-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIgeM6pIqiSPuz8sjI/rKsz8JJeatKrKydkMJ+WSnwvt5/WO8EsN7hhqHjJsP2Td 3YYLzMrZ8FzUkUF0Tb0wdg== 0001026018-03-000029.txt : 20031114 0001026018-03-000029.hdr.sgml : 20031114 20031114134151 ACCESSION NUMBER: 0001026018-03-000029 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNERGY BRANDS INC CENTRAL INDEX KEY: 0000870228 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 222993066 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19409 FILM NUMBER: 031002746 BUSINESS ADDRESS: STREET 1: 40 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5166821980 MAIL ADDRESS: STREET 1: 40 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 FORMER COMPANY: FORMER CONFORMED NAME: KRANTOR CORP DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: DELTA VENTURES INC DATE OF NAME CHANGE: 19600201 10QSB 1 file001.txt FORM 10-QSB. 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-QSB [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended SEPTEMBER 30, 2003 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.) 1175 Walt Whitman Road, Melville NY 11747 (Address of principal executive offices) (zip code) 631-424-5500 (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 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On November 5, 2003 there were 1,894,359 shares outstanding of the registrant's common stock. SYNERGY BRANDS, INC. FORM 10-Q SB SEPTEMBER 30, 2003 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Item 1: Financial Statements Consolidated Balance Sheet as of September 30, 2003 (Unaudited) 2 - 3 Consolidated Statements of Operations for the nine months ended September 30, 2003 and 2002 (Unaudited) 4 Consolidated Statements of Operations for the three months ended September 30, 2003 and 2002. (Unaudited) 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (Unaudited) 6 - 7 Notes to Consolidated Financial Statements 8 - 15 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 25 Forward Looking Information and Cautionary Statements 26 - 38 PART II: OTHER INFORMATION Item 3: Controls and Procedures 39 Item 4: Submission of matters to a vote of Security Holders 39 Item 6: Exhibits and Reports on Form 8-K 39 SIGNATURES AND CERTIFICATIONS SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2003 (Uuaudited)
ASSETS Current Assets: $ 562,396 Cash and cash equivalents 250,000 Cash collateral security deposit 43,045 Marketable Securities 3,557,566 Accounts Receivable, less allowance for doubtful accounts of $127,481 1,944,360 Inventory 1,149,360 Prepaid assets ------------ Total Current Assets 7,506,727 Property and Equipment, Net 411,635 Other Assets 184,101 Note Receivable 109,600 Web Site Development Costs, net of accumulated amortization of $846,639 82,840 Intangible Assets, net of accumulated amortization of $1,725,158 1,579,834 Goodwill 64,297 ------------ Total Assets $ 9,939,034 ============
The accompanying notes are an integral part of this statement. -2- SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2003 (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: $ 2,604,070 Line-of-Credit 3,116,216 Accounts Payable and Accrued Expenses 78,601 Related Party Note Payable ---------- Total Current Liabilities 5,798,887 Notes Payable, net of discount 776,690 Stockholders' Equity: Class A Preferred stock - $.001 par value; 100,000 shares authorized and outstanding; liquidation preference of $10.50 per share 100 Class B preferred stock - $.001 par value; 9,900,000 shares authorized - Class B, Series A Preferred stock - $.001 per value; 500,000 shares authorized 160,000 shares outstanding; liquidation preference of $10.00 per 160 share Common stock - $.001 par value; 49,900,000 Shares authorized 1,884,359 shares outstanding 1,884 Additional paid-in capital 37,705,608 Subscription receivable (45,000) Unearned Compensation (369,876) Deficit (33,912,396) Accumulated other comprehensive loss (12,023) Less; treasury stock, at cost, 7,500 shares (5,000) ---------- Total stockholders' equity 3,363,457 ---------- Total Liabilities and Stockholders Equity $9,939,034 ==========
The accompanying notes are an integral part of this statement. -3- SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
2003 2002 Net Sales $ 28,112,897 $ 21,295,240 -------------- --------------- Cost of Sales Cost of product 25,462,539 19,776,964 Shipping and handling costs 606,621 395,691 -------------- --------------- 26,069,160 20,172,655 -------------- --------------- Gross Profit 2,043,737 1,122,585 Operating expenses Selling General and Administrative Expenses 2,249,770 2,790,219 Depreciation and Amortization 494,584 753,470 -------------- --------------- 2,744,354 3,543,689 Operating loss (700,617) (2,421,104) Other Income (Expense) Interest Income 10,066 21,347 Other Income (Expense) 312,703 (32,947) Equity in earnings of investee 92,368 61,965 Interest and Financing Expense (498,154) (130,120) -------------- --------------- (83,017) (79,755) Loss before income taxes (783,634) (2,500,858) Income tax expense 32,658 22,687 NET LOSS (816,292) (2,523,546) Dividend-Preferred Stock (42,000) - -------------- --------------- Net loss attributable to Common Stockholders $ (858,292) $(2,523,546) ============== =============== Basic and diluted net loss per common share: $ (0.55) $ (1.95) ============== ===============
The accompanying notes are an integral part of these statements -4- SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
2003 2002 Net Sales $ 10,278,027 $ 5,549,288 -------------- --------------- Cost of Sales Cost of product 9,429,048 4,952,219 Shipping and handling costs 229,354 122,898 -------------- --------------- 9,658,402 5,075,117 -------------- --------------- Gross Profit 619,625 474,171 Operating expenses Selling General and Administrative Expenses 841,020 1,017,934 Depreciation and Amortization 197,832 255,038 -------------- --------------- 1,038,852 1,272,972 -------------- --------------- Operating loss (419,227) (798,801) Other Income (Expense) Interest Income 3,404 2,086 Other Income (Expense) (1,725) 7,028 Equity in earnings of investee 12,962 24,712 Interest and Financing Expense (194,837) (26,878) -------------- --------------- (180,196) 6,948 Loss before income taxes (599,423) (791,853) Income tax expense - 7,383 -------------- --------------- NET LOSS (599,423) (799,236) Dividend-Preferred Stock (28,500) - -------------- --------------- Net loss attrubutable to Common Stockholders $ (627,923) $(799,236) ============== =============== Basic and diluted net loss per common share: $(0.34) $ (0.60) ============== ===============
The accompanying notes are an integral part of these statements -5- SYNERGY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
2003 2002 ------------- -------------- Cash Flows From Operating Activities: Net loss $ (816,292) $ (2,523,546) Adjustments to Reconcile Net loss to net cash used in operating activities Depreciation and Amortization 494,584 753,470 Amortization of debt discount 24,690 - (Recovery of)/ provision for doubtful accounts (35,090) 58,000 (Gain) Loss on sale of marketable securities (6,713) 59,368 Loss on extinguishment of debt - 290,217 Loss on sale of preferred stock of Investee - 57,600 Gain on dissolution of subsidiary - (215,250) Equity in earnings of investee (92,368) (61,965) Loss on forgivness of stockholders note receivable - 113,129 Gain on settlement of other liabilities (282,750) - Dividends on preferred stock of subsidiary - 6,125 Common stock and options issued in conjunction with compensation plan 61,725 389,470 Changes in Operating Assets and Liabilities: Net (increase) decrease in: Accounts Receivable (1,663,378) (500,869) Inventory (869,452) (151,832) Prepaid assets, related party note receivable and other assets (741,913) 23,724 Net increase (decrease) in: Accounts payable and and other current liabilities 1,502,554 (993,977) ------------- -------------- Net cash used in operating activities (2,424,403) (2,696,336) Cash Flows From Investing Activities Purchase of business, net of cash required (414,000) - Refund of collateral security deposit - 658,542 Payment of collateral security deposit (250,000) - Purchase of marketable securities (98,986) (977,086) Proceeds from sale of marketable securities 58,272 2,517,135 Purchase of property and equipment (29,602) (9,441) Payments received on notes receivable 800 - Issuance of note receivable - (44,100) Proceeds from the sale of preferred stock of investee - 230,400 Purchase of trade names and customer lists - (250,000) ------------- -------------- Net cash (used in) provided by investing activities (733,516) 2,125,450 Cash Flows From Financing Activities Borrowings under line of credit 13,095,984 6,945,022 Repayments of line of credit (12,246,033) (6,391,279) Proceeds from the issuance of notes payable 850,000 722,778 Proceeds from the issuance of common and preferred stock in a private placement 1,600,000 - Proceeds from the exercise of stock options 84,000 - Proceeds from the sale of common stock 27,200 - Repayments of notes payable (20,000) (662,778) Proceeds from the sale of treasury stock 234,391 106,497 Payment of dividends (42,000) - Purchase of treasury stock (32,779) (52,313) ------------- -------------- Net cash provided by financing activities 3,550,763 667,927 Foreign currency translation (5,172) - ------------- -------------- Net increase in cash and cash equivalents 387,672 97,041 Cash and cash equivalents, beginning of period 174,724 611,316 ------------- -------------- Cash and cash equivalents, end of period $562,396 $708,357 ============= ==============
The accompanying notes are an integral part of these statements. -6- SYNERGY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) 2003 2002 --------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest $ 413,288 $ 90,985 ========== =========== Cash paid for income taxes $ 32,658 $ 22,687 ========== =========== The accompanying notes are an integral part of these statements. -7- SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements SEPTEMBER 30, 2003 and 2002 NOTE A - UNAUDITED FINANCIAL STATEMENTS The consolidated balance sheet as of September 30, 2003, the consolidated statements of operations for the nine months ended September 30, 2003 and 2002, and the consolidated statements of operations for the three months ended September 30, 2003 and 2002, the consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002, have been prepared by Synergy Brands, Inc. ("Synergy" or the Company) without audit. In the opinion of management, all adjustments (which include only normally recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2003 (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-KSB for the year ended December 31, 2002 filed by the Company. The results of operations for the periods ended September 30, 2003 and 2002 are not necessarily indicative of the operating results for the respective full years. NOTE B - STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No.25") and has adopted the disclosure provisions of SFAS No. 148. Under APB No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The following table illustrates the effect on net loss available to common stockholders and loss per share had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
Nine months ended September 30, Three months ended September 30, 2003 2002 2003 2002 ---------- ----------- --------- ---------- Net loss attributable to common stockholders as reported $(858,292) $(2,523,546) $(627,923) $(799,236) Add: Total stock-based employee compensation expense included in reported net loss - 49,825 - - Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards - (450,938) - (150,313) ---------- ----------- --------- ---------- Pro forma net loss $(858,292) $(2,924,659) $(627,923) $(949,549) ========== =========== ========= ========== Loss per common share Basic and diluted - as reported $ (0.55) $ (1.95) $ (0.34) $ (0.60) ========== =========== ========= ========== Basic and diluted - pro forma $ (0.55) $ (2.26) $ (0.34) $ (0.72) ========== =========== ========= ==========
Pro forma compensation expense may not be indicative of pro forma expense in future years. For purposes of estimating the fair value of each option on the date of grant, the Company utilized the Black-Scholes option pricing model. -8- NOTE C - IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 is effective for disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN No. 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN No. 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the of FIN No. 45 did not have a material impact on the Company's financial position or results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46") "Consolidation of Variable Interest Entities." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans for receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in activities on behalf of another company. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46's consolidation requirements apply immediately to variable interest entities created or acquired after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has adopted FIN No. 46 effective January 31, 2003. The adoption of FIN No. 46 has not had a material impact on the Company's consolidated financial condition or results of operations taken as a whole. -9- In April 2003, the FASB issued SFAS No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The adoption of SFAS No. 149 has not had a material impact on the Company's financial position and results of operations. In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The Company adoption of SFAS No. 150 has not had a material impact on its financial position and results of operations. NOTE D - ACQUISITION On June 1, 2003, the company acquired the common stock of Ranley Group, Inc. (d.b.a Cigars Around the World ("CAW") of Chicago, Illinois). CAW is a leading supplier of premium hand made cigars to some of the most prestigious hotels, restaurants, casinos and golf clubs in the United States. The purchase price for the assets and liabilities acquired was $425,000. Additional consideration of up to $450,000, to be paid through the issuance of Class B, Series A Preferred stock is payable on various dates through May 2006, based upon the achievement of certain targeted operating results of CAW, as defined. -10- The acquisition of CAW has been accounted for as a purchase pursuant to SFAS No. 141, "Business Combinations." The operations of CAW have been included in the Company's statement of operations since the acquisition date. The following table summarizes the assets and liabilities acquired from CAW based upon the Company's allocation of the purchase price. Cash $ 11,000 Accounts Receivable 374,000 Other Assets 9,000 Intangible Assets 361,000 Goodwill 64,000 Accounts Payable (331,000) Other Current Liabilities (35,000) Other Long-Term Liabilities (28,000) -------- $425,000 ======== The intangible assets acquired consist principally of customer lists, which are being amortized over a six year estimated useful life from the date of acquisition. The primary reason for the acquisition of CAW and the main factor that contributed to a purchase price in excess of the net assets acquired is that CAW is expected to positively impact the Company's results of operations, in that CAW is expected to have limited selling, general and administrative expenses, as such business is a strategic addition to the Company's current internet operations. CAW distribution will be handled at Synergy's current cigar distribution facilities in Florida. The Company's cigar operations are conducted through Gran Reserve Corporation ("GRC"), which is wholly owned by the Company.Summarized below are the unaudited pro forma results of operations of the Company as if CAW had been acquired at the beginning of the fiscal periods presented: Nine Months ended September 30, 2003 2002 Net Sales $28,638,000 $22,357,000 Net Loss per common shareholders (845,000) (2,531,000) Net loss per common share: Basic $ (.55) $(1.96) Diluted $ (.55) $(1.96) The pro forma financial information presented above for the nine months ended September 30, 2003 and 2002 are not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the periods presented or of future operating results of the combined companies. NOTE E - COLLATERAL SECURITY DEPOSIT At September 30, 2003, the Company had a security deposit with it's major supplier aggregating $250,000 which serves as collateral for credit purchases made by the Company from the supplier. NOTE F - INVENTORY Inventory, consisting of goods held for sale, as of September 30, 2003, consisted of the following: Grocery, health and beauty products $ 1,563,594 General Merchandise $ 380,766 ------------ $ 1,994,360 ============ -11- NOTE G - NOTE RECEIVABLE In 2002, the Company provided $109,600 in financing to a customer engaged in grocery wholesaling products in Canada. The promissory note, which is secured, bears interest at 12%. The principal balance is due on December 31, 2004. Sales to this customer aggregated $3,193,390 during the nine months ended September 30, 2003 and accounts receivable from this customer aggregates $906,229 at September 30, 2003. There were no sales to this customer during the nine months ended September 30, 2002. In August 2003, the Company issued options to purchase 75,000 shares of its common stock to a principal at this customer. (See note J) NOTE H - INVESTMENT In December 2001, the Company made an investment in approximately 20% of the outstanding common stock of 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 $ 92,368 and $61,965 during the nine months ended September 30, 2003 and September 30, 2002, respectively. Summarized results of operations of this investee for the nine months ended September 30, 2003 and 2002 is as follows: 2003 2002 Revenues $ 7,827,000 $7,085,000 Operating expenses (7,126,000) (6,605,000) Other income 40,000 42,000 Income before income taxes 741,000 522,000 Income tax expense (264,000) (195,000) ----------- ---------- Net income $ 477,000 $ 327,000 =========== ========== NOTE I - LINE-OF-CREDIT AND NOTES PAYABLE In 2002, the Company entered into a promissory note with a lender that provide for borrowings of $60,000, bore interest at a rate of 9% per annum and was due on December 31, 2004. On March 31, 2003 the Company entered into a modification agreement with the lender pursuant to which the Company exchanged the note for 15,300 shares of common stock valued at $40,000 and $20,000 in cash. In 2002, two of the Company's subsidiaries entered into two revolving loan and security agreements with the same financial institution (the "Lender"). The lines of credit (the "2002 Lines") as amended in July 2003, under the loans allow for the borrowing of up to $7,000,000 based on the sum of 85% of the net face amount of eligible accounts receivable, as defined, plus the lesser of (1) $2,750,000 or (2) eligible inventory and eligible goods in transit, as defined. The terms of the agreements are for one year and provide for automatic renewals unless written consent by either the Company or the Lender is provided within 60 days of the renewal date. Interest accrues on outstanding borrowings at the greater of (i) 8% per annum in excess of the prime rate or (ii) 17% per annum. The minimum interest to be paid for any year under the line of credit is $320,000. At September 30, 2003, the interest rate on outstanding borrowings was 17%. Outstanding borrowings are collateralized by a continuing security interest in all of the subsidiaries' accounts receivable, chattel paper, inventory, equipment, instruments, investment property, documents and general intangibles. 525,000 shares of the Company's common stock have also been pledged as collateral on the outstanding borrowings. The Company has guaranteed these loans on an unsecured basis. On February 5, 2003, the Company received $500,000 pursuant to the issuance of two secured promissory notes from certain shareholders of ITT, a 20% investee. Borrowings under the notes bear interest at a rate of 12%. The Company is not required to repay any principal until the maturity date of the notes, February 4, 2005. 25,000 restricted shares of the Company's common stock were also issued as part of the financing. The relative estimated fair value of the common stock that was issued of $56,000 was recorded as debt discount and will be amortized over the life of the notes payable. As security for the notes, the Company pledged as collateral its investment in the common stock of ITT. (See Note H.) -12- On July 1, 2003, the Company received $ 350,000 pursuant to the issuance of three secured promissory notes from certain shareholders of ITT, a 20% investee. Borrowings under the notes bear interest at a rate of 12%. The Company is not required to repay any principal until the maturity date of the notes, June 30, 2005. 17,500 restricted shares of the Company's common stock were also issued as part of the financing. The relative estimated fair value of the common stock that was issued of $42,000 was recorded as debt discount and will be amortized over the life of the notes payable. As security for the notes, the Company pledged as collateral its investment in the common stock of an investee. (See Note H.) NOTE J - STOCKHOLDERS EQUITY During the nine months ended September 30, 2003, the Company purchased 47,866 shares of its stock on the open market. These shares were recorded as treasury stock at their aggregate cost of approximately $32,779. During the nine months ended September 30, 2003, the Company sold 47,866 shares of its treasury stock for aggregate proceeds of $234,391. During the nine months ended September 30, 2003, the Company issued 30,938 shares of common stock as compensation for services under existing agreements and recorded a charge to operations of $54,225. The Company also issued options to purchase 75,000 shares of its common stock at a exercise price of $4.00 per share to a principal at a major customer in Canada. (See note G) During the nine months ended September 30, 2003, the Company received proceeds of $84,000 from the exercise of stock options to purchase 60,000 shares of the Company's common stock. The Company also issued 12,500 shares of its common stock pursuant to the exercise of stock options, for which cash proceeds of $45,000 was received in October 2003. In January 2003, the Board of Directors of the Company approved a private placement of securities ("2003 Private Placement") in which 100,000 units were offered, with each unit consisting of one share of unregistered Class B, Series A Preferred Stock and one share of unregistered restricted common stock, at a purchase price of $10.00 per unit. In February 2003, the Company sold 60,000 units and received aggregate proceeds of $600,000 as a result of the 2003 Private Placement. In June 2003, the Board of Directors of the Company approved an increase to 500,000 authorized shares, Class B Series A Preferred Stock. The Board of Directors approved a second Private Placement in which 100,000 shares were offered, with each unit consisting of one share of unregistered Class B, Series A Preferred Stock and one share of unregistered restricted Common Stock at a purchase price of $10.00 per unit. In June 2003, the Company sold 10,000 units and received aggregate proceeds of $100,000. Subsequently, in July 2003, the Company sold 90,000 units and received proceeds of $900,000. The Company has 500,000 authorized shares of its Class B, Series A Preferred Stock . 160,000 shares were issued in conjunction with the 2003 Private Placement. The holders of Class B, Series A Preferred Stock have no voting rights with respect to general corporate matters. The holders of Class B, Series A Preferred Stock are entitled to receive dividends at the annual rate of $.90 per share per annum. -13- The Company may, as its option, at any time in whole, or from time to time in part, out of earned funds of the Corporation, redeem the Class B, Series A Preferred Stock on any date set by the Board of Directors, at $10.00 per share plus, in each case, an amount equal to all dividends of Class B, Series A Preferred Stock accrued and unpaid thereon, pro rata to the date of redemption. If, however, as to each share of Class B, Series A Preferred Stock outstanding, if such as not redeemed by the Company within 2 years of such shares, the Company will be obligated to issue to the then holder of record of such outstanding Class B, Series A Preferred Stock, half a share of the Company's unissued restricted Common Stock per share of Class B, Series A Preferred Stock for each year that said share is not redeemed. No more than 19.9% of the Company's stock can be issued in connection with stock dividend payments against the Class B, Series A preferred stock. NOTE K - COMMITMENTS AND CONTINGENCIES 1. Other Liabilities Since 1999, the Company has disputed services performed by two vendors. The Company has entered into a settlement and release agreement in which the Company has paid $13,000 to one of the vendor and the Company has been released of its liability to that vendor. The Company has recorded a gain of $155,750 as a result of this release during the first quarter of 2003. In March 2003, the Company and the other vendor executed a settlement and release agreement. Pursuant to the terms of the settlement and release agreement, the Company was relieved of its obligation to pay for the services that was disputed. The Company recorded a gain of $127,000 as a result of the release by this vendor. These gains were recorded as a component of other income (expense) in the consolidated statements of operations. 2. Indemnification The subscription Agreement pursuant to which securities were offered in conjunction with the 2003 Private Placement contain provisions by which the Company is obligated to indemnify, defend and hold the purchaser harmless from and against any damages, liabilities, losses, judgement, claim, defiency or reasonable expense (including interest, penalties, reasonable attorney's fees and amounts paid in settlement) incurred or asserted against any purchaser arising out of or connected with, or as a result of (i) any failure of the Company to fulfill any terms or conditions of the Subscription Agreement, or any breach of the Company of any warranties contained in the Subscription Agreements and (ii) any claim, litigation, investigation or proceeding relating to any of the foregoing. As of September 30, 2003, the Company has not recorded a liability for any obligations arising as a result of these indemnification obligations. NOTE L - SEGMENT AND GEOGRAPHICAL INFORMATION All of the Companys identifiable assets and results of operations are located in the United States and Canada. Management evaluates the various segments of the Company based on the types of products being distributed which were, as shown below: Nine Months Ended September 30, 2003 and 2002 Salon Grocery and Products HBA (BtoB) B2C Total Revenue 2003 $3,010,607 $ 23,502,757 $ 1,599,533 $ 28,112,897 2002 $1,969,383 $ 18,364,964 $ 960,893 $ 21,295,240 Net Income 2003 $(323,360) $ (135,013) $ (357,919) $ (816,292) (Loss) 2002 $(620,300) $ (339,360) $(1,563,886) $(2,523,546) Interest & 2003 $146,974 $ 323,043 $28,137 $498,154 Finance Expenses 2002 $ 29,908 $ 51,164 $49,048 $130,120 Depreciation & 2003 $159,732 $ 204,579 $130,273 $494,584 amortization 2002 $394,551 $ 204,420 $154,499 $753,470 -14- The sale of Salon products, Grocery and Health & Beauty Aids are on a wholesale basis predominantly in the Northeastern United States. B to C Sales (business to Consumer) are sold over the Internet. Products sold online include Cigars, Salon Products and general merchandise. Three Months Ended September 30, 2003 and 2002 Salon Grocery and Products HBA (BtoB) B2C Total Revenue 2003 $753,731 $8,889,336 $634,960 $10,278,027 2002 $498,420 $4,761,945 $288,923 $ 5,549,288 Net Income 2003 $(156,528) $(158,280) $(284,615) $(599,423) (Loss) 2002 $(195,560) $ 22,524 $(626,200) $(799,236) Interest & 2003 $56,759 $126,440 $11,638 $194,837 Finance Expenses 2002 $ 3,512 $ 10,509 $12,857 $ 26,878 Depreciation & 2003 $ 53,244 $68,193 $76,395 $197,832 amortization 2002 $131,517 $68,140 $55,381 $255,038 Identifiable assets are as follows: September 30, 2003 $3,132,424 $4,681,168 $2,125,442 $9,939,034 December 31, 2002 $2,193,471 $2,477,292 $1,200,906 $5,871,669 NOTE M- NET LOSS PER SHARE Basic and diluted loss per share is calculated by dividing the net loss applicable to common stock by the weighted-average number of common shares outstanding during each period. Incremental shares from assumed exercises of stock options and warrants of 599,550 and 594,934 for the nine months ended September 30, 2003 and 2002, respectively, have been excluded from the calculation of diluted loss per share since their effect would be antidilutive. The following data shows the amounts used in computing basic and diluted loss per share: Nine Months ended September 30, 2003 2002 Net loss applicable to common stock $ (858,292) $(2,523,546) =========== ============ Weighted-average number of shares in basic 1,568,756 1,293,949 and diluted EPS =========== ============ Three Months ended September 30, 2003 2002 Net loss applicable to common stock $ (627,923) $ (799,236) =========== ============ Weighted-average number of shares in basic 1,825,140 1,322,377 and diluted EPS =========== ============ -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Synergy Brands, Inc. (SYBR or the Company) is a holding company, which operates through three unique business segments that all utilize distribution and logistics. The businesses include PHS Group (also known as Dealbynet;or DBN), Gran Reserve Corporation (GRC), and Proset Hair Systems (Proset). PHS Group procures fast moving brand name grocery and Health and Beauty Aids (HBA) products for resale to traditional customers utilizing the logistics and networking advantages of electronic commerce and just in time distribution. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery HBA sectors. Distribution of such products is directed to major retailers and wholesalers from major U.S. consumer product manufacturers. Major product categories include detergents, paper products, household cleaners that are manufactured by major producers such as Procter and Gamble, Clorox, Marcal and many others. PHS has positioned itself a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire need of a retail operation, whereby 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 and in turn increase sales to its customers through this unique focus. PHS concentrates on the fastest moving promotional items and uses logistics and distribution savings to streamline and reduce its sale prices. GRC manages multiple Internet domains that market directly to the retail consumer via electronic commerce. GRC owns multiple domains including Cigargold.com, Netcigar.com and BeautyBuys.com. GRC focuses on a mix of Brand name premium cigar items and cigar related accessories and markets them through multiple cigar domains including CigarGold.com and NetCigar.com. Beautybuys.com markets beauty related products to the customer on the Internet through multiple domains including store.perx.com. Proset distributes Salon Hair care products to chain drug stores, small wholesalers and supermarkets in the Northeastern part of the United States. Proset uses just in time technology and continuous replenishment programs to stock, track and market defined planograms within the store's beauty aisles. Planograms can range from 4 feet to 16 feet depending on the demographics of the store. -16- The Company also owns 20% of the outstanding common stock of Interline Travel and Tours, Inc. (ITT). The Company believes that its capital investment in this unique travel Company may provide for the future capital appreciation. Synergy Brands does not manage ITT and relies on such company's management for day-to day operations. ITT provides cruise and resort hotel packages through a proprietary reservation system to solely airline employees and their retirees. ITT is believed to be the largest Company in this sector of the travel industry. Information on ITT can be found at www.perx.com and www.store.perx.com. Results for the nine months ended September 30, 2003 as compared to September 30, 2002 The Company's statements of operations were comprised of the following:
Net Sales 9/30/03 9/30/02 % change ----------- ----------- -------- PHS Group (BtoB) $23,502,757 $18,364,964 28% Proset (Salon hair care products) $ 3,010,607 $ 1,969,383 53% B2C Sites $ 1,599,533 $ 960,893 66% Total Net Sales $28,112,897 $21,295,240 32% Gross Profit $ 2,043,737 $ 1,122,585 82% 7.3% 5.3% 38% Net loss $ (816,292) $(2,523,546) 68% Depreciation and Amortization expense $ 494,584 $ 753,470 34% *Adjusted operating loss $ (321,708) $(1,770,076) 82% Basic & diluted net loss per common share $ (0.55) $ (1.95) 72% Weighted average shares outstanding 1,568,756 1,293,949
* Adjusted operating (loss) represents net loss less Deprecation and Amortization expenses. -17- Sales increased by 32% to $28.1 million for the nine months ended September 30, 2003. The rise is attributable to a 53% increase in sales of salon hair care products as well as a 66% increase in Internet related sales, especially in the Company"s premium Cigar operation resulting from the purchase of Cigars Around the World during the three months ended June 30, 2003. The grocery business (BtoB) increased by 28% for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. Although sales increased by 32%, the Company's gross profit increased by 82% to $2.0 million for the nine months ended September 30, 2003. The Company increased its margin due to two factors; (i) Sales of salon products and Internet related goods categories increased, which sales traditionally result in a higher gross margin to the Company and (ii) Promotional funding from the Company's suppliers significantly increased for the nine month period as compared to the prior period in the Company"s grocery BtoB operation. The Company's grocery operation provided 63% of the overall margin contribution for the nine months ended September 30, 2003 as compared to a 56% contribution for the nine months ended September 30, 2002. The Company used this additional margin to expand its Direct Store operation by expanding its warehousing, transportation and logistical support centers. The BtoB operation was able to expand its gross profit by 105%, while increasing revenues by 28% through optimizing its procurement cycles and maximizing its promotional programs. Management has worked closely with its primary vendors to migrate its purchases to customized displays of nationally branded products that can be bulk shipped to optimize retail floor displays. This enables the Company to increase revenues and procure goods at lower average costs then regular stock units. Gross Profit Analysis table
Gross Gross Gross Gross Profit Gross Gross Profit Profit% Profit% Profit% Contribution Profit % Contribution 9/30/03 9/30/03 9/30/03 9/30/02 PHS Group 5.5% 3.4% $1,286,397 63.0% $627,357 55.9% BtoB) Proset 10.5% 13.7% $315,687 15.5% $269,294 24.0% Salon Products B2C sites 27.6% 23.5% $441,653 21.5% $225,934 20.1% Total Gross 7.3% 5.3% $2,043,737 $1,122,585 Profit
Selling, general and administrative expenses decreased by 19.4% to $2,249,770 for the nine months ended September 30, 2003 as compared to $2,790,219 for the nine months ended September 30, 2002. Contributing to the decrease in selling, general and administrative expenses was a $100,000 decrease in compensation charges related to the issuance of stock-based compensation to employees and vendors. The Company also had recorded a bad debt recovery of $35,000 during the first nine months of 2003 as compared to a provision for doubtful accounts of $58,000 for the first nine months of fiscal 2002. Depreciation and amortization expenses were further reduced by 34.4% to $494,584 for the nine months ended September 30, 2003, predominately due to the adoption of FAS 142. This reduction was also a factor in reducing the operating loss of the Company. Other income and expense increased from expense of $79,755 for the nine months ended September 30, 2002 to expense of $83,017 for the nine months ended September 30, 2003. The components of other income and expenses include financing costs as well as non-recurring items. For the nine months ended September 30, 2003, financing cost increased by 283% to $498,154 predominantly due to inventory financing and trade credit extension. The Company is able to recognize better operating profits through wholesaling, but needs to extend credit terms of 10 to 45 days, thus increasing its financing costs. The Company further extinguished $282,750 of accounts payable relating to online advertising that had been disputed for a long period. -18- The net loss of the Company was reduced by 68% to a net loss of $816,292 or $0.55 per common share for the nine months ended September 30, 2003 as compared to a net loss of $2,523,546 or $1.95 per common share for the nine months ended September 30, 2002. The improvement in profitability is predominately related to a reduction of operating expenses and an increase in gross profit as well as a material increase in sales. The Company owns a 20% equity stake in ITT. The Company recorded earnings under the equity method in ITT of $92,368 for the nine months ended September 30, 2003 as compared to $61,965 for the nine months ended September 30, 2002. For the full fiscal year period of ITT, which ended June 30, 2003, ITT generated almost $900,000 in pre-tax income. The Company's share under the equity method would have amounted to $180,000 for the full fiscal year. The Company has this investment recorded on its Balance sheet at a value of $164,549. Management believes, with no assurances, that its book value based upon cost is significantly lower then the potential market value of this investment. Subsequent to this investment, certain shareholders of ITT provided Synergy with $850,000 in 12% notes that are secured by Synergy's investment in ITT. The Company, together with ITT, is exploring all possible options to optimize the valuation of ITT. Results for the three months ended September 30, 2003 as compared to September 30, 2002 The Company's statements of operations were comprised of the following:
Net sales 9/30/03 9/30/02 % Change PHS Group (BtoB) $ 8,889,336 $ 4,761,945 87% Proset (Salon hair care products) $ 753,731 $ 498,420 51% B2C Sites $ 634,960 $ 288,923 120% Total net sales $10,278,027 $ 5,549,288 85% Gross Profit $ 619,625 $ 474,171 31% 6.0% 8.5% 29% Net loss $ (599,423) $ (799,236) 25% Deprecation and Amortization expense $ 197,832 $ 255,038 22% * Adjusted operating loss $ (401,591) $ (544,198) 26% Basic & diluted net loss per common share $ (0.34) $ (0.60) 43% Weighted average shares outstanding 1,825,140 1,322,377
* Adjusted operating loss represents net loss less Deprecation and Amortization expenses. -19- Sales increased by 85% to $10.3 million for the three months ended September 30, 2003. The rise is attributable to a 51% increase in sales of salon hair care products as well as a 120% increase in Internet related sales, especially in the Company's premium Cigar operation resulting from the purchase of Cigars Around the World. The grocery business (BtoB) increased by 87% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002. Although sales increased by 85%, the Company's gross profit increased by 31% to $619,625 for the three months ended September 30, 2003. The Company increased its margin due to two factors, (i) Sales of salon products and Internet related goods categories increased which sales traditionally result in a higher gross margin to the Company and (ii) Promotional funding from the Company's suppliers significantly increased for the three months period as compared to the prior period in the Company's grocery BtoB operations. Gross Profit Analysis table
Gross Gross Gross Gross Profit Gross Gross Profit Profit% Profit% Profit% Contribution Profit % Contribution 9/30/03 9/30/03 9/30/03 9/30/02 PHS Group 4.1% 7.0% $368,067 59.4% $334,666 70.6% (BtoB) Proset Salon 9.2% 13.7% $ 69,578 11.2% $ 68,040 14.3% Products B2C sites 28.7% 24.7% $181,980 29.4% $ 71,465 15.1% Total Gross 6.0% 8.5% $619,625 $474,171 Profit
Selling, general and administrative expenses decreased by 17% to $841,020 for the three months ended September 30, 2003 as compared to $1,017,934 for the three months ended September 30, 2002. Depreciation and amortization expenses were further reduced by 22.4% to $197,832 for the three months ended September 30, 2003, predominately due to the change in the useful life of customer lists in the fourth quarter 2002. This reduction was also a factor in reducing the operating loss of the Company. Other income and expense decreased from income of $6,948 for the three months ended September 30, 2002 to expense of $180,196 for the three months ended September 30, 2003. The components of other income and expenses include financing costs as well as non-recurring items. For the three months ended September 30, 2003, financing cost increased by 625% to $194,837 predominantly due to inventory financing and trade credit extension. The Company is able to recognize better operating profits through wholesaling, but needs to extend credit terms of 10 to 45 days, thus increasing its financing costs. The net loss of the Company was reduced by 25% to a net loss of $599,423 or $0.34 per common share for the three months ended September 30, 2003 as compared to a net loss of $799,236 or $0.60 per common share for the three months ended September 30, 2002. The improvement in profitability is predominately related to a reduction of operating expenses and an increase in gross profit. In 2003, PHS Group powered by DealBynet (DBN) (The Company's BtoB operation) created a full service direct store delivery (DSD)operation. -20- In the second quarter of 2003, major suppliers advised PHS that in order to qualify for significant promotional rebates, retail performance was required. Management evaluated the programs required and decided that it can best serve its customers by continuing to reduce product costs through the optimization of manufacturers rebates that it can pass along to its customer base. In order to develop the DSD plan, PHS initiated the following operating plan; * Lease a fleet of trucks for direct store efficiency ; and hire, train and manage a staff of company drivers with CDL qualifications as well as develop a customer routing system; * Operate a company warehouse for logistics and inventory management; * Expanded a retail sales staff; * Hire, telemarketers to facilitate order taking and catalog generation as well as provide technical training for customer web based ordering; * Open a total 1000 retail accounts; * Develop a competitive niche by selling high velocity, high demand products already being purchased for wholesale distribution at ultra competitive retail pricing for the purpose of increasing our market penetration; * Increase gross margin for the BtoB operation to 10%. As of the end of third quarter of 2003, the following goals were achieved; * DBN leased six trucks and consigned its warehouse for its TL deliveries. * A new warehouse was consigned in the third quarter ended September 30, 2003. At current volume levels, management is seeking a dedicated permanent facility to further streamline its DSD operation. * Over 300 accounts were opened and a daily route was developed for all drivers to existing accounts. * In the third quarter ended September 30, 2003, 1.5 million in retail sales were generated out of a total of $8.9 million in total PHS sales. * The start-up costs for the DBN DSD operation were $250,000 for the three months ended September 30, 2003. These items have been expensed as selling general and administrative expenses. PHS has been able to absorb the incremental costs and still reduce its overall selling, general and administrative expense from the prior period. Management believes that its investment in the start-up costs for a newly developed routing system for retail accounts will allow its customers to benefit from its streamlined logistics model of selling highly desired national brand name products at reduced prices. By creating a dedicated route, PHS believes that customers will value consistency of deliveries on a predictable cycle under selective merchandising conditions that will allow for rebate optimization. -21- LIQUIDITY AND CAPITAL RESOURCES The Company's major lender is the International Investment Group Trade Opportunities Fund (IIG). IIG finances two of the Company's major subsidiaries, PHS Group and Gran Reserve Corporation (GRC). The line of credit, as amended in July 2003, with IIG allows for borrowings up to $7,000,000 against eligible accounts receivable, orders, and inventory. The term of the agreement is for one year and allows for automatic renewals. Outstanding borrowings are collateralized by a continuing security interest in all of the Company's accounts receivable, chattel paper, and inventory, orders in transit equipment, instruments, investment property, documents and general intangibles as well as a $7 million Corporate guaranteed from Synergy Brands. All of the Company's businesses rely on the marketing and merchandising of nationally branded products together with manufacturers that already spend billions of dollars to build their brands. The manufacturers of grocery products have encouraged PHS to use its platform to reduce product distribution costs through logistics. The Company's believes that its working capital metrics are stable and rely on continuous sales flow. By maintaining a revolving line of credit from IIG that provides the Company with advance rates of 85% against receivables and 50% against inventory and orders, the Company believes that sufficient working capital is available to increase Company sales to about $40 million per year. This prediction is a forward looking statement subject to uncertainties although the Company believes such outcome is attainable. Management expects to achieve revenue growth of approximately $40 million in FY 2003. It is therefore anticipated that additional capital may be needed for additional revenue growth. The Company's predominant need for liquidity is its requirement to finance its Receivables and Inventory requirements. In order to finance its requirements the Company relies on Asset based lending, trade financing as well as its cash flow. The Company's major lender IIG provides receivable and inventory financing to its Grocery, HBA, Salon, and Cigar businesses. In addition, most of the Company's major vendors provide payment terms for purchases ranging from 10 to 30 days. Working capital improved to $1,707,840 at September 30, 2003 as compared to $51,542 at December 31, 2002. The Company's liquidity improved through the placement of $1,600,000 of restricted 9% Class B series A preferred as well as the placement of $850,000 of 12% long-term notes. The Company utilizes this placement to leverage its revolving line of credit of IIG so that it can maximize its ability to generate sales through inventory and receivable financing. Shareholder's equity improved to $3.4 million, predominately due to the private placement of $1,600,000 during the nine months ended September 30, 2003. The Company completed the acquisition of Cigars around the World (CAW) on June 1, 2003. CAW is a leading supplier of premium hand made cigars to some of the most prestigious Hotels, Restaurants, Casinos and Golf Clubs in the United States. CAW provides its customers with a turnkey package that includes merchandising, special display units and product guidance. This acquisition is expected to be immediately accretive to Synergy's operating income and is a strategic addition to the current Internet operations of the company. CAW distribution will be handled at Synergy's current cigar distribution facilities in Florida. The company's Cigar operations are conducted through Gran Reserve Corporation (GRC), which is wholly owned by Synergy Brands. The acquisition was for cash of $425,000, with additional consideration of $450,000 based on a multiple of Earnings before taxes, depreciation and amortization (EBTDA) over the next three years as defined. The founder and principal shareholder of CAW, William Rancic, has signed a two-year employment agreement that includes a five-year non-compete from the end of the term of his employment agreement. Management believes that cost containment, improved financial and operating controls, and a focused sales and marketing effort should provide positive results from operations and cash flows in the near term. Achievement of these goals, however, will be dependent upon the Company's attainment of increased revenues, improved operating costs and trade support levels that are consistent with management's plans. Such operating performance will be subject to financial, economic and other factors beyond its control, and there can be no assurance that the Company's goals will be achieved. -22- The following table presents the Company's expected cash requirements for contractual obligations outstanding as of September 30, 2003.
Payment due by period Less than 1 year 1 - 3 4 - 5 After 5 Total years years years Line-of-credit $2,604,070 - - - $2,604,070 Notes Payable - $850,000 - - $850,000 Operating Leases $7,729 $394,498 $178,323 - $580,550 Total Contractual Cash $2,611,799 $1,244,498 $178,323 - $4,034,620
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 these estimates. Management uses authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. Management believes that the following critical accounting policies affect its more significant judgments and estimates in the preparation of the Company's financial statements. ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable are due from businesses engaged in the distribution of grocery, health and beauty products as well as from consumers who purchase health and beauty products and premium handmade cigars from the Company's Web sites. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral is not required. Accounts receivable are due within 30 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 bad debt expense. VALUATION OF DEFERRED TAX ASSETS. Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily comprised of reserves, which have been deducted for financial statement purposes, but have not been deducted for income tax purposes as well as net operating loss carry forwards. The Company annually reviews the deferred tax asset accounts to determine if is appears more likely than not that the deferred tax assets will be fully realized. At September 30, 2003 the Company has established a full valuation allowance. VALUATION OF LONG-LIVED ASSETS. The Company reviews its long-lived assets periodically to determine potential impairment by comparing the carrying value of the assets with expected net cash flows expected to be provided by the operating activities of the business or related products. Should the sum of the expected future net cash flows be less than the carrying value, the Company would determine whether an impairment loss should be recognized. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the asset. -23- RECENT ISSUED ACCOUNTING PRONOUNCEMENTS. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the current requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified as extraordinary items only if they are deemed to be unusual and infrequent, in accordance with the current criteria for extraordinary classification. Additionally, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB Opinion No. 30 for classification as an extraordinary item shall be reclassified. In addition, SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that modifications of capital leases that result in reclassification as operating leases be accounted for consistent with sale-leaseback accounting rules. SFAS No. 145 also contains other nonsubstantive corrections to authoritative accounting literature. The changes related to debt extinguishment will be effective for fiscal years beginning after May 15, 2002, and the changes related to lease accounting will be effective for transactions occurring after May 15, 2002. In accordance with SFAS 145, the Company has reclassified the forgiveness of a shareholder's note receivable of $113,129 to the Company from extraordinary items to other income (expense) during the nine months ended September 30, 2002 as it did not meet the definition for classification as extraordinary. This reclassification had no effect on the Company's reported net loss per basic or diluted share for the nine months ended September 30, 2002. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 is effective for disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN No. 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN No. 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material impact on the Company's financial position or results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46") "Consolidation of Variable Interest Entities." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans for receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in activities on behalf of another company. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46's consolidation requirements apply immediately to variable interest entities created or acquired after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has adopted FIN No. 46 effective January 31, 2003. The Company adoption of FIN No. 46 has not had a material impact on the Company's consolidated financial condition or results of operations taken as a whole. -24- In April 2003, the FASB issued SFAS No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The adoption of SFAS No. 149 has not had a material impact on the Company's financial position and results of operations. In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has not had a material impact on the Company's financial position and results of operations. SEASONALITY Sales of beauty care products and fragrances increase over traditional gift giving holidays such as Christmas, Mother's Day, Father's Day, and Valentine's Day. Cigar product sales also increase during holiday periods and summer months, but also sales increases occur during periods of special sporting events. PHS Group revenues increase during the cold and flu season due to the sale of high cost respiratory products. Sales decrease during the spring and summer as the products sold during that period have lower costs. INFLATION The Company believes that inflation, under certain circumstances, could be beneficial to the Company's business. 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. Since the Company's current interest rate is at the rate of 17% under the line of credit agreement, the Company currently does not have any interest rate risk on its line of credit. -25- FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS Other than the factual matters set forth herein, the matters and items set forth in this report are forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. These statements relate to future events or the Company's future financial performance and include, but are not limited to, statements concerning: The anticipated benefits and risks of the Company's key strategic partnerships, business relationships and acquisitions; The Company's ability to attract and retain customers; The anticipated benefits and risks associated with the Company's business strategy, including those relating to its distribution and fulfillment strategy and its current and future product and service offerings; The Company's future operating results and the future value of its common stock; The anticipated size or trends of the market segments in which the Company competes and the anticipated competition in those markets; Potential government regulation; and The Company's future capital requirements and its ability to satisfy its capital needs. Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Factors that could cause such differences include, but are not limited to, those identified herein and other risks included from time to time in the Company's other Securities and Exchange Commission ("SEC") reports and press releases, copies of which are available from the Company upon request. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Moreover the Company assumes no responsibility for the accuracy and completeness of the forward-looking statements to conform such statements to actual results or to changes in its expectations. In addition to the other information in this Form 10-QSB, the following risk factors should be carefully considered in evaluating the Company business because these factors may have a significant impact on the Company's business, operating results and financial condition. As a result of the risk factors discussed below and elsewhere in this Form 10-QSB and the risks discussed in the Company's other SEC filings, actual results could differ materially from those projected in any forward-looking statements. 1. THE COMPANY HAS INCURRED OPERATING LOSSES. The Company has a long history of operating losses. To date, a large portion of the Company's expenses have been financed through capital raising activities. Although the Company has narrowed its losses, it still continues to report operating deficits as opposed to profits. A large portion of the Company's historical losses are a direct result of fees and expenses paid for in stock and/or barter. However, due to a pattern of historical losses, there is no assurance that further capital will not be needed for operating purposes. 2. INTERNET The internet environment is relatively new to business and is subject to inherent risks as in any new developing business including rapidly developing technology with which to attempt to keep pace and level of acceptance and level of consumer knowledge regarding its use. 3. DEPENDENCE ON PUBLIC TRENDS. The Company's business is subject to the effects of changing customer preferences and the economy, both of which are difficult to predict and over which the Company has no control. A change in either consumer preferences or a down-turn in the economy may affect the Company's business prospects. -26- 4. POTENTIAL PRODUCT LIABILITY. As a participant in the distribution chain between the manufacturer and consumer, the Company would likely be named as a defendant in any product liability action brought by a consumer. To date, no claims have been asserted against the Company for product liability; there can be no assurance, however, that such claims will not arise in the future. Currently, the Company does not carry product liability insurance. In the event that any products liability claim is not fully funded by insurance, and if the Company is unable to recover damages from the manufacturer or supplier of the product that caused such injury, the Company may be required to pay some or all of such claim from its own funds. Any such payment could have a material adverse impact on the Company. 5. RELIANCE ON COMMON CARRIERS. The Company does not utilize its own trucks in its business and is dependent, for shipping of product purchases, on common carriers in the trucking industry. Although the Company uses many different common carriers, the trucking industry is subject to strikes from time to time, which could have material adverse effect on the Company's operations if alternative modes of shipping are not then available. Additionally the trucking industry is susceptible to various natural disasters which can close transportation lanes in any given region of the country. To the extent common carriers are prevented from or delayed in utilizing local transportation lanes, the Company will likely incur higher freight costs due to the limited availability of trucks during any such period that transportation lanes are restricted. 6. COMPETITION. The Company is subject to competition in all of its various product sale businesses. While these industries may be highly fragmented, with no one distributor dominating the industry, the Company is subject to competitive pressures from other distributors based on price and service and product quality and origin. 7. LITIGATION The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions should not materially affect the financial position, results of operations or cash flows of the Company, but there can be no assurance as to this. -27- 8. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING. Synergy's qualification for trading on the NASDAQ Small Cap system has in the recent past been questioned, the focus being on the market quotes for the Company's stock, the current bid price having for a time been reduced below the minimum NASDAQ standard of $1 and having been below such level for an appreciable period of time, as well as the Company also being notified that stockholders' equity has fallen below minimum NASDAQ continued listing standard of $2,500,000. NASDAQ has adopted, and the Commission has approved, certain changes to its maintenance requirements including the requirement that a stock listed in such market have a bid price greater than or equal to $1.00 and the listed Company maintain stockholders equity above $2,500,000. The bid price per share for the Common Stock of Synergy has been below $1.00 in the past and the Common Stock has remained on the NASDAQ Small Cap System because Synergy has complied with alternative criteria which are now eliminated under the new rules. If the bid price dips below $1.00 per share, and is not brought above such level for a sustained period of time or the Company fails to maintain stockholders'equity at a level of at least $2,500,000 the Common Stock could be delisted from the NASDAQ Small Cap System and thereafter trading would be reported on the OTC Bulletin Board or on the "pink sheets." (see Item 5-"Market For The Registrant's Common Stock and Related Stockholder Matters" contained in the Company's Annual Report of Form 10-KSB for the year -ended December 31, 2002 for a more in depth discussion of the Company's current NASDAQ listing status)In the event of delisting from the NASDAQ Small Cap System, the Common Stock would become subject to the rules adopted by the Commission regulating broker-dealer practices in connection with transactions in "penny stocks." The disclosure rules applicable to penny stocks require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. In addition, the broker-dealer must identify its role, if any, as a market maker in the particular stock, provide information with respect to market prices of the Common Stock and the amount of compensation that the broker-dealer will earn in the proposed transaction. The broker-dealer must also provide the customer with certain other information and must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that following the proposed transaction the broker-dealer provide the customer with monthly account statements containing market information about the prices of the securities. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Common Stock became subject to the penny stock rules, many broker-dealers may be unwilling to engage in transactions in the Company's securities because of the added disclosure requirements, thereby making it more difficult for purchasers of the Common Stock to dispose of their shares. The Company's common stock is presently above and has historically remained at NASDAQ trading levels above $1 except for limited periods of time and the Company has presently achieved a level of Stockholders' equity above $2,500,000. NASDAQ Listing Qualifications has recently confirmed the Company's compliance with standards for continued listing on the NASDAQ Small Cap Market. Historical stability combined with the Company's increasing business share in the market and its continuing establishment as a viable force in the industries wherein it participates gives the Company confidence that its susceptibility to market deficiencies is in a much lessened state then in years past and that it can continue to achieve and maintain NASDAQ listing compliance, but of this there can be no assurance. -28- 9. RISKS OF BUSINESS DEVELOPMENT. Because still the lines of product and product distribution established for the Company are relatively new and different from its historical non-internet product distribution business, the Company's operations in these areas should continue to be considered subject to all of the risks inherent in a new business enterprise, including the absence of an appreciable operating history and the expense of new product development and uncertainties on demand and logistics of delivery and other satisfaction of customer demands. Various problems, expenses, complications and delays may be encountered in connection with the development of the Company's new products and methods of product distribution. These expenses must either be paid out of the proceeds of future offerings or out of generated revenues and Company profits and will likely be a drain on Company capital if revenue and revenue collection does not keep pace with Company expenses. There can be no assurance as to the continued availability of funds from any of these sources. 10. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS. The market for the Company's products is rapidly changing with evolving industry standards and frequent new product introductions. The Company's future success will depend in part upon its continued ability to enhance its existing products and to introduce new products and features to meet changing customer requirements and emerging industry standards and to continue to have access to such products from their sources on a pricing schedule conducive to the Company operating at a profit. The Company will have to develop and implement an appropriate marketing strategy for each of its products. There can be no assurance that the Company will successfully complete the development of future products or that the Company's current or future products will achieve market acceptance levels and be made available for sale by the Company conducive to the Company's fiscal needs. Any delay or failure of these products to achieve market acceptance or limits on their availability for sale by the Company would adversely affect the Company's business. In addition, there can be no assurance that the products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. Management believes actions presently being taken to meet and enhance the Company's operating and financial requirements should provide the opportunity for the Company to continue as a going concern. However, Management cannot predict the outcome of future operations and no adjustments have been made to offset the outcome of this uncertainty. 11.EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS AND LITIGATION MAY IMPACT CIGAR INDUSTRY. The tobacco industry in general has been subject to extensive regulation at the federal, state and local levels. Recent trends have increased regulation of the tobacco industry. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the industry as a whole and may focus more directly on cigars in the future. The increase in popularity of cigars may likely lead to an increase in regulation of cigars. A variety of bills relating to tobacco issues have been introduced in the U.S. Congress, including bills that would (i) prohibit the advertising and promotion of all tobacco products or restrict or eliminate the deductibility of such advertising expense, (ii) increase labeling requirements on tobacco products to include, among others things, addiction warnings and lists of additives and toxins, (iii) shift control of tobacco products and advertisements from the Federal Trade Commission (the "FTC") to the Food and Drug Administration (the "FDA"), (iv) increase tobacco excise taxes and (v) require tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. Future enactment of such proposals or similar bills may have an adverse effect on the results of operations or financial condition of the Company. Although, except for warning labeling and smoke free facilities, current legislation and regulation focuses on cigarette smoking and sales, there is no assurance that the scope of legislation will not be expanded in the future to encompass cigars as well. -29- A majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. Local legislative and regulatory bodies also have increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by designating "smoking" areas. These restrictions generally do not distinguish between cigarettes and cigars. These restrictions and future restrictions of a similar nature have and likely will continue to have an adverse effect on the Company's sales or operations because of resulting difficulty placed upon advertising and sale of tobacco products, such as restrictions and in many cases prohibition of counter access to or display of premium handmade cigars, and/or decisions by retailers not to advertise for sale and in many cases to sell tobacco products because of public pressure to stop the selling of tobacco products. Numerous proposals also have been and are being considered at the state and local levels, in addition to federal regulations, to restrict smoking in certain public areas, regulating point of sale placement and promotions of tobacco products and requiring warning labels. Increased cigar consumption and the publicity such increase has received may increase the risk of additional regulation. The Company cannot predict the ultimate content, timing or effect of any additional regulation of tobacco products by any federal, state, local or regulatory body, and there can be no assurance that any such legislation or regulation would not have a material adverse effect on the Company's business. In addition numerous tobacco litigation has been commenced and may in the future be instituted, all of which may adversely affect(albeit focusing primarily on cigarette smoking) cigar consumption and sale and may pressure applicable government entities to institute further and stricter legislation to restrict and possibly prohibit cigar sale and consumption, any and all of which may have an adverse affect on Company business (see "Government Regulation - -Tobacco Industry Regulation and Tobacco Industry Litigation" supra). 12. NO DIVIDENDS LIKELY. No dividends have been paid on the Common Stock since inception, nor, by reason of its current financial status and its contemplated financial requirements, does Synergy contemplate or anticipate paying any dividends upon its Common Stock in the foreseeable future. 13. POTENTIAL LIABILITY FOR CONTENT ON THE COMPANY'S WEB SITE. Because the Company posts product information and other content on its Web sites, the Company faces potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that the Company posts. Such claims have been brought, and sometimes successfully pressed, against other Internet content distributors. In addition, the Company could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties' proprietary technology or infiltration into the Company's system by unauthorized personnel. 14. THE COMPANY'S NET SALES WOULD BE HARMED IF IT EXPERIENCES SIGNIFICANT CREDIT CARD FRAUD. A failure to adequately control fraudulent credit card transactions would harm the Company's net sales and results of operations because it does not carry insurance against such risk. Under current credit card practices, the Company may be held liable for fraudulent credit card transactions where it does not obtain a cardholder's signature, a frequent practice in internet sales. 15. THE COMPANY DEPENDS ON CONTINUED USE OF THE INTERNET AND GROWTH OF THE ONLINE PRODUCT PURCHASE MARKET. The Company's future revenues and profits, if any, substantially depend upon the widespread acceptance and use of the internet as an effective medium of business and communication by the Company's target customers. Rapid growth in the use of and interest in the Internet has occurred only recently. As a result, acceptance and use may not continue to develop at historical rates, and a sufficiently broad base of consumers may not adopt, and continue to use, the Internet and other online services as a medium of commerce. -30- In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements and/or potential customer continued preferences for more traditional see and touch purchasing. The Company's success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services and hopeful continued shifting of potential customers shopping preferences to the internet. 16. IF THE COMPANY DOES NOT RESPOND TO RAPID TECHNOLOGY CHANGES, ITS SERVICES COULD BECOME OBSOLETE AND ITS BUSINESS WOULD BE SERIOUSLY HARMED. As the Internet and online commerce industry evolve, the Company must license leading technologies useful in its business, enhance its existing services, develop new services and technology that address the increasingly sophisticated and varied needs of its prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The Company may not be able to successfully implement new technologies or adapt its proprietary technology and transaction processing systems to customer requirements or emerging industry standards. If the Company is unable to do so, it could adversely impact its ability to build on its varied businesses and attract and retain customers. 17. POTENTIAL FUTURE SALES OF COMPANY STOCK. The majority of the shares of common stock of the Company outstanding are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act of 1933. In general under Rule 144 a person (or persons whose shares are aggregated) who has satisfied a one year holding period may, under certain circumstances, sell within any three month period a number of shares which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares by a person who is not an affiliate of the Company and who has satisfied a two year holding period without, any quantity limitation. The vast majority of holders of the shares of the outstanding common stock of the Company deemed "restricted securities" have already satisfied at least their one year holding period or will do so with the next fiscal year, and such stock is either presently or within the next fiscal year will become eligible for sale in the public market (subject to volume limitations of Rule 144 when applicable). The Company is unable to predict the effect that sales of its common stock under Rule 144, or otherwise, may have on the then prevailing market price of the common stock. However, the Company believes that the sales of such stock under Rule 144 may have a depressive effect upon the market. 18. THE COMPANY MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS. The success of the Company's business model depends in large part on its continued ability to increase its number of customers. The market for its businesses may grow more slowly than anticipated because of or become saturated with competitors, many of which may offer lower prices or broader distribution. The Company is also highly dependant on internet sales which require interest of potential suppliers in the internet mode of product purchasing. Some potential suppliers may not want to join the Company's networks because they are concerned about the possibility of their products being listed together with their competitors' products thus limiting availability of product mix made available by the Company. If the Company cannot continue to bring new customers to its sites or maintain its existing customer base or attract listing of a mixture of product, the Company may be unable to offer the benefits of the network model at levels sufficient to attract and retain customers and sustain its business. 19. BECAUSE THE COMPANY'S INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, THE COMPANY MAY NOT BE ABLE TO EFFECTIVELY COMPETE. The U.S. market for e-commerce services is extremely competitive. The Company expects competition to intensify as current competitors expand their product offerings and enter the e-commerce market, and new competitors enter the market. The principal competitive factors are the quality and breadth of services provided, potential for successful transaction activity and price. E-commerce markets are characterized by rapidly changing technologies and frequent new product and service introductions. The Company may fail to update or introduce new market pricing formats, selling techniques and/or other mechanics and administrative tools and formats for internet sales consistent with current technology on a timely basis or at all. If its fails to introduce new service offerings or to improve its existing service offerings in response to industry developments, or if its prices are not competitive, the Company could lose customers, which could lead to a loss of revenues. -31- Because there are relatively low barriers to entry in the e-commerce market, competition from other established and emerging companies may develop in the future. Many of the Company's competitors may also have well-established relationships with the Company's existing and prospective customers. Increased competition is likely to result in fee reductions, reduced margins, longer sales cycles for the Company's services and a decrease or loss of its market share, any of which could harm its business, operating results or financial condition. Many of the Company's competitors have, and new potential competitors may have, more experience developing Internet-based software applications and integrated purchasing solutions, larger technical staffs, larger customer bases, more established distribution channels, greater brand recognition and greater financial, marketing and other resources than the Company has. In addition, competitors may be able to develop products and services that are superior to those of the Company or that achieve greater customer acceptance. There can be no assurance that the e-commerce solutions offered by the Company's competitors now or in the future will not be perceived as superior to those of the Company by either businesses or consumers. 20. THE COMPANY'S BUSINESS MAY SUFFER IF IT IS NOT ABLE TO PROTECT IMPORTANT INTELLECTUAL PROPERTY. The Company's ability to compete effectively against other companies in its industry will depend, in part, on its ability to protect its proprietary technology and systems designs relating to its technologies. The Company does not know whether it has been or will be completely successful in doing so. Further, its competitors may independently develop or patent technologies that are substantially equivalent or superior to those of the Company 21. THE COMPANY MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF ITS PROPRIETARY KNOWLEDGE. The Company relies, in part, on contractual provisions to protect its trade secrets and proprietary knowledge. These agreements may be breached, and the Company may not have adequate remedies for any breach. Its trade secrets may also be known without breach of such agreements or may be independently discovered by competitors. Its inability to maintain the proprietary nature of its technology could harm its business, results of operations and financial condition by adversely affecting its ability to compete. 22. OTHERS MAY ASSERT THAT THE COMPANY'S TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY RIGHTS. The Company believes that its technology does not infringe the proprietary rights of others. However, the e-commerce industry is characterized by the existence of a large number of patents and trademarks and frequent claims and litigation based on allegations of patent infringement and violation of other intellectual property rights. As the e-commerce market and the functionality of products in the industry continues to grow and overlap, the Company believes that the possibility of an intellectual property claim against it will increase. For example, the Company may inadvertently infringe an intellectual property right of which it is unaware, or there may be applications to protect intellectual property rights now pending of which it is unaware which it may be infringing when they are issued in the future, or the Company's service or systems may incorporate and/or utilize third party technologies that infringe the intellectual property rights of others. The Company has been and expects to continue to be subject to alleged infringement claims. The defense of any claims of infringement made against the Company by third parties, whether or not meritorious, could involve significant legal costs and require the Company's management to divert time and attention from its business operations. Either of these consequences of an infringement claim could have a material adverse effect on the Company's operating results. If the Company is unsuccessful in defending any claims of infringement, it may be forced to obtain licenses or to pay royalties to continue to use its technology. The Company may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If the Company fails to obtain necessary licenses or other rights, or if these licenses are costly, its operating results may suffer either from reductions in revenues through the Company's inability to serve customers or from increases in costs to license third-party technologies. -32- 23. THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO CONTINUE TO LICENSE SOFTWARE THAT IS NECESSARY FOR ITS SERVICE OFFERING. Through distributors, the Company licenses a variety of commercially available Internet technologies, which are used in its services and systems to perform key functions. As a result, the Company is to a certain extent dependent upon continuing to maintain these technologies. There can be no assurance that the Company would be able to replace the functionality provided by much of its purchased Internet technologies on commercially reasonable terms or at all. The absence of or any significant delay in the replacement of that functionality could have a material adverse effect on the Company's business, financial condition and results of operations. 24. THE COMPANY'S SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS OF ITS CUSTOMERS. Interruptions of service as a result of a high volume of traffic and/or transactions could diminish the attractiveness of the Company's services and its ability to attract and retain customers. There can be no assurance that the Company will be able to accurately project the rate or timing of increases, if any, in the use of its service, or that it will be able to expand and upgrade its systems and infrastructure to accommodate such increases in a timely manner. The Company currently maintains systems in the U.S. Any failure to expand or upgrade its systems could have a material adverse effect on its results of operations and financial condition by reducing or interrupting revenue flow and by limiting its ability to attract new customers. Any such failure could also have a material adverse effect on the business of its customers, which could damage the Company's reputation and expose it to a risk of loss or litigation and potential liability. 25. A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO THE COMPANY'S CUSTOMERS. Service offerings involving complex technology often contain errors or performance problems. Many serious defects are frequently found during the period immediately following introduction and initial implementation of new services or enhancements to existing services. Although the Company attempts to resolve all errors that it believes would be considered serious by its customers before implementation, its systems are not error-free. Errors or performance problems could result in lost revenues or cancellation of customer agreements and may expose the Company to litigation and potential liability. In the past, the Company has discovered errors in software used in the Company after its incorporation into Company sites. The Company cannot assure that undetected errors or performance problems in its existing or future services will not be discovered or that known errors considered minor by it will not be considered serious by its customers. The Company has experienced periodic minor system interruptions, which may continue to occur from time to time. 26. THE FUNCTIONING OF THE COMPANY'S SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH IT RELIES COULD BE DISRUPTED BY FACTORS OUTSIDE THE COMPANY'S CONTROL. The Company's success depends on the efficient and uninterrupted operation of its computer and communications hardware systems. These systems are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. Despite any precautions the Company takes or plans to take, the occurrence of a natural disaster or other unanticipated problems could result in interruptions in its services. In addition, if any hosting service fails to provide the data communications capacity the Company requires, as a result of human error, natural disaster or other operational disruption, interruptions in the Company's services could result. Any damage to or failure of its systems could result in reductions in, or terminations of, its services, which could have a material adverse effect on its business, results of operations and financial condition. -33- 27. THE COMPANY MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT IN DILUTION TO ITS STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIES WHICH COULD IMPAIR ITS FINANCIAL PERFORMANCE. If appropriate opportunities present themselves, the Company may acquire complementary or strategic businesses, technologies, services or products that it believes will be useful in the growth of its business. The Company does not currently have any commitments or agreements with respect to any new acquisitions. They may not be able to identify, negotiate or finance any future acquisition successfully. Even if the Company does succeed in acquiring a business, technology, service or product, the process of integration may produce unforeseen operating difficulties and expenditures and may require significant attention from the Company's management that would otherwise be available for the ongoing development of its business. Moreover the anticipated benefits of any acquisition may not be realized or may depend on the continued service of acquired personnel who could choose to leave. If the Company makes future acquisitions, it may issue shares of stock that dilute other stockholders, incur debt, assume contingent liabilities or create additional expenses related to amortizing intangible assets, any of which might harm its financial results and cause its stock price to decline. Any financing that it might need for future acquisitions may only be available to it on terms that restrict its business or that impose on it costs that reduce its revenue. 28. THE COMPANY'S SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE COMMERCE. The Company's future revenues and profits depend to a large extent upon the widespread acceptance and use of the Internet and other online services as a medium for commerce by merchants and consumers. The use of the Internet and e-commerce may not continue to develop at past rates and a sufficiently broad base of business and individual customers may not adopt or continue to use the Internet as a medium of commerce. The market for the sale of goods and services over the Internet is a relatively new and emerging market. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty. Growth in the Company's customer base depends on obtaining businesses and consumers who have historically used traditional means of commerce to purchase goods. For the Company to be successful, these market participants must accept and use novel ways of conducting business and exchanging information. E-commerce may not prove to be a viable medium for purchasing for the following reasons, any of which could seriously harm the Company's business: - the necessary infrastructure for Internet communications may not develop adequately; - the Company's potential customers, buyers and suppliers may have security and confidentiality concerns; - complementary products, such as high-speed modems and high-speed communication lines, may not be developed or be adequately available; - alternative-purchasing solutions may be implemented; - buyers may dislike the reduction in the human contact inherent in traditional purchasing methods; - use of the Internet and other online services may not continue to increase or may increase more slowly than expected; - the development or adoption of new technology standards and protocols may be delayed or may not occur; and - new and burdensome governmental regulations may be imposed. -34- 29. THE COMPANY'S SUCCESS DEPENDS ON THE CONTINUED RELIABILITY OF THE INTERNET. The Internet continues to experience significant growth in the number of users, frequency of use and bandwidth requirements. There can be no assurance that the infrastructure of the Internet and other online services will be able to support the demands placed upon them. Furthermore, the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face such outages and delays in the future. These outages and delays could adversely affect the level of Internet usage and also the level of traffic and the processing of transactions. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet or other online service activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services or other Internet service providers to support the Internet or other online services also could result in slower response times and adversely affect usage of the Internet and other online services generally and the Company's service in particular. If use of the Internet and other online services does not continue to grow or grows more slowly than expected, if the infrastructure of the Internet and other online services does not effectively support growth that may occur, or if the Internet and other online services do not become a viable commercial marketplace, the Company will have to adapt its business model to the new environment, which would materially adversely affect its results of operations and financial condition. 30. GOVERNMENT REGULATION OF THE INTERNET MAY IMPEDE THE COMPANY'S GROWTH OR ADD TO ITS OPERATING COSTS. Like many Internet-based businesses, the Company operates in an environment of tremendous uncertainty as to potential government regulation. The Internet has rapidly emerged as a commerce medium, and governmental agencies have not yet been able to adapt all existing regulations to the Internet environment. Laws and regulations have been introduced or are under consideration and court decisions have been or may be reached in the U.S. and other countries in which the Company does business that affect the Internet or other online services, covering issues such as pricing, user privacy, freedom of expression, access charges, content and quality of products and services, advertising, intellectual property rights and information security. In addition, it is uncertain how existing laws governing issues such as taxation, property ownership, copyrights and other intellectual property issues, libel, obscenity and personal privacy will be applied to the Internet. The majority of these laws were adopted prior to the introduction of the Internet and, as a result, do not address the unique issues of the Internet. Recent laws that contemplate the Internet, such as the Digital Millennium Copyright Act in the U.S., have not yet been fully interpreted by the courts and their applicability is therefore uncertain. The Digital Millennium Copyright Act provides certain "safe harbors" that limits the risk of copyright infringement liability for service providers such as the Company with respect to infringing activities engaged in by users of the service, such as end-users of the Company's customers' auction sites. The Company has adopted and is further refining its policies and practices to qualify for one or more of these safe harbors, but there can be no assurance that its efforts will be successful since the Digital Millennium Copyright Act has not been fully interpreted by the courts and its interpretation is therefore uncertain. -35- In the area of user privacy, several states have proposed legislation that would limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission also has become increasingly involved in this area. The Company does not sell personal user information regarding its customers. The Company does use aggregated data for analysis regarding the Company network, and does use personal user information in the performance of its services for its customers. Since the Company does not control what its customers do wth the personal user information they collect, there can be no assurance that its customers' sites will be considered compliant. As online commerce evolves, the Company expects that federal, state or foreign agencies will adopt regulations covering issues such as pricing, content, user privacy, and quality of products and services. Any future regulation may have a negative impact on its business by restricting its methods of operation or imposing additional costs. Although many of these regulations may not apply to its business directly, the Company anticipates that laws regulating the solicitation, collection or processing of personal information could indirectly affect its business. Title V of the Telecommunications Act of 1996, known as the Communications Decency Act of 1996, prohibits the knowing transmission of any comment, request, suggestion, proposal, image or other communication that is obscene or pornographic to any recipient under the age of 18. The prohibitions scope and the liability associated with a violation are currently unsettled. In addition, although substantial portions of the Communications Decency Act of 1996 have been held to be unconstitutional, the Company cannot be certain that similar legislation will not be enacted and upheld in the future. It is possible that such legislation could expose companies involved in online commerce to liability, which could limit the growth of online commerce generally. Legislation like the Communications Decency Act could reduce the growth in Internet usage and decrease its acceptance as a communications and commerce medium. The worldwide availability of Internet web sites often results in sales of goods to buyers outside the jurisdiction in which the Company or its customers are located, and foreign jurisdictions may claim that the Company or its customers are required to comply with their laws. As an Internet Company, it is unclear which jurisdictions may find that the Company is conducting business therein. Its failure to qualify to do business in a jurisdiction that requires it to do so could subject the Company to fines or penalties and could result in its inability to enforce contracts in that jurisdiction. The Company is not aware of any recent related legislation not specifically mentioned herein but there can be no assurance that future government regulation will not be enacted further restricting use of the internet that might adversely affect the Company's business. -36- 31. NEW TAXES MAY BE IMPOSED ON INTERNET COMMERCE. In the U.S., the Company does not collect sales or other similar taxes on goods sold through the Company's internet websites. The Internet Tax Freedom Act of 1998, (extended through November 2003), prohibits the imposition of taxes on electronic commerce by United States federal and state taxing authorities. However, a number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted and not in conflict with federal prohibitions, could substantially impair the growth of electronic commerce, and could adversely affect the Company's opportunity to derive financial benefit from such activities. In addition, non-U.S. countries may seek to impose service tax (such as value-added tax) collection obligations on companies that engage in or facilitate Internet commerce. A successful assertion by one or more states or any foreign country that the Company should collect sales or other taxes on the sale of merchandise could impair its revenues and its ability to acquire and retain customers. 32. THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO ONLINE COMMERCE. A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. A compromise or breach of the technology used to protect the Company's customers' and their end-users' transaction data could result from, among other things, advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments. Any such compromise could have a material adverse effect on the Company's reputation and, therefore, on its business, results of operations and financial condition. Furthermore, a party who is able to circumvent the Company's security measures could misappropriate proprietary information or cause interruptions in its operations. The Company may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. Concerns over the security of transactions conducted on the Internet and other online services and the privacy of users may also inhibit the growth of the Internet and other online services generally, especially as a means of conducting commercial transactions. The Company currently has practices and procedures in place to protect the confidentiality of its customers' and their end-users' information. However, its security procedures to protect against the risk of inadvertent disclosure or intentional breaches of security might fail to adequately protect information that it's obligated to keep confidential. The Company may not be successful in adopting more effective systems for maintaining confidential information, and its exposure to the risk of disclosure of the confidential information of others may grow with increases in the amount of information it possesses. To the extent that the Company activities involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage its reputation and expose it to a risk of loss or litigation and possible liability. The Company's insurance policies may not be adequate to reimburse it for losses caused by security breaches. 33. IF THE COMPANY'S FULFILLMENT CENTERS ARE NOT EFFECTIVELY OPERATED THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED. If the Company does not successfully operate its fulfillment centers such could significantly limit the Company's ability to meet customer's demands, which would likely result in diminished revenues, adversely affecting the Company's business. Because it is difficult to predict sales increases the Company may not manage its facilities in an optimal way which may result in excess inventory, warehousing, fulfillment and distribution capacity having an adverse impact on working capital of the Company, or the lack of sufficiency in such areas causing delays in fulfillment of customer orders adversely affecting customer confidence and loyalty. -37- 34. THE COMPANY'S STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE. The stock market, and in particular the market for Internet-related stocks, has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for the Company's common stock to decline, perhaps substantially, including: - failure to meet its development plans; - the demand for its common stock; - downward revision in securities analyst's estimates or changes in general market conditions; - technological innovations by competitors or in competing technologies; and - investor perception of the Company's industry or its prospects. The Company's stock pricing has fluctuated significantly in the past and there is no assurance such trend may not continue in the future. -38- Part II - Other Information Item 3-Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our disclosure controls and procedures within the 90 days proceeding the date of this filing. Under rules promulgated by the SEC, disclosure controls and procedures are defined as those controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms." Based on the evaluation of our disclosure controls and procedures, management determined that such controls and procedures were effective in timely alerting them to material information relating to the Company (including its Consolidated Subsidiaries) required to be included in the Company's periodic reports. Further, there were no significant changes in the internal controls or in other factors that could significantly affect these controls after November 11, 2003, the date of the conclusion of the evaluation of disclosure controls and procedures. Item 4-Submission of matters to vote of security holders. 13. No matters were submitted to vote of shareholders for the third quarter ended September 30, 2003. 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 no reports filed on 8-K for the relevant period. -39- 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: 11/14/03 - ----------------------- By: Mair Faibish Chief Executive Officer /s/ Mitchell Gerstein ----------------------- Date: 11/14/03 - ------------------------ By: Mitchell Gerstein Chief Financial Officer -40- 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-QSB 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 cause 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) Designed such internal control over financial reporting, or caused such internal control over financing reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of financial statements for external purposes in accordance with general accepted accounting principles; (c) 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 (d) 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 in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Mair Faibish - ------------------- Mair Faibish Chief Executive Officer -41- 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-QSB 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 cause 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) Designed such internal control over financial reporting, or caused such internal control over financing reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of financial statements for external purposes in accordance with general accepted accounting principles; (c) 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 (d) 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 in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Mitchell Gerstein - ----------------------- Mitchell Gerstein Chief Financial Officer -42- 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-QSB of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2003 /s/ Mair Faibish - -------------------- Mair Faibish Chief Executive Officer -43- 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-QSB of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2003 /s/ Mitchell Gerstein - ----------------------- Mitchell Gerstein Chief Financial Officer -44- -----END PRIVACY-ENHANCED MESSAGE-----