-----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, Km474FUE0ZY+IIjoqpE9QEda3Z2ZpGx3ibm41vD6EKCfi3nun0q2N4Tc3iat0YyY EwbRSA9NY/+aUrQqvD5VSw== 0001026018-07-000017.txt : 20070515 0001026018-07-000017.hdr.sgml : 20070515 20070515130855 ACCESSION NUMBER: 0001026018-07-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070515 DATE AS OF CHANGE: 20070515 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19409 FILM NUMBER: 07851194 BUSINESS ADDRESS: STREET 1: 223 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5167148200 MAIL ADDRESS: STREET 1: 223 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 10-Q 1 file001.txt FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended March 31, 2007. Commission File Number: 0-19409 SYNERGY BRANDS, INC. (Exact name of registrant as it appears in its charter) Delaware 22-2993066 (State of incorporation) (I.R.S. Employer identification no.) 223 Underhill Blvd. Syosset NY 11791 (Address of principal executive offices) 516-714-8200 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] YES [ ] NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ x ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [ x ] NO APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. N/A [ ] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On May 14, 2007 there were 8,365,042 shares outstanding of the registrant's common stock. SYNERGY BRANDS, INC. FORM 10-Q MARCH 31, 2007 TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page Item 1: Financial Statements Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006 2 - 3 Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (Unaudited) 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (Unaudited) 5-6 Notes to Consolidated Financial Statements (Unaudited) 7-14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 15-24 Item 4: Control and Procedures 25 PART II: OTHER INFORMATION Item 1A: Risk Factors 26 Item 2: Unregistered Sales of Equity Securities and use of Proceeds 26 Item 4: Submission of Matters to a Vote of Security Holders 26 Item 6: Exhibits and Reports on Form 8-K 26
SIGNATURES AND CERTIFICATIONS 1 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2007 AND DECEMBER 31, 2006
ASSETS March 31, 2007 DECEMBER 31, 2006 (Unaudited) Current Assets: Cash and cash equivalents $451,498 $644,870 Accounts receivable trade, less allowance for doubtful accounts of $127,481 for both periods 8,190,675 11,165,980 Other receivables 2,664,162 2,453,705 Note Receivable - current 347,706 344,699 Inventory 4,946,772 1,289,221 Prepaid assets and other current assets 317,937 669,908 Assets of discontinued operations 89,098 127,182 -------------- ----------------- Total Current Assets 17,007,848 16,695,565 Property and Equipment, Net 246,382 252,950 Other Assets 2,083,690 909,454 Notes Receivable 1,991,813 2,207,233 Intangible Assets, net of accumulated amortization of $404,205 and $389,226 273,318 288,297 Goodwill 514,297 514,297 -------------- ----------------- Total Assets $22,117,348 $20,867,796 ============== =================
The accompanying notes are an integral part of these statements. 2 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2007 AND DECEMBER 31, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, 2007 December 31, (Unaudited) 2006 Current Liabilities: Notes Payable - Current $ 2,490,667 $ 4,196,757 Accounts Payable and Accrued Expenses 2,292,404 2,321,445 Related Party Note Payable 38,987 23,706 Deferred income 1,470,940 755,503 Liabilities of Discontinued Operations 55,823 112,569 ------------ ----------- Total Current Liabilities 6,348,821 7,409,980 Notes Payable, net of discount of $236,640 and $313,749, respectively 8,026,646 1,960,638 Lines of credit 1,104,610 5,836,928 Stockholders' Equity: Class A Preferred stock - $.001 par value; 100,000 shares authorized, 93,213 and 93,213 shares issued and outstanding; liquidation preference of $10.50 per share 93 93 Class B preferred stock - $.001 par value; 150,000 shares authorized, none issued - - Class B, Series A Preferred stock - $.001 par value; 500,000 shares authorized; 285,000 and 285,000 shares issued and outstanding; liquidation preference of $10.00 per share 285 285 Class B Series B preferred stock - $.001 par value, 250,000 shares authorized, 80,000 shares issued and outstanding; liquidation preference of $10.00 per share 80 80 Common stock - $.001 par value;14,000,000 shares authorized; 7,908,292 and 6,484,275 shares issued 7,908 6,484 Additional paid-in capital 48,438,579 47,252,064 Deficit (41,796,334) (41,585,416) Accumulated other comprehensive loss (8,340) (8,340) Less treasury stock, at cost, 1,000 shares (5,000) (5,000) ------------ ----------- Total stockholders' equity 6,637,271 5,660,250 ------------ ----------- Total Liabilities and Stockholders' Equity $ 22,117,348 $20,867,796 ============ ===========
The accompanying notes are an integral part of these statements. 3 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED)
2007 2006 -------------- ------------- Net Sales $ 17,613,713 $ 14,878,155 Cost of Sales Cost of product 15,963,709 13,576,348 Shipping and handling costs 236,228 227,436 -------------- ------------- 16,199,937 13,803,784 Gross Profit 1,413,776 1,074,371 Operating expenses Selling, general and Administrative Expenses 1,065,673 1,007,214 Depreciation and amortization 44,758 78,634 -------------- ------------- 1,110,431 1,085,848 -------------- ------------- Operating Profit (loss) 303,345 (11,477) Other Income (expense) Interest Income 34,095 37,170 Other expense (446) (205) Equity in earnings of investee 91,141 15,465 Interest and financing expense (586,058) (378,397) -------------- ------------- (461,268) (325,967) -------------- ------------- Loss from continuing operations before income taxes (157,923) (337,444) Income tax expense 46,782 37,828 -------------- ------------- Loss from continuing operatons (204,705) (375,272) -------------- ------------- Discontinued operations Loss from operations of discontinued component (6,213) (3,174) Income tax expense - 240 -------------- ------------- Loss from discontinued operations ( 6,213) ( 3,414) -------------- ------------- Net loss (210,918) (378,686) Dividend-Preferred Stock 84,625 90,250 -------------- ------------- Net loss attributable to common stockholder $ (295,543) $ (468,936) ============== ============= Basic and diluted net loss per common share from continuing operations: $ ( 0.04) $ ( 0.10) Basic and diluted net loss per common share from discontinued operations: $ 0.00 $ 0.00 -------------- ------------- $ ( 0.04) $ ( 0.10) -------------- -------------
The accompanying notes are an integral part of these statements. 4 SYNERGY BRANDS, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED)
2007 2006 ---------- ----------- Cash Flows From Operating Activities: Net loss $(210,918) $ (378,686) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and Amortization 44,758 78,634 Amortization of financing cost 46,943 14,209 Equity in earnings of investee (91,141) (15,465) Operating expenses paid with common stock 40,970 33,000 Changes in Operating Assets and Liabilities: Net (increase) decrease in: Accounts receivable and other receivables 2,764,848 955,844 Inventory (3,657,551) (1,355,006) Prepaid assets, related party note receivable and other assets 531,957 16,258 Net increase (decrease) in: Accounts payable, related party note payable, accrued expenses and other current liabilities (13,760) (556,145) Deferred Income 715,437 649,418 Net assets of discontinued operations (18,662) 10,454 ---------- ----------- Net cash provided by (used in) operating activities 152,881 (547,485) Cash Flows From Investing Activities: Purchase of fixed assets (8,627) (2,527) Payments received on notes receivable 220,913 75,262 Issuance of notes receivable (8,500) 14,995 ---------- ----------- Net cash provided by investing activities 203,786 57,740 ---------- ----------- Cash Flows From Financing Activities: Borrowings under line of credit 291,610 10,918,314 Repayments under line of credit (4,836,928) (10,580,572 Proceeds from the issuance of notes payable 6,690,000 1,882,500 Repayments of notes payable (2,617,190) (624,000) Payment of dividends (84,625) (90,250) Payment of financing costs - (46,707) Proceeds from issuance of common stock 7,094 90,094 ---------- ----------- Net cash (used in) provided by financing activities (550,039) 1,549,379 ---------- ----------- Net (decrease) increase in cash (193,372) 1,059,634 Cash and cash equivalents, beginning of period 644,870 255,483 ---------- ----------- Cash and cash equivalents, end of period $ 451,498 1,315,117 =========== ===========
The accompanying notes are an integral part of these statements. 5 SYNERGY BRANDS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED)
2007 2006 ------------ ----------- Supplemental disclosure of cash flow information: Cash paid for interest $ 364,564 $ 249,094 =========== =========== Cash paid for income taxes $ 46,782 $ 38,068 =========== =========== Supplement disclosures of non-cash operating, investing and financing activities: Debt conversion to common stock $ 187,000 $ 60,000 =========== ========== Common Stock issued for services $ 40,970 $ 33,000 =========== ========== Common Stock issued for financing cost $ 978,250 - ========== ==========
The accompanying notes are an integral part of these statements. 6 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MARCH 31, 2007 and 2006 NOTE A - UNAUDITED FINANCIAL STATEMENTS The consolidated balance sheet as of March 31, 2007, the consolidated statements of operations for the three months ended March 31, 2007 and 2006, and the condensed consolidated statements of cash flows for three months ended March 31, 2007 and 2006, have been prepared by Synergy Brands, Inc. ("Synergy" or the "Company") without audit. The balance sheet at December 31, 2006 has been derived from the audited financial statements as of that date. In the opinion of management, all adjustments (which include only normally recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2007 (and for all other periods presented) have been made. Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2006 filed by the Company. The results of operations for the periods ended March 31, 2007 and 2006 are not necessarily indicative of the operating results for the respective full years. NOTE B - STOCK-BASED COMPENSATION Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments to be recognized as an expense in the historical financial statements as services are performed. NOTE C - ADVERTISING EXPENSE The Company expenses advertising and promotional costs as incurred. Advertising and promotional costs were approximately $22,000 and $53,000 for the three months ended March 31, 2007 and 2006, respectively. 7 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MARCH 31, 2007 and 2006 NOTE D - VENDOR ALLOWANCES The Company accounts for vendor allowances under the provisions of EITF No. 02-16 "Accounting by a Customer (including a reseller) for Certain Consideration Received from a Vendor". The Company recognizes vendor allowances at the date goods are purchased and recorded under fixed and determined arrangements. The Company receives allowances and credits from suppliers for volume incentives, promotional allowances and, to a lesser extent, new product introductions, which are typically based on contractual arrangements covering a period of one year or less. Volume incentives and promotional allowances earned based on quantities purchased and new product allowances are recognized as a reduction to the cost of purchased inventory and recognized when the related inventory is sold. Promotional allowances that are based on the sell-through of products are recognized as a reduction of cost of sales when the products are sold for which the promotional allowances are given. For the three months ended March 31, 2007, the Company recognized approximately $817,000 in vendor allowances arising from arrangements with a major supplier that met the criteria for being fixed and determinable. Vendor allowances from a manufacturer, included in other receivables in the accompanying consolidated balance sheet aggregated $2,664,162 and $2,453,705 at March 31, 2007 and December 31, 2006. NOTE E - INVENTORY Inventory, consisting of goods held for sale, as of March 31, 2007 consisted of the following: Grocery, health and beauty products $4,490,389 General merchandies 456,383 --------- $4,946,772 ========== NOTE F - NOTE RECEIVABLE In December 2004, the Company sold accounts receivable for $2,200,000. This promissory note, which is secured by the accounts receivable, requires monthly payments of principal and interest at 4% for seven years, beginning in January 2005. As a condition for the sale, the Company issued 150,000 shares of common stock to the note holder. The value of the shares ($200,000) was treated as a reduction of the sales price. The balance of the note receivable at March 31, 2007 was $1,561,533. In October, 2005 SYBR.com Inc., a wholly owned subsidiary of the Company, invested $1 million in a Private Placement of Senior Subordinated Debentures issued by ITT. The investment consists of a five year 8% Note (ITT Note), and 200,000 warrants exercisable into 200,000 common shares of ITT stock at $5.00 per share (ITT Warrants). The Company financed this investment with a $1 million fully recourse note with a major Shareholder under the same terms and conditions as the ITT Note and assigned to such shareholder the ITT Warrants. As consideration for the financing, the Company has retained the benefit to be derived from 100,000 of the warrants received from ITT. In relation to the ITT warrants, Company has recorded deferred income of $127,000. In 2006, $142,857 was paid by ITT to reduce the loan balance. On March 30, 2007 $142,857 was paid by ITT to reduce the loan balance. As of March 31, 2007 the outstanding loan balance was $714,286. As part of the Company's agreement, the Company has paid $285,714 on the note payable. The outstanding balance of the note payable at March 31, 2007 was $714,286. 8 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MARCH 31, 2007 and 2006 NOTE G - INVESTMENT The Company holds a 20% interest in an investee ("Interline Travel and Tours or ITT"). The Company accounts for this investment under the equity method. The Company recorded equity in the net earnings of investee of $ 91,141 and $15,465 during the three months ended March 31, 2007 and March 31, 2006, respectively. At March 31, 2007, the investment in ITT is $653,734 as included in "Other Assets" on the accompanying balance sheet. Summarized results of operations of this investee for the three months ended March 31, 2007 and 2006 is as follows: 2007 2006 ------------ ------------- Revenues $ 8,920,000 $ 6,970,000 Total expenses (8,294,000) (6,846,000) Other income 42,000 89,000 ------------ ------------- Income before income taxes 668,000 213,000 Income tax expense (252,000) (113,000) ------------ ------------- Net income $ 416,000 $ 100,000 ============ ============= NOTE H - LINE-OF-CREDIT AND NOTES PAYABLE In 2002, two of the Company's subsidiaries entered into two revolving loan and security agreements with the same financial institution (the "Lender"). The lines of credit, as amended in July 2006, allow for the borrowing of up to $6,000,000 based on the sum of 85% of the net face amount of eligible accounts receivable, as defined, plus the lesser of (1) $2,750,000 or (2) eligible inventory and eligible goods in transit, as defined. $1,104,610 was outstanding under the agreements at March 31, 2007. The Company did refinance its secured financing (See Note N). This agreement was terminated in April 2007. Interest accrues on outstanding borrowings at the greater of (i) 5% per annum in excess of the prime rate or (ii) 10.50% per annum. At March 31, 2007, the interest rate on outstanding borrowings was 13.25%. 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. During the three months of 2007, the Lender converted $187,000 of outstanding debt into 202,120 shares of common stock. In 2006 the Lender converted $331,200 of outstanding debt into 289,080 shares of common stock. 9 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MARCH 31, 2007 and 2006 NOTE H (continued) In 2004, the Company received $490,000 pursuant to the issuance of secured promissory notes from certain shareholders of ITT (see Note G). On April 2, 2004 the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $1.5 million secured convertible debenture that converts into common stock under certain conditions at $1.75 per share as amended, and matures on April 2, 2007. The debenture provides for monthly payments of $50,000, plus interest commencing October 1, 2004. In addition, Laurus was issued 100,000 warrants exercisable at $3.00 per share. The debenture has a three-year term with a coupon rate of prime plus 3%. The Company has filed an S-3 registration statement which has been granted effectiveness to register the common stock underlying the debenture and warrant. In 2006, the Company converted $150,000 of this outstanding debt into 159,754 shares of common stock. The Company repaid $275,000 of this debt at March 31, 2007. At March 31, 2007 the outstanding balance was $50,000. In 2005, the Company received $600,000 pursuant to the issuance of secured promissory notes from certain shareholders of ITT (see Note G). On January 25, 2005, the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $500,000 secured convertible debenture that converts into common stock under certain conditions at $1.75 per share as amended, and matures on January 25, 2008. The financing provides Laurus with registration rights for common shares it is issued under conversion. The debenture provides for monthly payments of $16,666.67 plus interest, commencing August 1, 2005. In 2006, the Company converted $90,000 of this outstanding debt into 93,478 shares of common stock. The Company repaid $243,000 of this debt at March 31, 2007. In addition, Laurus was issued 33,333 warrants exercisable at $ 3.50 per share. The debenture has a three-year term with a coupon rate of prime plus 3%. The conversion prices on the Laurus debentures were always above the current stock price at the closing date. At March 31, 2007, the outstanding balance was $166,667. In January 2005, the Company entered into a promissory note with a major regional bank for $1,000,000. Borrowing under the note bears interest at prime. The Company is not required to repay any principal until the maturity date of the note, September 1, 2007. As security for the note, a pledge agreement was entered by certain Shareholders of ITT. There were no borrowings as of March 31, 2007. On June 21, 2005, the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $500,000 secured convertible debenture that converts into common stock under certain conditions at $1.75 per share as amended, and matures on June 21, 2008. The financing provides Laurus with registration rights for common shares it is issued under conversion. The debenture provides for monthly payments of $16,666.67 plus interest, commencing December 1, 2005. In 2006, the Company converted $90,000 of this outstanding debt into 93,478 shares of common stock. The Company repaid $176,667 of this debt at March 31, 2007. In addition, Laurus was issued 33,333 warrants exercisable at $ 3.50 per share. The Company's common stock quoted market price at the date of closing was $2.15 per share. The debenture has a three-year term with a coupon rate of prime plus 3%. At June 30, 2005 the Company recorded a charge of $18,000 as prepaid expense for the fair value of the warrants, and this amount is being amortized over the life of the note. At March 31, 2007, the outstanding balance was $233,333. On March 14, 2006 the Company closed a $1.75 million junior secured five year loan with an existing lender bearing a fixed interest rate of 10%. Payments will be made at a rate of $32,000 per month starting October 1, 2006. The lender was issued a warrant to acquire 270,000 shares of the Company's common stock valued at $362,000. The relative fair value of the warrant of $362,000 is being charged to operations as additional interest over the term of the loan. The Company repaid $192,000 of this debt at March 31, 2007. At March 31, 2007, the outstanding balance was $1,558,000. On January 19, 2007, Synergy Brands Inc. completed a $6.5 million secured financing with Lloyd I. Miller, a major shareholder and a director of Synergy Brands for its main operating subsidiary PHS Group Inc. The financing consisted of $6.5 million in secured term notes to be amortized over a 5 year period, with a balloon payment of $3,250,000 in January 2012 at an interest rate of 11.75%. The agreement further involved a securities purchase agreement, issued 1,075,000 common shares of Synergy Brands to Lloyd Miller as a financing cost and retired all warrants beneficially owned by Mr. Miller. The Company repaid $108,333 of this debt at March 31, 2007. At March 31, 2007, the outstanding balance was $6,391,667. In the fourth quarter of 2006, the Company secured $1,800,000 from shareholders of short term financing. At March 31, 2007 the outstanding balance was $550,000, which was paid in April 2007. 10 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MARCH 31, 2007 and 2006 NOTE I - STOCKHOLDERS' EQUITY During the three months ended March 31, 2007, the Company converted $187,000 of debt of IIG into 202,120 shares of common stock (see Note H). During the three months ended March 31, 2007, the Company issued 136,897 shares of common stock as compensation for services under existing agreements and recorded a charge to operations of $40,970. During the three months ended March 31, 2007, the Company issued 1,085,000 shares of common stock in connection with financing or the sale of securities and the satisfaction of certain obligations. There are no options outstanding with employees at March 31, 2007. NOTE J - SEGMENT AND GEOGRAPHICAL INFORMATION The Company offers a broad range of Internet access services and related products to businesses and consumers throughout the United States and Canada. Management evaluates the various segments of the Company based on the types of products being distributed which were, as of March 31, 2007 and 2006, as shown below the segment information does not include the discontinued segment of Proset: Three Months Ended March 31, 2007 and 2006
PHS Group GRC Corporate Total Revenue from external customers 2007 $ 17,225,884 $ 387,829 $ - $ 17,613,713 2006 $ 14,487,003 $ 391,152 $ - $ 14,878,155 Net Income (loss) from continuing operations 2007 $ 259,002 $ (96,301) $ (452,031) $ (289,330) attributable to common Stockholders 2006 $ 93,599 $ (145,449) $ (413,672) $ (465,522) Interest and Finance Expense 2007 $ 408,905 $ - $ 177,153 $ 586,058 2006 $ 293,133 $ - $ 85,264 $ 378,397 Depreciation & 2007 $ 3,621 $ 39,114 $ 2,023 $ 44,758 amortization 2006 $ 3,204 $ 39,114 $ 36,316 $ 78,634
Identifiable assets from continuing operations are as follows: March 31, 2007 $ 16,048,533 $ 1,480,599 $ 4,499,118 $ 22,028,250 December 31, 2006 $ 15,609,833 $ 1,594,373 $ 3,536,408 $ 20,740,614 NOTE K - 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, warrants and convertible debt and equity securities of 693,808 and 1,232,930 for the three months ended March 31, 2007 and 2006, respectively, have been excluded from the calculation of diluted loss per share since their effect would be antidilutive. Three Months ended March 31, 2007 2006 ----------- ---------- Net loss applicable to common stock $( 295,543) $(468,936) ============ ========== Weighted-average number of shares in basic 7,616,174 4,563,651 and diluted EPS =========== ========== 11 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MARCH 31, 2007 and 2006 NOTE L - DISCONTINUED OPERATIONS In December 2006, the Company instituted a plan to discontinue the Pro-Set segment. Accordingly, the operating results of Pro-set segment for March 31, 2007 and March 31, 2006 has been presented as Discontinued operations. Net assets and liabilities to be disposed of or liquidated, at their book value, have been separately classified in the accompanying balance sheets at March 31,2007 and December 31, 2006 and statement of cash flows. Summarized financial information of the Pro-Set segment as discontinued operations for each of the two periods ended as follows: Three Months Ended March 31, 2007 March 31, 2006 -------------- --------------- Net Sales $ 5,405 $ 492,522 Cost of sales Cost of product 3,170 330,067 Shipping and handling costs - 34,539 -------------- --------------- 3,170 364,606 -------------- --------------- Gross Profit 2,235 127,916 Operating expenses: General and administrative 8,448 83,213 Depreciation and amortization - 24,876 -------------- --------------- 8,448 108,089 Operating loss (profit) (6,213) 19,827 Other Income (expenses): Other income (expenses) - (450) -------------- --------------- Interest and financing expenses - (22,551) -------------- --------------- - (23,001) -------------- --------------- Net loss before income taxes (6,213) (3,174) Income tax expense - 240 -------------- --------------- Net loss from discontinued operations $(6,213) $ (3,414) ============== =============== 12 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MARCH 31, 2007 and 2006 NOTE L (continued) March 31, 2007 Dec. 31, 2006 ASSETS: CURRET ASSETS: CASH AND CASH EQUIVALENTS $ 1,787 $ 1,782 ACCOUNTS RECEIVABLE TRADE 9,713 44,632 OTHER RECEIVABLES 28,563 28,563 INVENTORY 49,035 52,205 ---------- ---------- TOTAL ASSETS $ 89,098 $ 127,182 ========== =========== LIABILITIES: ACCOUNTS PAYABLE $ 55,823 $ 112,569 ---------- ---------- TOTAL LIABILITIES $ 55,823 $ 112,569 ========== =========== NOTE M - RECENT ACCOUNTING PRONOUNCEMENTS In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - An Amendment of FASB No. 133 and 140. The purpose of SFAS statement No. 155 is to simplify the accounting for certain hybrid financial instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. The adoption of this standard on January 1, 2007 did not have a material effect on our consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding financial instruments in one of the categories (level 3), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We believe that the adoption of SFAS No. 157 will not have a material impact on our consolidated financial statements. In June, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN48), to create a single model to address accounting for uncertainty in tax portions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest, and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 as of January 1, 2007 and the adoption did not have a material impact to the Company's consolidated financial statements or effective tax rate and did not result in any unrecognized tax benefits. Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectably, in the Company's consolidated financial statements. For the three months ended March 31, 2007 and 2006, the Company did not recognize and interest or penalty expense related to income taxes. It is determined not to be reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months. The Company is currently subject to a three year status of limitations by major tax jurisdictions. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction. 13 SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MARCH 31, 2007 and 2006 NOTE M (continued) In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of SFAS 115" (SFAS No. 159). The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fare value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potential impact of SFAS No. 159 on our financial position and results of operations. NOTE N - SUBSEQUENT EVENTS Effective April 5, 2007, Synergy Brands Inc. completed an amendment to a secured financing agreement with Lloyd I. Miller, a major Shareholder and Director of Synergy Brands for its main operating subsidiary, PHS Group to increase its $6.5 million loan balance to $8.0 million. The financing consisted of long term notes to be amortized over a 5 year period, with a balloon payment of $4,000,000 in January 2012 at an interest rate of 11.75%. This financing supplements the $6.5 term notes previously announced in January 2007. This supplemental financing has no additional equity component. This financing retired all of the Company's debt with its primary Lender (See Note H). 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Synergy Brands Inc. (SYBR or the Company) is a holding company that principally operates through a wholly owned subsidiary, PHS Group Inc. ("PHS") in the wholesale distribution of nationally known brands and proprietary private label Groceries and Health and Beauty Aid (HBA) products as well as wholesale luxury goods. It principally focuses on the sale of nationally known brand name consumer products manufactured by major U.S. manufacturers and has begun focusing on the grocery private label market in FY 2006. The Company uses logistics based distribution programs to optimize its costs on both wholesale and retail levels. The Company also owns a wholly owned subsidiary Gran Reserve Corporation that principally operates in the wholesale, retail and online sales of Premium hand made cigars and accessories. The Company also owns 20% of the outstanding common stock of Interline Travel and Tours, Inc. (aka: PERX.com). PERX provides cruise and resort hotel packages through a proprietary reservation system to airline employees and their retirees. PERX is believed to be the largest Company in this sector of the travel industry. Information on PERX can be found at www.perx.com. The Company believes that its capital investment in this unique travel company should provide for material future capital appreciation. Synergy Brands does not manage PERX's day-to-day operations. For further information please visit the Company's corporate website at www.sybr.com. PHS GROUP (GROCERY & HBA OPERATIONS) PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States. PHS is the largest business segment of the Company's business operations, representing about 98% of the overall Company sales and 92% of gross profit. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, whereas a distributor caters to specific merchandising categories. As a result, PHS is able to better plan for the needs of its specific customers and at the same time benefit the manufacturer as the direct supply source and in turn increase sales to its customers at optimized pricing through this unique strategy. PHS concentrates on what it perceives to be faster moving promotional items such as: Tide, Bounty, Nyquil, Pantene, Clorox bleach, Scott tissues, Marcal tissues among many others, and uses promotions, logistics and distribution savings to streamline and reduce its sale prices and increase gross profit thereby. The second business segment within the sector wherein PHS participates was previously Proset Hair Systems (Proset) but Proset discontinued its operations in the 4th quarter of FY 2006. In the third quarter of 2006 PHS entered the private label grocery market specializing in the distribution of baking mixes and spices to national chains on a proprietary basis. PHS hopes to develop private label programs for national accounts by creating proprietary baking mix products and spice plan-o-grams specifically designed for particular retail needs. PHS further hopes to expand its grocery distribution business by complementing the distribution of its promotional grocery and HBA items with higher margin secondary items that would blend a higher margin into PHS operations. GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS) The Company's premium cigar operations are conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses (under the business names stated) o Cigars Around the World (CAW) sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. This company was acquired in June 2003. CAW opened a retail store and lounge in Miami Lakes, Florida selling premium cigars and accessories in March 2006 as well as established and furthered a web site related to its operations, www.cigarsaroundtheworld.com. o CigarGold.com sells premium cigars through the Internet directly to the consumer and through partnership online affiliations. o BeautyBuys.com sells salon hair care products directly to the consumer via the Internet and through partnership online affiliations. 15 CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2006. SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND SEGMENTS CORPORATE SEGMENTS THREE MONTHS ENDED 3/31/07 Revenue $17,613,713 18.39% $ 17,613,713 18.39% Gross Profit 1,413,776 31.59% 1,413,776 31.59% SG&A 796,104 0.72% 1,065,673 5.80% Operating Profit 574,937 137.92% 303,345 2743.07% Net Profit (loss) from continuing operations attributable to common shareholders 162,701 413.79% (289,330) -37.85% Per share continuing operations 0.02 (0.04) Net loss from discontinued operations (6,213) 81.99% Per share discontinued operations (0.00) Net loss attributable to shareholders (295,543) -36.98% Net loss per common share (0.04) Interest and financing expense 408,905 39.49% 586,058 54.88% THREE MONTHS ENDED 3/31/06 Revenue $14,878,155 $ 14,878,155 Gross Profit 1,074,371 1,074,371 SG&A 790,405 1,007,214 Operating Profit (loss) 241,648 (11,477) Net Profit (loss) from continuing operations attributable to common shareholders (51,850) (465,522) Per share continuing operations (0.01) (0.10) Net loss from discontinued operations (3,414) Per share discontinued operations 0.00 Net loss attributable to shareholders (468,936) Net loss per common share (0.10) Interest and financing expense 293,133 378,397
Synergy Brands Synergy Brands is a holding Company that operates through wholly owned segments. In order to fully understand the results of operations, each segment is analyzed respectively. Revenues increased by 18% to $17,613,713 for the three months ended March 31,2007, as compared to $14,878,155 for the three months ended March 31, 2006. The increase in sales was predominately from the sale of PHS private label products and an increase in the Company's PHS wholesale distribution operations. The Company has been able to diversify its products selection both in national brand and private label to achieve better operating margins. The Company was able to grow revenue by 18% and gross profit increased by 32%. The Company attained an operating profit of $303,345 at March 31, 2007 as compared to a $11,477 operating loss at March 31, 2006. Selling General and Administrative expenses (SGA) increased by 6% to $1,065,673 for the three months ended March 31, 2007 as compared to $1,007,214 for the three months ended March 31, 2006. The increase of SG&A was marginal as compared to increased sales as well as an increase in corporate regulatory costs on a corporate level. SG&A expense for PHS Group increased by 9% to $623,990 for the three months ended March 31, 2007 as compared to $571,191 for the three months ended March 31, 2006. PHS incurs variable expenses in connection with selling costs such as sales commission, drivers, warehousing and administrative personnel as well as its promotional expenses. As revenues rise sales commissions and certain operating expenses resulting from sales increase commensurately. 16 The net loss attributable to Common Stockholders of the Company was $295,543 for the three months ended March 31, 2007 as compared to $468,936 for the three months ended March 31, 2006. Interest and financing costs represents 199% of the total loss attributable to common shareholders. Synergy Brands earned $162,701 from operations as compared to a loss of $289,330 for the same period last year. Management believes that its corporate expenses may increase as a result of additional regulatory requirements that have been enacted by the Securities and Exchange Commission (SEC). The Company will be required to comply with additional governance and financial regulations that will likely result in additional corporate expenses. Corporate expenses for the three months ended March 31, 2007 totaled $269,569, which include legal, accounting, corporate employees, and regulatory expenses as compared to $216,809 for the three months ended March 31, 2006. Below is a summary of the results of operation by segment: PHS Group: (Grocery and HBA operations) Synergy's Grocery and HBA business improved its operation through an expansion of its direct store delivery and private label wholesale and distribution operations. Sales improved by 19% to $17.2 million and operating profit increased by 73% to $671,034. PHS represented 98% of the Company's overall revenues and provides most of the cash flow for the Company's other segments as well as corporate regulatory expenses. PHS plans to continue attempting to build its DSD operations, expand its private label programs, and increase its international sales which are anticipated to help continue its direction toward greater profitability. GRAN RESERVE CORPORATION (Cigar operations) Gran Reserve segment operations headed by GRC consist of subcategories www.CigarGold.com, www.CigarsAroundtheWorld.com, www.BeautyBuys.com, and the retail store operation in Miami Lakes, Florida as well as online partnership programs such as www.Overstock.com and www.Google.com. The principal operation was relocated in March 2006 to a 6,000 square foot facility in Miami Lakes, Florida, which handles order flow for the operation as well as retail operations. Sales for this segment during this period remained flat while operating loss was reduced by 34% to $96,097. Retail store operations commenced in December of 2005 with a grand opening, which occurred on March 4, 2006. GRC plans to have its retail outlets act as its hubs for expansion in FY 2007. The combination of online sales as well as retail store sales is expected to be the focus for growth in FY 2007. The retail store is an expansion of Bill Rancic's Cigars Around the World (CAW) concept of providing the ultimate destination to a cigar aficionado. The Company has been disappointed by GRC's growth and believes that rapidly changing antismoking legislation may be shifting the Cigar business to be a complete destination business as opposed to a leisurely activity which GRC has commenced focus upon through its retail store operations. 17 Corporate Expenses: The Company's allocation to corporate expenses was increased by 24% to $269,569 for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006. Corporate expenses represent 25% of overall operating expense of the Company. Operating expenses for all operations including corporate expenses totaled $1.1 million in the first three months of 2007. Corporate expenses reflected the charges needed to operate the public corporation, Synergy Brands Inc. These included all the regulatory costs, board fees, governance fees, legal and accounting expenses and employees that oversee the operations of the Company's assets. Below is a detailed review of the Company's performance. In order to fully understand the Company's results a discussion of the Company's segments and their respective results follow; PHS GROUP (Grocery and HBA operations) PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States as well as in Canada. PHS constitutes the largest segment of the Company's operations from a financial prospective, representing about 98% of the overall Company sales. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, where as a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply which in turn is designed to increase sales to its customers through this unique focus. PHS concentrates on what it perceives to be the fastest moving consumer product items and uses promotional savings to streamline and reduce their sale prices. PHS focuses on approximately 1,000 products manufactured by the top Grocery and HBA Companies in the United States and as a result the Company believes that they have a competitive advantage in comparison to the traditional wholesaler, which may concentrate on over 10,000 different items. 18 PHS SEGMENT INFORMATION OF OPERATING BUSINESSES PHS Group CHANGE THREE MONTHS ENDED 3/31/07 Revenue 17,225,884 18.91% Gross Profit 1,298,645 35.06% SG&A 623,990 9.24% Operating Profit 671,034 73.34% Net Profit 259,002 176.71% Interest and financing expenses 408,905 39.49% THREE MONTHS ENDED 3/31/06 Revenue 14,487,003 Gross Profit 961,519 SG&A 571,191 Operating Profit 387,124 Net Profit 93,599 Interest and financing expenses 293,133 PHS increased its revenues by 19% to $17.2 million for three months ended March 31, 2007 as compared to $14.5 million for the three months ended March 31, 2006. The increase in PHS business is attributable to the utilization of additional vendors, development of a private label grocery program designed to sell proprietary products, more specifically in the baking mix and spice market, to national chains in the United States and Canada, and organic growth in sales to its customers in the Northeastern section of the United States. PHS increased its gross profit by increasing Direct Store Delivery sales, developing a private label market to national chains as well as focusing on promotional merchandise offered by its vendors. The overall gross profit percentage increased from 6.6% to 7.5%. PHS has been able to maintain its sales and customer base while increasing gross profit by 35%. This has been achieved through its wholesale operations by generating incremental retail sales as opposed to lower margin wholesale revenues. Additionally, PHS has taken advantage of promotional rebates, which further enables its cost of foods to be reduced. PHS plans to continue this approach, but it does rely on manufactures promotion to achieve its targeted results. Continuing the development of grocery products produced for the benefit of PHS customers is another objective currently being developed and executed by PHS. Net profit was $259,002 for the three months ended March 31, 2007 as compared to a profit of $93,599 for the three months ended March 31, 2006. 19 GRAN RESERVE SEGMENT GRC CHANGE THREE MONTHS ENDED 3/31/07 Revenue 387,829 -0.85% Gross Profit 115,131 2.02% SG&A 172,114 -21.49% Operating Profit(loss) (96,097) -33.94% Net loss (96,301) -33.79% THREE MONTHS ENDED 3/31/06 Revenue 391,152 Gross Profit 112,852 SG&A 219,214 Operating Profit(loss) (145,476) Net loss (145,449) The Company's direct to consumers activities are conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses o Cigars Around the World sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. The company was acquired in June 2003. (www.cigarsaroundtheworld.com) o CigarGold.com sells premium cigars through the Internet directly to the consumer. (www.cigargold.com) o GRC opened its first retail store in Miami, Florida in March, 2006. The store is expected to be an extension to CAW operation and the store is called Cigars Around the World. o BeautyBuys.com sells salon hair care products directly to the consumer via the Internet. (www.beautybuys.com) o The Company's websites also expects to generate revenue through affiliates and partnership agreements such as www.overstock.com, www.google.com and paid links. Cigars Around the World (CAW), a wholly owned subsidiary of Synergy Brands, Inc., officially opened its first retail outlet and cigar club in Miami Lakes, Florida, on March 4, 2006. The 6,000 square-foot facility, located at 15804 57th Ave, in Miami Lakes features more than 1,000 unique cigars that include brand name, hand made premium cigars as well as Gran Reserve Corp's (GRC) proprietary brands as well as Cigar Accessories. The entire facility is temperature and humidity controlled so all the Cigars can be viewed in a total store experience. In addition, the store houses a Cigar Lounge with Free satellite TV and Free Wireless Internet which will enhance the customer's Cigar smoking and shopping experience. CAW expects to use its facility for Radio remotes for special events, seminars on upcoming news in the Cigar world, and other organized events for its members. CAW features the top selling Cigar brands which include Macanudo, Partagas, Montecristo, Cohiba, Arturo Fuentes-Opus X, Hemingway, Padron, Punch, Romeo y' Julietta, Suarez Gran Reserve, Davidoff, Ashton, Mike Ditka and Breton labels among others. The store will also offer premium brands of upscale accessories. All the products in the store are available nationally on the Store's website www.CigarsAroundTheWorld.com. 20 Revenues in the Company's cigar operation remained flat for the three months ended March 31,2007 at $387,829 as compared to $391,152 for the three months ended March 31, 2006. CAW on a current operating basis represents approximately 47% of cigar revenues for the three months ended March 31, 2007. Gross profit for the three months ended March 31, 2007 increased by 2% to $115,131 as compared to $112,852 for the three months ended March 31, 2006. DISCONTINUED OPERATIONS The Company discontinued Proset's operation in the fourth quarter of 2006 and such discontinuance is reflected in the financial statements hereinafter provided. The prior Proset segment of the Company's business has never been considered a significant component thereof. After review of the relevant components required for measuring the importance of and particulars of the Proset segment, the Company determined that the lessened value of the Company of Proset's revenues did not warrant continuing its operations because such revenues (because of the cost factor) had not become sufficient to sustain the costs of its operations. Proset has not been able to acquire and sell salon hair care products at costs needed to market those products profitably. In addition, Proset's inventory could not be replenished at appropriate levels to accommodate customers' needs as determined by the Company. Proset has continued to operate at a loss and management believed that there was little likelihood of establishing a plan to make such segment profitable. Management further believes that the expansion of its profitable grocery operations will provide for vertical growth that may require additional capital that would be better invested in PHS operations rather then Proset operations. The table below summarizes the historical financial operations of Proset for the periods being discussed.
Three Months Ended Three Months Ended March 31, 2007 March 31, 2006 ------------------ ----------------- Net Sales $ 5,405 $492,522 Cost of sales Cost of product 3,170 330,067 Shipping and handling costs - 34,539 ------------------ ----------------- 3,170 364,606 Gross Profit 2,235 127,916 Operating expenses: General and administrative 8,448 83,213 Depreciation and amortization - 24,876 ------------------ ----------------- 8,448 108,089 Operating profit (loss) (6,213) 19,827 Other Income (expenses): Other income (expenses) - (450) Interest and financing expenses - (22,551) ------------------ ----------------- - (23,001) Net loss before income taxes (6,213) (3,174) Income tax expense - 240 ------------------ ----------------- Net loss from discontinued $ (6,213) $(3,414) operations ------------------ -----------------
21 LIQUIDITY AND CAPITAL RESOURCES
March 31 2007 2006 Working Capital $ 10,659,027 $ 5,643,868 Assets 22,117,348 18,824,285 Liabilities 15,480,077 12,116,104 Equity 6,637,271 6,708,181 Line of Credit Facility 1,104,610 4,310,983 Receivable turnover (days) 43 38 Inventory Turnover (days) 25 16 Net cash provided by (used in) operating activies 152,881 (547,485) Net cash provided by investing activites 203,786 57,740 Net cash (used in) provided by financing activites (550,039) 1,549,379
The Company's working capital increased by $5.0 million at March 31, 2007 to $10.7 million due to a combination of several factors including amortization of debt, refinancing of short term debt to long term debts and operating profits from PHS Group. The Company plans to further improve its working capital through conversion of short-term debt to long-term debt and increasing its operating profit. Liquidity for the Company predominately involves the need to finance accounts receivables, inventory, and fixed costs. The cash flow realized from the Company's gross profit has been sufficient to cover the Company's operating expenses. However, the Company relies on debt and equity financing in order to support the interest that it pays in support of financing its receivables and inventory. The Company historically has not been able to date to completely support its financing costs solely from operations and has relied on equity and debt financing to bridge the gap. However, the Company was able to support its business through cash flow from operations, which totaled $152,881 as compared to a cash deficit of $547,485 for the prior period. The Company generated a net loss attributable of Common Shareholders of approximately $296,000 for the first quarter ended March 31, 2007. Financing costs totaled $586,058 and non-cash charges totaled approximately $88,000 for the period. Reductions in financing expenses through equity conversions and debt repayments through operating or capital transactions have been and should continue to be beneficial to the Company's performance. The capital resources that were available to the Company consisted of $8.0 million in long-term notes, $2.5 million in short term notes, $3.65 million of non-redeemable preferred stock, as of March 31, 2007. The Company's objectives are to reduce its debt through the issuance of equity, cash flow from operation, dispositions of assets as well as refinancing its current obligations with lower rates. In the first quarter of 2007, the Company refinanced its $6 million dollar senior line of credit with a $6.5 million 10 year term facility and materially reduced its interest rate to 11.75%. However, there is no assurance that the Company will be able to achieve its stated objectives. The Company completed its debt refinancing in April, 2007 by paying off its short term revolving line of credit with the additional $1.5 million note proceeds of senior long term debt. The Company's liquidity relies in material part on the turnover of it inventory and accounts receivable. The Company turns its receivables on average every 43 days and the Company has turned its overall inventory on average approximately every 25 days. The Company believes that its collection procedures and procurement policies are consistent with industry standards. However, nearly 60% of the Company's assets consist of trade receivables and inventory. The Company must maintain a strict policy on insuring collections of receivables and adequate procurement based upon customer demands to optimize its profit potential. The Company's sales are reliant in significant part on extending credit that ranges from 30 to 60 days. As a result, the Company must have financing facilities that will continue to allow the Company to procure inventory and extend accounts receivable credits. The Company has strict credit policies and reviews; however credit extensions may pose material financial risks to the Company. In addition the Company relies on performance incentives from its manufacturers that are based upon sales. Provided the Company maintains its performance standards with the Manufacturers with whom it contracts for procurement of goods its estimates of incentives that are due should remain accurate. However, if the respective manufactures change their policies or the Company does not meet the manufacturers standards, incentives may be reduced. 22 Management believes that continued cost containment, improved financial and operating controls, debt reduction, and a focused sales and marketing effort should provide sufficient cash flow from operations in the near term and the Company is working toward reliance on such financial sources and attributes to cover its cash flow requirements but achievement of these goals, however, will likely continue to be dependent upon the Company's attainment of increased revenues, improved operating costs, reduced financing cost and trade support levels that are consistent with management's plans. Such operating performance will likely continue to be subject to financial, economic and other factors likely to be beyond its control, and there can be no assurance that the Company's goals will be achieved. In the interim while such goals are being pursued achievement of positive cash flow has been and continues to be reliant on equity and debt financing, including the Company's exchange of notes payable for common shares and its issuance of further common and preferred stock in private placements and the Company is hopeful that the market will continue to recognize the Company's stature so that such financing method will continue to be available in the future because, at least in the near future, the Company is likely to continue to use such financing opportunities to maintain adequate cash flow. Expected interest payments on notes payable for the period ended March 31, are as follows: 03/31/08 03/31/09 03/31/10 03/31/11 03/31/12 Total $985,000 $750,000 $590,000 $486,000 $350,000 $3,161,000 Variable interest rate on notes of $450,000 was 11.25%. Principle repayments on notes payable for the period ended March 31, are as follows: 3/31/08 $ 2,491,000 3/31/09 $ 2,457,000 3/31/10 $ 650,000 3/31/11 $ 1,365,000 3/31/12 $ 3,791,000 ------------ $10,754,000 Discounts $ (236,687) ------------ Total $10,517,313 ------------ CRITICAL ACCOUNTING POLICIES. The discussion and analysis of the Company's financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on going basis, management evaluates its estimates. Management uses authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. Management believes that the following critical accounting policies affect its more significant judgments and estimates in the preparation of the Company's financial statements. ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable are due from businesses engaged in the distribution of grocery, health and beauty products as well as from consumers who purchase health and beauty products and premium handmade cigars from the Company's Web sites. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral may be required. Accounts receivable are due within 10 - 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. Estimates are used in determining the allowance for doubtful accounts based on the Company's historical collections experience, current trends, credit policy and a percentage of its accounts receivable by aging category. In determining these percentages, the Company looks at historical write-offs of its receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from its customers. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. VALUATION OF DEFERRED TAX ASSETS. Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily comprised of reserves, which have been deducted for financial statement purposes, but have not been deducted for income tax purposes as well as net operating loss carry forwards. The Company annually reviews the deferred tax asset accounts to determine if is appears more likely than not that the deferred tax assets will be fully realized. At March 31, 2007, the Company has established a full valuation allowance. 23 VALUATION OF LONG-LIVED ASSETS. The Company reviews its long-lived assets periodically to determine potential impairment by comparing the carrying value of the assets with expected net cash flows expected to be provided by the operating activities of the business or related products. Should the sum of the expected future net cash flows be less than the carrying value, the Company would determine whether an impairment loss should be recognized. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the Asset. Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset. SEASONALITY Sales by PHS Group and Proset usually peak at the end of the calendar quarter, when the Company's suppliers offer promotions which lower prices and, in turn, the Company is able to lower its prices and increase sales volume. Suppliers tend to promote at quarter end and as a result reduced products costs may increase sales. In particular, the first and second quarters are usually better operating quarters. Sales of beauty care products and fragrances increase over traditional gift giving holidays such as Christmas, Mother's Day, Father's Day, and Valentine's Day. Cigar product sales also increase during holiday periods and summer months as well as around special sporting events. INFLATION The Company believes that inflation, under certain circumstances, could be beneficial to the Company's major business, PHS Group. When inflationary pressures drive product costs up, the Company's customers sometimes purchase greater quantities of product to expand their inventories to protect against further pricing increases. This enables the Company to sell greater quantities of products that are sensitive to inflationary pressures. However, inflationary pressures frequently increase interest rates. Since the Company is dependent on financing, any increase in interest rates will increase the Company's credit costs, thereby reducing its profits. However, inflation increases prices which maybe a natural hedge to an increase in interest in the Company's consumer business. However, in certain times rising prices may cause a decline in sales that would result in reduced operating profit. 24 Item 4-Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our disclosure controls and procedures as of and have found such to be effective as of the end of the period covered by this report. Under rules promulgated by the SEC, disclosure controls and procedures are defined as those controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Based on the evaluation of our disclosure controls and procedures, management determined that such controls and procedures were effective in timely alerting them to material information relating to the Company (including its Consolidated Subsidiaries) required to be included in the Company's periodic reports. Further, there were no significant changes in the internal controls or in other factors that could significantly affect these controls after March 31, 2007, the date of the conclusion of the evaluation of disclosure controls and procedures. The Company's management, including its principal executive officer and the principal financial officer, does not expect that the Company's disclosure controls and procedures and its internal control processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. The Company monitors its disclosure controls and procedures and internal controls and makes modifications as necessary; the Company's intent in this regard is that the disclosure controls and procedures and the internal controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. 25 Part II - OTHER INFORMATION Item 1A - Risk Factors There have been no material changes to the Company's risk factors as previously disclosed in Item 1A "Risk Factors" in our 2006 Form 10-K for the fiscal year ended December 31, 2006. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds In January 2007, the Company issued 1,075,000 shares of common stock to Lloyd Miller in compliance with security purchase agreement dated January 19, 2007. Item 4 - Submission of Matters to a Vote of Security Holders There were no submission of matters to a vote of security holders to be reported during the three month fiscal period ended March 31, 2007. Item 6- Exhibits and Reports on Form 8-K (1) 31.1 Certification Pursuant to Exchange Act Rule 13a - 14(a) / 15d-14(a) signed by the Chief Executive Officer. 31.2 Certification Pursuant to Exchange Act Rule 13a - 14(a) / 15d-14(a) signed by the Chief Financial Officer. 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer. 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by Chief Financial Officer. (2) There were three reports filed on 8-K for the relevant period. 1) On January 22, 2007, the Company announced its entering the January 19, 2007 financing made reference to supra whereby the Company completed a $6.5 million secured financing with Lloyd I. Miller, a major shareholder and a director of Synergy Brands for its main operating subsidiary PHS Group Inc. The financing consisted of $6.5 million in secured term notes to be amortized over a 5 year period, with a balloon payment of $3,250,000 in January 2012. 2) On February 2, 2007, the Company announced that it had received notice from NASDAQ Stock market, dated January 31, 2007 that for 30 consecutive business days the bid price of the Registrant's common stock has closed below the minimum $1.00 per share requirements for listing. The Registrant has been provided until July 30, 2007 to regain compliance. 3) On April 5, 2007, the Company announced its 2006 year end financial results disclosed in the 10K filing for 2006. 26 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Synergy Brands, Inc. /s/ Mair Faibish - -------------------- By: Mair Faibish Chief Executive Officer Date: May 15, 2007 /s/ Mitchell Gerstein - ---------------------- By: Mitchell Gerstein Chief Financial Officer 27 Exhibit 31.1 Certification Pursuant To Exchange Act Rule 13-a-14(a)/-15d-14(a) I, Mair Faibish, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies and material weaknesses we find in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2007 /s/ Mair Faibish Mair Faibish, Chief Executive Officer 28 Exhibit 31.2 Certification Pursuant To Exchange Act Rule 13-a-14(a)/-15d-14(a) I, Mitchell Gerstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies and material weaknesses we find in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2007 /s/ Mitchell Gerstein Mitchell Gerstein, Chief Financial Officer 29 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of Synergy Brands Inc., (the "Company"), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2007 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 15, 2007 /s/ Mair Faibish - ----------------- Mair Faibish, Chief Executive Officer Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Financial Officer of Synergy Brands, Inc. (the "Company"), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2007 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 15, 2007 /s/ Mitchell Gerstein - --------------------- Mitchell Gerstein, Chief Financial Officer 30 -----END PRIVACY-ENHANCED MESSAGE-----