)
Net loss before income taxes - (82,658)
Income tax expense - -
------------- --------------
Net loss from discontinued operations - $ (82,658)
============= ==============
14
SYNERGY BRANDS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
JUNE 30, 2008 AND 2007
(Unaudited)
NOTE J (continued)
June 30, 2008 Dec. 31, 2007
------------- --------------
ASSETS:
CURRET ASSETS:
CASH AND CASH EQUIVALENTS $ - $ 13,277
ACCOUNTS RECEIVABLE TRADE, NET - 202,514
INVENTORY - 541,865
PROPERTY AND EQUIPMENT, NET - 71,122
OTHER ASSETS - 20,000
------------- --------------
TOTAL ASSETS $ - $ 848,778
============= ==============
LIABILITIES:
ACCOUNTS PAYABLE $ - $ 181,766
------------- --------------
TOTAL LIABILITIES $ - $ 181,766
============= ==============
NOTE K - 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 L - SUBSEQUENT EVENTS
On July 24, 2008, the Company received a NASDAQ staff letter indicating that the
Company fails presently to comply with the minimum bid price requirements
because for 180 consecutive business days since the last letter received from
NASDAQ, the bid price of the Company's common stock has closed below the $1.00
per share requirement. The Company has been granted a stay to September 4, 2008.
15
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 and the grocery and HBA business located in NY. The Company's spice
business, is also nationally distributed through its Michigan facilities and
manufactured for PHS group through a co-packing arrangement in China. The
Company's packaged meal business 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. The Company combines the
distribution of nationally recognized brands together with private label brands
and proprietary products.
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 and wholesale 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 offsets 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, it may 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 to
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.
16
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.
17
CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008
AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2007.
OPERATING OPERATING AND
SEGMENT CORPORATE SEGMENTS
SIX MONTHS ENDED 6/30/08
Revenue $44,535,305 $44,535,305 15.73%
Gross Profit 4,466,869 4,466,869 48.80%
SG&A 2,681,351 3,649,529 92.27%
Operating Profit 1,487,108 514,884 -52.87%
Net Profit (loss) from continuing operations
attributable to common shareholders 564,807 (599,907) -1361.53%
Per share continuing operations 0.05 (0.05)
Non Cash Charges 1,087,378 195.06%
Net Profit (loss)before non-cash charges
attributable to shareholders 487,471 17.16%
Per share 0.04
Net loss from discontinued
operations (258,099) 44.26%
Per share discontinued operations (0.02)
Net profit (loss) attributable
to shareholders (858,006) 553.15%
Net profit (loss) per common share (0.07)
Interest and financing expense 916,473 1,169,550 6.00%
Non Cash Charges *
Depreciation & Amortization 302,456
Operating non-cash charges 476,307
Financing charges 308,615
-----------------
Total 1,087,378
SIX MONTHS ENDED 6/30/07
Revenue $38,481,250 $38,481,250
Gross Profit 3,001,939 3,001,939
SG&A 1,259,479 1,898,148
Operating Profit 1,735,218 1,092,503
Net Profit (loss) from continuing operations
attributable to common shareholders 964,028 47,554
Per share continuing operations 0.11 0.00
Non Cash Charges 368,525
Net Profit (loss)before non-cash charges
attributable to shareholders 416,079
Per share 0.05
Net loss from discountinued operations (178,918)
Per share discontinued operations (0.02)
Net loss attributable
to shareholders (131,364)
Net loss per common share (0.02)
Interest and financing expense 768,063 1,103,310
Non Cash Charges *
Depreciation & Amortization 11,288
Operating non-cash charges 126,053
Financing charges 231,184
-----------------
Total 368,525
* Management believes such non-GAAP financial presentation better reflects
fundamential business performance for the Quarter, but such non-GAAP measures
should be viewed in addition to, and not as an alternative for, the Company's
results prepared and presented in accodrance with GAAP.
Synergy Brands
The Company reported its first combined results of operations as a pure Grocery
Manufacturer and Distributor for the six months ended June 30, 2008 as compared
to the six months ended June 30, 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 16% to $44,535,305 for the six months ended
June 30, 2008 while gross profit increased by 49% to $4,466,869 for the six
months ended June 30, 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 in Canada.
SG&A increased by 92% to $3,649,529 for the six months ended June 30, 2008 as
compared to the same comparable period in 2007. It is important to note that in
the first six months of 2007, the Company co-packed its production in Michigan,
while in the first six months 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 $599,907 for the six month ended June 30,
2008 as compared to a profit of $47,554 in the comparable period in 2007. The
increase in loss is directly related to an increase of non-cash charges such as
depreciation & amortization of the Michigan facilities and associated non-cash
financing and operating charges which did not exist in the comparable period in
2007. 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 also charged
in the first six months of 2008.
18
Corporate Expenses:
The Company's allocation to corporate expenses increased by 51% to $968,178 for
the six months ended June 30, 2008 as compared to $585,241 for the six months
ended June 30, 2007. Corporate expenses represent 27% of overall operating
expense of the Company. Operating expenses for all operations including
corporate expenses totaled $3.6 million in for the six months ended June 30,
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, whereas 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.
19
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
SIX MONTHS ENDED 6/30/08
Revenue 44,535,305 15.73%
Gross Profit 4,466,869 48.80%
SG&A 2,681,351 112.89%
Operating Profit 1,487,108 -14.30%
Net Profit 564,807 -41.41%
Interest and financing expenses 916,473 19.32%
SIX MONTHS ENDED 6/30/07
Revenue 38,481,250
Gross Profit 3,001,939
SG&A 1,259,479
Operating Profit 1,735,218
Net Profit 964,028
Interest and financing expenses 768,063
PHS increased its revenues by 16% to $44.5 million for six months ended June 30,
2008 as compared to $38.4 million for the six months ended June 30, 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 7.8%
to 10.0%. PHS has been able to maintain its sales and customer base while
increasing gross profit by 49%. 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 $564,807 for
the six months ended June 30, 2008 as compared to a profit of $964,028 for the
six months ended June 30, 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.
20
DISCONTINUED OPERATIONS
In December 2006, the Company instituted a plan to discontinue its Pro-Set
segment. In the second quarter of 2008, the Company sold its 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.
Six Months Ended Six Months Ended
June 30, 2008 June 30, 2007
------------- --------------
Net Sales $289,059 $935,723
Cost of sales
Cost of product 157,814 603,671
Shipping and handling costs 22,727 43,471
------------- --------------
180,541 647,142
Gross Profit 108,518 288,581
Operating expenses:
General and administrative 161,120 391,926
Depreciation and amortization 5,136 75,573
------------- --------------
166,256 467,499
Operating loss (57,738) (178,918)
Other Income (expenses):
Loss on disposal (200,367) -
Other income (expenses) 6 -
------------- --------------
(200,361) -
Net loss before income taxes (258,099) (178,918)
Income tax expense - -
------------- --------------
Net loss from discontinued operations $(258,099) $(178,918)
21
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2008
AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2007.
SEGMENT CORPORATE SEGMENTS
THREE MONTHS ENDED 6/30/08
Revenue $24,110,156 $24,110,156 13.28%
Gross Profit 2,422,268 2,422,268 40.88%
SG&A 1,395,451 1,980,692 95.26%
Operating Profit 877,612 290,348 -58.48%
Net Profit (loss) from continuing operations
attributable to common shareholders 428,682 (240,916) 197.60%
Per share continuing operations 0.04 (0.02)
Non Cash Charges 595,184 200.06%
Net Profit (loss)before non-cash charges
attributable to shareholders 354,268 -20.42%
Per share 0.03
Net profit (loss) attributable
to shareholders (240,916) 246.74%
Net profit (loss) per common share (0.02)
Interest and financing expense 448,930 572,809 10.74%
Non Cash Charges *
Depreciation & Amortization 151,228
Operating non-cash charges 289,550
Financing charges 154,406
-------------------
Total 595,184
THREE MONTHS ENDED 6/30/07
Revenue $21,284,060 $21,284,060
Gross Profit 1,719,331 1,719,331
SG&A 645,272 1,014,372
Operating Profit 1,070,438 699,315
Net Profit (loss) from continuing operations
attributable to common shareholders 711,280 246,837
Per share continuing operations 0.08 0.03
Non Cash Charges 198,358
Net Profit (loss)before non-cash charges
attributable to shareholders 445,195
Per share 0.05
Net loss from discontinued
operations (82,658)
Per share discontinued operations (0.01)
Net profit (loss) attributable
to shareholders 164,179
Net loss per common share 0.02
Interest and financing expense 359,158 517,252
Non Cash Charges *
Depreciation & Amortization 5,644
Operating non-cash charges 85,083
Financing charges 107,631
-------------------
Total 198,358
* Management believes such non-GAAP financial presentation better reflects
fundamential business performance for the Quarter, but such non-GAAP measures
should be viewed in addition to, and not as an alternative for, the Company's
results prepared and presented in accodrance with GAAP.
Synergy Brands
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 13% to
$24,110,156 for the three months ended June 30, 2008 while gross profit
increased by 41% to $2,422,268 for the three months ended June 30, 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 in Canada. SG&A increase by 95% to
$1,980,692 for the three months ended June 30, 2008 as compared to the same
comparable period in 2007. It is important to note that in the second quarter of
2007, the Company co-packed its production in Michigan, while in the second
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
$240,916 for the three month ended June 30, 2008 as compared to a profit of
$246,837 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 2008.
22
Corporate Expenses:
The Company's allocation to corporate expenses increased by 59% to $585,241 for
the three months ended June 30, 2008 as compared to $369,100 for the three
months ended June 30, 2007. Corporate expenses represent 30% of overall
operating expense of the Company. Operating expenses for all operations
including corporate expenses totaled $2.0 million in the three months ended June
30, 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, whereas a distributor caters to specific
merchandising categories. As a result, PHS is able to plan the needs of its
customers directly from the source of supply which in turn is designed to
increase sales to its customers through this unique focus. PHS concentrates on
what it perceives to be the fastest moving consumer product items and uses
promotional savings to streamline and reduce their sale prices. PHS focuses on
approximately 1,000 products manufactured by the top Grocery and HBA Companies
in the United States and as a result the Company believes that they have a
competitive advantage in comparison to the traditional wholesaler, which may
concentrate on over 10,000 different items.
23
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
THREE MONTHS ENDED 6/30/08
Revenue 24,110,156 13.28%
Gross Profit 2,422,268 40.88%
SG&A 1,395,451 116.26%
Operating Profit 877,612 -18.01%
Net Profit 428,682 -39.73%
Interest and financing expenses 448,930 25.00%
THREE MONTHS ENDED 6/30/07
Revenue 21,284,060
Gross Profit 1,719,331
SG&A 645,272
Operating Profit 1,070,438
Net Profit 711,280
Interest and financing expenses 359,158
PHS increased its revenues by 13% to $24.1 million for three months ended June
30, 2008 as compared to $21.2 million for the three months ended June 30, 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 8.1%
to 10.0%. PHS has been able to maintain its sales and customer base while
increasing gross profit by 41%. 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 $428,682 for
the three months ended June 30, 2008 as compared to a profit of $711,280 for the
three months ended June 30, 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.
24
DISCONTINUED OPERATIONS
In December 2006, the Company instituted a plan to discontinue its Pro-Set
segment. In the second quarter of 2008, the Company sold its cigar segment.
Accordingly, the results of Pro-Set, and the cigar segment have been presented
as discontinued operations.
The table below summarizes the historical financial operations of Proset and GRC
segment for the periods being discussed.
Three Months Ended Three Months Ended
June 30, 2008 June 30, 2007
----------------- -----------------
Net Sales - $513,795
Cost of sales
Cost of product - 334,839
Shipping and handling costs - 23,778
----------------- -----------------
- 358,617
Gross Profit - 155,178
Operating expenses:
General and administrative - 201,377
Depreciation and amortization - 36,459
----------------- -----------------
- 237,836
Operating loss - (82,658)
Net loss before income taxes - (82,658)
Income tax expense - -
----------------- -----------------
Net loss from discontinued
operations - $(82,658)
----------------- -----------------
25
LIQUIDITY AND CAPITAL RESOURCES
June 30, 2008 2007
Working Capital $ 4,726,799 $ 6,744,693
Assets 30,740,141 28,652,403
Liabilities 22,154,481 21,405,837
Equity 8,585,660
7,246,466
Receivable turnover (days) 13 17
Inventory Turnover (days) 12 24
Net cash (used in) provided by operating activies (313,032) 50,012
Net cash provided by investing activites 244,159 253,801
Net cash (used in) financing activites (419,602) (925,576)
The Company's working capital decreased by $2 million at June 30, 2008 to $4.7
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 to Common Shareholders of
approximately $858,000 for the six months ended June 30, 2008. Financing costs
totaled $1,169,550 and non-cash charges totaled approximately $1,087,000 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 by the Company consisted of $10.6
million in long-term notes, $5.4 million in short term notes and $3.65 million
of non-redeemable preferred stock, as of June 30, 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 at 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 13
days and the Company has turned its overall inventory on average approximately
every 12 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.
26
Management believes that continued cost containment, improved financial and
operating controls, debt reduction, and a focused sales and marketing effort
should provide sufficient cash flow from operations in the near term and the
Company is working toward reliance on such financial sources and attributes to
cover its cash flow requirements but achievement of these goals, however, will
likely continue to be dependent upon the Company's attainment of increased
revenues, improved operating costs, reduced financing cost and trade support
levels that are consistent with management's plans. Such operating performance
will likely continue to be subject to financial, economic and other factors
likely to be beyond its control, and there can be no assurance that the
Company's goals will be achieved. In the interim while such goals are being
pursued achievement of positive cash flow has been and continues to be reliant
on equity and debt financing, including the Company's exchange of notes payable
for common shares and its issuance of further common and preferred stock in
private placements and the Company is hopeful that the market will continue to
recognize the Company's stature so that such financing method will continue to
be available in the future because, at least in the near future, the Company is
likely to continue to use such financing opportunities to maintain adequate cash
flow.
Expected interest payments on notes payable for the period ended June 30, 2008,
are as follows:
06/30/09 06/30/10 06/30/11 06/30/12 Total
$610,000 $163,000 $217,000 $740,000 $1,730,000
Principal repayments on notes payable for the period ended June 30, are as
follows:
06/30/09 $ 5,793,000
06/30/10 $ 1,553,000
06/30/11 $ 2,071,000
06/30/12 $ 7,058,000
-----------
$16,475,000
Discounts and rounding $ (435,115)
-----------
Total $16,039,885
===========
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 June 30,
2008, the Company has established a full valuation allowance.
27
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
prices 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.
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.
Management's Annual Report on Internal Control Over Financial Reporting
The financial statements, financial analyses and all other information included
in this Quarterly Report on Form 10-Q were prepared by the Company's management,
which is responsible for establishing and maintaining adequate internal control
over financial reporting.
The Company's disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in its reports
filed under the Exchange Act, such as this Form 10-Q, is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. The Company's disclosure controls and procedures are also designed to
ensure that such information is accumulated and communicated to management to
allow timely decisions regarding required disclosure. The Company's internal
controls are designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of its financial statements in
conformity with GAAP.
28
The Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company's internal control over
financial reporting includes those policies and procedures that:
i. Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company;
ii. Provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and
iii. Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition and use or disposition of the Company's assets that
could have a material effect on the financial statements.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal controls can provide only
reasonable assurances with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal controls may
vary over time.
Management assessed the design and effectiveness of the Company's internal
control over financial reporting as of June 30, 2008. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Based on management's assessment using this framework, it believes
that, as of June 30, 2008, the Company's internal control over financial
reporting is effective.
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.
This quarterly report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
29
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fiscal quarter ended June 30, 2008, there has been no change in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Further, there were no significant changes in the internal controls or in other
factors that significantly affected these controls, during the period ended June
30, 2008, the date of the conclusion of the evaluation of disclosure controls
and procedures.
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
(a) Election of the Company's board of directors, wherein the following
person's were elected, such persons being all of the same persons acting as
directors, except for Randall J. Perry who did not seek re-election, the
Company having reduced its board to five members.
For Withheld
1. Mair Faibish 7,339,268 124,278
2. Frank Bellis, Jr. 7,386,128 87,418
3. Lloyd Miller 7,385,201 88,345
4. Joel Sebastion 7,385,983 87,563
5. Bill Rancic 7,379,178 103,368
(b) To elect auditors,
Where Holtz Rubenstein Reminick, LLP was elected for December 31, 2008
For Against Abstain
6,906,559 19,982 336,428
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.
On April 19, 2008 the Company entered into an agreement to sell its
ownership in Gran Reserve Corporation ("GRC"). The purchase price was $400,000
of which $350,000 thereof is being financed by a promissory, note, with a five
year term at an annual interest rate 5%.
30
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Synergy Brands, Inc.
/s/ Mair Faibish
----------------
By: Mair Faibish
Chief Executive Officer
Date: August 14, 2008
- ----------------------
/s/ Mitchell Gerstein
----------------------
By: Mitchell Gerstein
Chief Financial Officer
Date: August 14, 2008
- ----------------------
31
Exhibit 31.1
Certification Pursuant
To Exchange Act Rule 13-a-14(a)/-15d-14(a)
I, Mair Faibish, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15 (e) and internal control over financial
reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for
the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and to the audit committee of the registrant's board of
directors (or persons fulfilling the equivalent function):
(a) All significant deficiencies and material weaknesses we find in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 14, 2008
/s/ Mair Faibish
Mair Faibish, Chief Executive Officer
32
Exhibit 31.2
Certification Pursuant
To Exchange Act Rule 13-a-14(a)/-15d-14(a)
I, Mitchell Gerstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial
reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for
the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and to the audit committee of the registrant's board of
directors (or persons fulfilling the equivalent function):
(a) All significant deficiencies and material weaknesses we find in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 14, 2008
/s/ Mitchell Gerstein
Mitchell Gerstein, Chief Financial Officer
33
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of
Synergy Brands Inc., (the "Company"), hereby certify that the Quarterly Report
on Form 10-Q of the Company for the quarterly period ended June 30, 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: August 14, 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 June 30, 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: August 14, 2008
/s/ Mitchell Gerstein
- ---------------------
Mitchell Gerstein, Chief Financial Officer
34