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 June 30, 2008. Commission File Number: 0-19409 SYNERGY BRANDS, INC. (Exact name of registrant as it appears in its charter) Delaware 22-2993066 (State of incorporation) (I.R.S. Employer identification no.) 223 Underhill Blvd. Syosset NY 11791 (Address of principal executive offices) 516-714-8200 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] YES [ ] NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller Reporting Company [x] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [ x ] NO APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. N/A [ ] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. August 4, 2008 there were 12,153,437 shares outstanding of the registrant's common stock. SYNERGY BRANDS, INC. FORM 10-Q JUNE 30, 2008 TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page Item 1: Financial Statements Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007 2 - 3 Consolidated Statements of Operations for the six Months ended June 30, 2008 and 2007 (Unaudited) 4 Consolidated Statements of Operations for the three Months ended June 30, 2008 and 2007 (Unaudited) 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (Unaudited) 6-7 Notes to Consolidated Financial Statements (Unaudited) 8-15 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 16-28 Item 4: Control and Procedures 28 PART II: OTHER INFORMATION Item 1A: Risk Factors 30 Item 2: Unregistered Sales of Equity Securities and use of Proceeds 30 Item 4: Submission of Matters to a Vote of Security Holders 30 Item 6: Exhibits and Reports on Form 8-K 30 SIGNATURES AND CERTIFICATIONS 31
1 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2008 AND DECEMBER 31, 2007
ASSETS June 30, 2008 December 31, 2007 (Unaudited) Current Assets: Cash and cash equivalents $ - $488,475 Accounts receivable trade, less allowance for doubtful accounts of $127,481 4,949,678 3,798,291 Other receivables 6,316,349 5,038,607 Note Receivable - current 423,894 356,909 Inventory 2,996,122 2,983,770 Prepaid assets and other current assets 1,562,885 3,231,673 Assets of discontinued operations - 848,778 ---------------- --------------- Total Current Assets 16,248,928 16,746,503 Property and Equipment, net 9,927,595 10,109,139 Other Assets 2,960,614 2,979,188 Notes Receivable 1,603,004 1,605,260 ---------------- --------------- Total Assets $30,740,141 $31,440,090 ================ ===============
The accompanying notes are an integral part of these statements. 2 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2008 AND DECEMBER 31, 2007
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 2008 December 31, 2007 (Unaudited) Current Liabilities: Notes Payable - Current $ 5,407,533 $ 4,199,348 Accounts Payable and Accrued Expenses 5,138,006 5,573,914 Deferred income 976,590 437,776 Liabilities of Discontinued Operations - 181,766 ---------------- ----------------- Total Current Liabilities 11,522,129 10,392,804 Notes Payable, net of discount $434,559 and $587,105, respectively 10,632,352 12,027,080 Stockholders' Equity: Class A Preferred stock - $.001 par value; 100,000 shares authorized; 93,213 and 93,213 shares issued and outstanding; liquidation preference of $10.50 per share 93 93 Class B preferred stock - $.001 par value; 150,000 shares authorized, none issued - - Class B, Series A Preferred stock - $.001 par value; 500,000 shares authorized; 285,000 and 285,000 shares issued and outstanding; liquidation preference of $10.00 285 285 per share Class B Series B preferred stock - $.001 par value, 250,000 shares authorized, 80,000 and 80,000 shares issued and outstanding; liquidation preference of $10.00 per share 80 80 Common stock - $.001 par value;14,000,000 shares authorized; 12,063,437 and 11,328,764 shares issued 12,063 11,329 Additional paid-in capital 50,979,457 50,712,481 Deficit (42,392,978) (41,690,722) Accumulated other comprehensive loss (8,340) (8,340) Less treasury stock, at cost, 1,000 shares (5,000) (5,000) ---------------- ----------------- Total stockholders' equity 8,585,660 9,020,206 ---------------- ----------------- Total Liabilities and Stockholders' Equity $30,740,141 $31,440,090 ================ =================
The accompanying notes are an integral part of these statements. 3 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, (UNAUDITED)
2008 2007 Net Sales $44,535,305 $38,481,250 ----------- ----------- Cost of Sales Cost of product 39,238,113 34,965,092 Shipping and handling costs 830,323 514,219 ----------- ----------- 40,068,436 35,479,311 Gross Profit 4,466,869 3,001,939 Operating expenses Selling, general and Administrative Expenses 3,649,529 1,898,148 Depreciation and amortization 302,456 11,288 ----------- ----------- 3,951,985 1,909,436 ----------- ----------- Operating Profit 514,884 1,092,503 Other Income (expense) Interest Income 62,741 79,664 Other expense - (242) Equity in earnings of investee 168,534 186,407 Interest and financing expense (1,169,550) (1,103,310) ----------- ----------- (938,275) (837,481) ----------- ----------- (Loss) profit from continuing operations before income taxes (423,391) 255,022 Income tax expense 20,766 47,218 ----------- ----------- (Loss) profit from continuing operatons (444,157) 207,804 ----------- ----------- Discontinued operations Loss from operations of discontinued components (including impairment loss of $200,367 in 2008) (258,099) (178,918) Income tax expense - - ----------- ----------- Loss from discontinued operations (258,099) (178,918) ----------- ----------- Net (loss) profit (702,256) 28,886 Dividend-Preferred Stock 155,750 160,250 ----------- ----------- Net (loss) attributable to common stockholder $(858,006) $(131,364) =========== =========== Basic and diluted net (loss) profit per common share from continuing operations: $ (0.05) $ 0.00 Basic and diluted net loss per common share from discontinued operations: $ (0.02) $ (0.02) ----------- ----------- $ (0.07) $ (0.02) ----------- -----------
The accompanying notes are an integral part of these statements. 4 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, (UNAUDITED)
2008 2007 Net Sales $ 24,110,156 $ 21,284,060 --------------- --------------- Cost of Sales Cost of product 21,267,375 19.267,045 Shipping and handling costs 420,513 297,684 --------------- --------------- 21,687,888 19,564,729 Gross Profit 2,422,268 1,719,331 Operating expenses Selling, general and Administrative Expenses 1,980,692 1,014,372 Depreciation and amortization 151,228 5,644 --------------- --------------- 2,131,920 1,020,016 --------------- --------------- Operating Profit 290,348 699,315 Other Income (expense) Interest Income 30,346 45,569 Equity in earnings of investee 86,824 95,266 Interest and financing expense (572,809) (517,252) --------------- --------------- (455,639) (376,417) --------------- --------------- (Loss) profit from continuing operations before income taxes (165,291) 322,898 Income tax expense - 436 --------------- --------------- (Loss) profit from continuing operatons (165,291) 322,462 --------------- --------------- Discontinued operations Loss from operations of discontinued components - (82,658) Income tax expense - - --------------- --------------- Loss from discontinued operations - (82,658) --------------- --------------- Net (loss) profit (165,291) 239,804 Dividend-Preferred Stock 75,625 75,625 --------------- --------------- Net (loss) profit attributable to common stockholder $ (240,916) $ 164,179 =============== =============== Basic and diluted net (loss) profit per common share from continuing operations: $ (0.02) $ 0.03 Basic and diluted net profit (loss) per common share from discontinued operations: $ 0.00 $ (0.01) --------------- --------------- $ (0.02) $ 0.02 --------------- ---------------
The accompanying notes are an integral part of these statements. 5 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, (UNAUDITED)
2008 2007 ----------- --------- Cash Flows From Operating Activities: Net Profit (loss) $ (702,256) $ 28,886 Adjustments to reconcile net (loss) profit to net cash (used in) provided by operating activities Depreciation and Amortization 302,456 11,288 Amortization of financing cost 86,046 47,243 Equity in earnings of investee (168,534) (186,407) Operating expenses paid with common stock 212,448 126,053 Changes in Operating Assets and Liabilities: Net (increase) decrease in: Accounts receivable and other receivables (2,429,129) 161,085 Inventory (12,352) (3,284,240) Prepaid assets, related party note receivable and other assets 2,212,863 44,150 Net increase (decrease) in: Accounts payable, related party note payable, accrued expenses and other current liabilities (435,908) 3,176,903 Deferred Income 554,689 (2,307) Net assets of discontinued operations 66,645 (72,642) ----------- --------- Net cash (used in) provided by operating activities (313,032) 50,012 ----------- --------- Cash Flows From Investing Activities: Purchase of fixed assets (120,912) (22,259) Payments received on notes receivable 368,521 312,610 Issuance of notes receivable (33,250) (15,350) Investee dividend received 29,800 28,800 Investment in investee - (50,000) ----------- --------- Net cash provided by investing activities 244,159 253,801 ----------- --------- Cash Flows From Financing Activities: Borrowings under line of credit - 375,751 Repayments under line of credit - (6,025,679) Proceeds from the issuance of notes payable 750,000 8,500,000 Repayments of notes payable (1,026,731) (3,622,492) Payment of dividends (155,750) (160,250) Proceeds from issuance of common stock 12,879 7,094 ----------- --------- Net cash (used in) financing activities (419,602) (925,576) ----------- --------- Net (decrease) in cash (488,475) (621,763) Cash and cash equivalents, beginning of period 488,475 624,740 ----------- --------- Cash and cash equivalents, end of period $ 0 $ 2,977 =========== =========
The accompanying notes are an integral part of these statements. 6 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, (UNAUDITED)
2008 2007 Supplemental disclosure of cash flow information: Cash paid for interest $ 886,548 $ 673,776 =========== =========== Cash paid for income taxes $ 20,776 $ 47,218 =========== =========== Supplement disclosures of non-cash operating, investing and financing activities: Debt conversion to common stock $ 150,743 $ 543,333 ========== ========== Common Stock issued for services $ 212,448 $ 126,053 ========== ========== Common Stock issued for financing cost - $ 978,250 ========== ==========
On April 14, 2008, the Company entered in an agreement to sell the cigar segment of the business. The sale price consisted of a cash down payment of $50,000 and a $350,000 promissory note, with principal and interest at a rate of 5%. The accompanying notes are an integral part of these statements. 7 SYNERGY BRANDS, INC. & SUBSIDIARIES Notes to Consolidated Financial Statements JUNE 30, 2008 AND 2007 (Unaudited) NOTE A - UNAUDITED FINANCIAL STATEMENTS The consolidated balance sheet as of June 30, 2008, the consolidated statements of operations for the six months ended June 30, 2008 and 2007, the consolidated statement of operations for the three months ended June 30, 2008 and 2007, and the consolidated statements of cash flows for six months ended June 30, 2008 and 2007, have been prepared by Synergy Brands, Inc. ("Synergy" or the "Company") without audit. The balance sheet at December 31, 2007 has been derived from the audited financial statements as of that date. In the opinion of management, all adjustments (which include only normally recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at June 30, 2008 (and for all other periods presented) have been made. Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2007 filed by the Company. The results of operations for the periods ended June 30, 2008 and 2007 are not necessarily indicative of the operating results for the respective full years. NOTE B - ADVERTISING EXPENSE The Company expenses advertising and promotional costs as incurred. Advertising and promotional costs were approximately $23,000 and $75,000 for the six months ended June 30, 2008 and 2007, respectively, and $10,000 and $58,500 for the three months ended June 30, 2008 and 2007, respectively. 8 SYNERGY BRANDS, INC. & SUBSIDIARIES Notes to Consolidated Financial Statements JUNE 30, 2008 AND 2007 (Unaudited) NOTE C - VENDOR ALLOWANCES The Company accounts for vendor allowances under the provisions of EITF No. 02-16 "Accounting by a Customer (including a reseller) for Certain Consideration Received from a Vendor". The Company recognizes vendor allowances at the date goods are purchased and recorded under fixed and determined arrangements. The Company receives allowances and credits from suppliers for volume incentives, promotional allowances and, to a lesser extent, new product introductions, which are typically based on contractual arrangements covering a period of one year or less. Volume incentives and promotional allowances earned based on quantities purchased and new product allowances are recognized as a reduction to the cost of purchased inventory and recognized when the related inventory is sold. Promotional allowances that are based on the sell-through of products are recognized as a reduction of cost of sales when the products are sold for which the promotional allowances are given. For the six months ended June 30, 2008, the Company recognized $2,534,785 in vendor allowances that met the criteria for being fixed and determinable. Vendor allowances included in other receivables in the accompanying consolidated balance sheet aggregated $6,316,349 at June 30, 2008 and $5,038,607 at December 31, 2007. NOTE D - INVENTORY Inventory, consisting of goods held for sale, as of June 30, 2008 consisted of the following: Grocery, general merchandise and health and beauty products $ 2,568,201 Raw Materials 427,921 ------------- $ 2,996,122 ============= NOTE E - NOTE RECEIVABLE In December 2004, the Company sold accounts receivable for $2,200,000. This promissory note, which is secured by the accounts receivable, requires monthly payments of principal and interest at 4% for seven years, beginning in January 2005. The balance of the note receivable at June 30, 2008 was $1,181,243. In October 2005 SYBR.com Inc., a wholly owned subsidiary of the Company, invested $1 million in a Private Placement of Senior Subordinated Debentures issued by ITT. The investment consists of a five year 8% Note (ITT Note), and 200,000 warrants exercisable into 200,000 common shares of ITT stock at $5.00 per share (ITT Warrants). The Company financed this investment with a $1 million fully recourse note with a major Shareholder under the same terms and conditions as the ITT Note and assigned to such shareholder the ITT Warrants. As consideration for the financing, the Company has retained the benefit to be derived from 100,000 of the warrants received from ITT. In relation to the ITT warrants, Company has recorded deferred income of $127,000. At June 30, 2008, the Company recognized $47,625 of the deferred income. As part of the Company's agreement, the Company has paid $571,429 on the note payable. The outstanding balance of the note payable at June 30, 2008 was $428,571. On April 14, 2008, the Company entered in an agreement to sell the cigar segment of the business. The sale price consisted of a cash down payment of $50,000 and a $350,000 promissory note with principal and interest payments at a rate of 5%. The balance of the note receivable at June 30, 2008 was $350,000. Note receivable from other parties, originating in the normal course of business, approximated $67,084 at June 30, 2008. 9 SYNERGY BRANDS, INC. & SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2008 AND 2007 (Unaudited) NOTE F - INVESTMENT The Company holds a 20% interest in an investee ("Interline Travel and Tours or ITT"). The Company accounts for this investment under the equity method. The Company recorded equity in the net earnings of investee of $168,534 and $186,407 during the six months ended June 30, 2008 and June 30, 2007, respectively. At June 30, 2008, the investment in ITT is $1,077,911 as included in "Other Assets" on the accompanying balance sheet. Summarized results of operations of this investee for the six months ended June 30, 2008 and 2007 is as follows: 2008 2007 Revenues $ 21,434,000 $ 18,149,000 Total expenses (20,189,000) (16,882,000) Other income 63,500 110,000 ------------- ------------- Income before income taxes 1,308,500 1,377,000 Income tax expense (466,000) (485,000) ------------- ------------- Net income $ 842,500 $ 892,000 ============= ============= NOTE G - NOTES PAYABLE The Company financed a series of secured notes with certain shareholders of ITT since 2004. In February 2008, $119,800 of the outstanding debt was converted. The outstanding balance as of June 30, 2008 was $730,200, which matures in January 2009. 10 SYNERGY BRANDS, INC. & SUBSIDIARIES Notes to Consolidated Financial Statements JUNE 30, 2008 AND 2007 (Unaudited) NOTE G (continued) In January 2005, the Company entered into a promissory note with a major regional bank for $1,000,000, which was increased to $1,500,000 in September 2007. Borrowing under the note bears interest at prime minus .5% (4.50% at June 30, 2008). The Company is not required to repay any principal until the maturity date of the note, June 1, 2009. As security for the note, a pledge agreement was entered by a certain Shareholder of ITT. Borrowings at June 30, 2008 were $377,850. In October 2005, the Company invested $1 million in a Private Placement of Senior Subordinated Debentures issued by ITT. The Company financed this investment with a $1 million fully recourse 5 year, 8% note with a major shareholder. The outstanding balance of the note at June 30, 2008 was $428,571. The Company financed a series of secured Notes with Laurus Master Funds (LMF). The remaining note was originally issued in the amount of $1.75 million on March 14, 2006 with a fixed rate of 10%. The note has a three year term. The balance of the note at June 30, 2008, net of discount approximated $992,485. On April 15, 2007, Synergy Brands Inc. completed a $8.0 million secured financing with a major shareholder and a director for its main operating subsidiary PHS Group Inc. The financing consisted of long term notes to be amortized over a 5 year period, with a balloon payment of $4,000,000 in January 2012 at an interest rate of 11.75%. The agreement further involved a securities purchase agreement, under which there was issued 1,075,000 common shares of Synergy Brands issued to this shareholder as a financing cost and all warrants beneficially owned by this shareholder were retired. The Company repaid $1,044,629 of this debt at June 30, 2008. At June 30, 2008, the outstanding balance was approximately $6,955,371. The Company financed an asset acquisition through the issuance by QFB of two 9% secured loan in the principal amount of $4,750,000 that matures on May 18, 2012, with principal payment that began December 1, 2007. In addition, in December 2007, the Company issued 480,000 shares valued at $393,600. The relative fair value of these shares is being charged to operations as additional interest over the term of the loan. Total repayments at June 30, 2008 were $110,000. The balance of the notes net of discount approximated $4,290,956 at June 30, 2008. In July 2007, the Company secured $1,500,000 from shareholders of short term financing bearing interest at 8% that matures on October 1, 2008. The balance of the notes at June 30, 2008, was $1,464,454. In the first quarter of 2008 the Company secured $800,000 bearing interest at 15%, from shareholders of short term financing which matures on October 31, 2008. NOTE H - STOCKHOLDERS' EQUITY During the six months ended June 30, 2008, the Company issued 734,673 shares of common stock in connection with financing, the sale of securities, conversions of debt to equity, services and dividends in connection with Class B Preferred Stock valued at $266,976. 11 SYNERGY BRANDS, INC. & SUBSIDIARIES Notes to Consolidated Financial Statements JUNE 30, 2008 AND 2007 (Unaudited) NOTE I - NET INCOME (LOSS) PER SHARE Basic and diluted income (loss) per share is calculated by dividing the net loss applicable to common stock by the weighted-average number of common shares outstanding during each period. Incremental shares from assumed exercises of stock options, warrants and convertible debt and equity securities of 1,087,177 and 536,666 for the six months ended June 30, 2008 and 2007, and for the three months ended June 30, 2008 respectively, have been excluded from the calculation of diluted loss per share since their effect would be antidilutive.
Six Months ended June 30, 2008 2007 ------------- ------------- Net loss applicable to common stockholder $ (858,006) $ (131,364) ============= ============= Weighted-average number of shares basic and diluted EPS 11,741,736 8,015,482 ============= ============= Three Months ended June 30, 2008 2007 ------------- ------------- Net profit (loss) applicable to common stockholder $ (240,916) $ 164,179 ============= ============= Weighted-average number of shares basic 11,960,446 8,410,401 ============= ============= Weighted-average number of shares diluted 11,960,446 8,947,067 ============= =============
12 SYNERGY BRANDS, INC. & SUBSIDIARIES Notes to Consolidated Financial Statements JUNE 30, 2008 AND 2007 (Unaudited) J - DISCONTINUED OPERATIONS In December 2006, the Company instituted a plan to discontinue the Pro-Set segment. In the first quarter of 2008 the Company instituted a plan to sell the Company's cigar segment. Accordingly, the operating results of Pro-Set and the cigar segment have been presented as discontinued operations. Net assets and liabilities to be disposed of or liquidated, at their book value after recording a loss on the impairment of the cigar segment of $200,367, have been separately classified in the accompanying balance sheets at June 30, 2008 and June 30, 2007 and statement of cash flows. Summarized financial information of the Proset and GRC segment as discontinued operations for each of the periods ended is as follows: Six Months Ended June 30, 2008 June 30, 2007 ------------- -------------- Net Sales $289,059 $ 935,723 Cost of sales Cost of product 157,814 603,671 Shipping and handling costs 22,727 43,471 ------------- -------------- 180,541 647,142 Gross Profit 108,518 288,581 Operating expenses: General and administrative 161,120 391,926 Depreciation and amortization 5,136 75,573 ------------- -------------- 166,256 467,499 Operating loss (57,738) (178,918) Other Income (expenses): Loss on disposal (200,367) - Other income (expenses) 6 - ------------- -------------- (200,361) - ------------- -------------- Net loss before income taxes (258,099) (178,918) Income tax expense - - ------------- -------------- Net loss from discontinued operations $ (258,099) $(178,918) ============= ============== 13 SYNERGY BRANDS, INC. & SUBSIDIARIES Notes to Consolidated Financial Statements JUNE 30, 2008 AND 2007 (Unaudited) NOTE J(continued) Three Months Ended June 30, 2008 June 30, 2007 ------------- -------------- Net Sales - $ 513,795 Cost of sales Cost of product - 334,839 Shipping and handling costs - 23,778 ------------- -------------- - 358,617 ------------- -------------- Gross Profit 155,178 Operating expenses: General and administrative - 201,377 Depreciation and amortization - 36,459 ------------- -------------- - 237,836 Operating loss - (82,658) Net loss before income taxes - (82,658) Income tax expense - - ------------- -------------- Net loss from discontinued operations - $ (82,658) ============= ============== 14 SYNERGY BRANDS, INC. & SUBSIDIARIES Notes to Consolidated Financial Statements JUNE 30, 2008 AND 2007 (Unaudited) NOTE J (continued) June 30, 2008 Dec. 31, 2007 ------------- -------------- ASSETS: CURRET ASSETS: CASH AND CASH EQUIVALENTS $ - $ 13,277 ACCOUNTS RECEIVABLE TRADE, NET - 202,514 INVENTORY - 541,865 PROPERTY AND EQUIPMENT, NET - 71,122 OTHER ASSETS - 20,000 ------------- -------------- TOTAL ASSETS $ - $ 848,778 ============= ============== LIABILITIES: ACCOUNTS PAYABLE $ - $ 181,766 ------------- -------------- TOTAL LIABILITIES $ - $ 181,766 ============= ============== NOTE K - RECENT ACCOUNTING PRONOUNCEMENTS In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding financial instruments in one of the categories (level 3), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of SFAS 115" (SFAS No. 159). The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have material impact on our consolidated financial statements. In December 2007, the FASB issued Statements No. 141 (R), "Business Combinations", and No. 160, "Noncontrolling Interests in Consolidated Financial Statements." Effective for fiscal years beginning after December 15, 2008, these statements revise and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The adoption of these statements is not expected to have a material impact on the Company's financial statements. In March 2008, FASB issued SFAS 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133". This Statement applies to all entities. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company does not believe this pronouncement will have a material effect on its financial statement. NOTE L - SUBSEQUENT EVENTS On July 24, 2008, the Company received a NASDAQ staff letter indicating that the Company fails presently to comply with the minimum bid price requirements because for 180 consecutive business days since the last letter received from NASDAQ, the bid price of the Company's common stock has closed below the $1.00 per share requirement. The Company has been granted a stay to September 4, 2008. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW The core operations of Synergy Brands include the baking mix manufacturing operation in Michigan, operated by Quality Food Brands, which is owned by PHS Group and the grocery and HBA business located in NY. The Company's spice business, is also nationally distributed through its Michigan facilities and manufactured for PHS group through a co-packing arrangement in China. The Company's packaged meal business is also distributed through the Company's Michigan distribution center and manufactured under a co-packing arrangement in North Dakota. The Company expanded its Michigan operations to 110,000 square feet in two facilities located in Monroe, Michigan. The Company combines the distribution of nationally recognized brands together with private label brands and proprietary products. In addition to its Michigan operations, the Company continues to grow its wholesaling business in New York. The Company believes that it is one of the largest independent wholesalers for P&G products based in the Long Island region of New York and continues to grow and expand its distribution of other nationally branded products, which include Clorox, Kimberley Clark, and Smuckers, among others, in the northeastern region of the United States. The Company's wholesaling focus is the distribution of nationally recognized consumer products in large quantities through retail and wholesale based promotional programs. Key products distributed by the Company include Bounty, Tide, Folgers, Gillette, Pringles, Clorox, Scott and Duracell. The Company limits its distribution to about 1,000 nationally recognized brands and uses its logistical advantages to streamline its costs to its customers. The Company is creating a logistical corridor between its New York and Michigan operations that has allowed for efficient distribution that offsets shipping and warehousing costs. In addition, the Company's New York operation began distributing the products that are directly manufactured by the Company in Michigan to its customers in the New York region. Leveraging upon its newly formulated operating structure is critical to the Company's efficiency and profitability and the benefits of this synergy can clearly be seen through expanding operating margins. The Company believes that as it expands its Michigan operation, and especially as it builds traction in its manufactured goods, it may add franchise value to labels and trademarks that the Company owns. The Company currently manufactures baking mixes under the "Rich & Moist" "Rich & Fluffy", "Country Value", "County Fare", "Merit Selection": and "County Pride" labels. It manufactures spices under the "Loretta" and "Gourmet Select" labels. It further manufactures packaged meals under the "Loretta" label. The Company believes that it is well positioned to expand its operations with the infrastructure that it has developed over the past few years in the United States and Canada as well as to enter into licensing arrangements in other parts of the world. PHS GROUP AND QUALITY FOOD BRANDS (GROCERY & HBA OPERATIONS) PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately in the United States. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, whereas a distributor caters to specific merchandising categories. As a result, PHS is able to better plan for the needs of its specific customers and at the same time benefits the manufacturer as the direct supply source and in turn increase sales to its customers at optimized pricing through this unique strategy. PHS concentrates on what it perceives to be faster moving promotional items such as: Tide, Bounty, Duracell, Folgers, Crest, Clorox bleach, Scott tissues, Marcal tissues among many others, and uses promotions, logistics and distribution savings to streamline and reduce its sale prices and increase gross profit thereby. 16 In the third quarter of 2006, PHS entered the private label grocery market specializing in the distribution of baking mixes and spices to grocery and Drug chains as well as wholesalers and distributors on a proprietary basis through a wholly owned subsidiary, Quality Food Brands (QFB), based in Michigan. QFB hopes to develop private label programs for national accounts by creating proprietary baking mix products and spice plan-o-grams specifically designed for particular retail needs. PHS further hopes to expand its grocery distribution business by complementing the distribution of its promotional grocery and HBA items with higher margin secondary items that would blend a higher margin into PHS operations. On May 18, 2007, PHS acquired the assets of a baking mix manufacturing facility through a wholly owned subsidiary that was known as Loretta Baking Mix Products (LBMP) for a combined cost of $10.4 million and positioned these assets in QFB. 17 CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2007.
OPERATING OPERATING AND SEGMENT CORPORATE SEGMENTS SIX MONTHS ENDED 6/30/08 Revenue $44,535,305 $44,535,305 15.73% Gross Profit 4,466,869 4,466,869 48.80% SG&A 2,681,351 3,649,529 92.27% Operating Profit 1,487,108 514,884 -52.87% Net Profit (loss) from continuing operations attributable to common shareholders 564,807 (599,907) -1361.53% Per share continuing operations 0.05 (0.05) Non Cash Charges 1,087,378 195.06% Net Profit (loss)before non-cash charges attributable to shareholders 487,471 17.16% Per share 0.04 Net loss from discontinued operations (258,099) 44.26% Per share discontinued operations (0.02) Net profit (loss) attributable to shareholders (858,006) 553.15% Net profit (loss) per common share (0.07) Interest and financing expense 916,473 1,169,550 6.00% Non Cash Charges * Depreciation & Amortization 302,456 Operating non-cash charges 476,307 Financing charges 308,615 ----------------- Total 1,087,378 SIX MONTHS ENDED 6/30/07 Revenue $38,481,250 $38,481,250 Gross Profit 3,001,939 3,001,939 SG&A 1,259,479 1,898,148 Operating Profit 1,735,218 1,092,503 Net Profit (loss) from continuing operations attributable to common shareholders 964,028 47,554 Per share continuing operations 0.11 0.00 Non Cash Charges 368,525 Net Profit (loss)before non-cash charges attributable to shareholders 416,079 Per share 0.05 Net loss from discountinued operations (178,918) Per share discontinued operations (0.02) Net loss attributable to shareholders (131,364) Net loss per common share (0.02) Interest and financing expense 768,063 1,103,310 Non Cash Charges * Depreciation & Amortization 11,288 Operating non-cash charges 126,053 Financing charges 231,184 ----------------- Total 368,525 * Management believes such non-GAAP financial presentation better reflects fundamential business performance for the Quarter, but such non-GAAP measures should be viewed in addition to, and not as an alternative for, the Company's results prepared and presented in accodrance with GAAP.
Synergy Brands The Company reported its first combined results of operations as a pure Grocery Manufacturer and Distributor for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007. Synergy Brands Inc. operates as a holding Company, which owns PHS Group and its related grocery businesses (QFB), as well as the 20% stake it owns in Interline Travel and Tours (aka PERX). In addition, Synergy Brands continues to report the disposition of its discontinued operations. Revenues increased by 16% to $44,535,305 for the six months ended June 30, 2008 while gross profit increased by 49% to $4,466,869 for the six months ended June 30, 2008 as compared to the same comparable period in 2007. The increase of sales is directly attributable to the Michigan operation, which nearly doubled from the prior period, as well as an increase in sales in Canada. SG&A increased by 92% to $3,649,529 for the six months ended June 30, 2008 as compared to the same comparable period in 2007. It is important to note that in the first six months of 2007, the Company co-packed its production in Michigan, while in the first six months of 2008, the Company directly manufactured its goods in Michigan. The manufacturing process as well as increased costs contributed to the increase in SG&A on a comparable basis. Net loss from continuing operations increased to $599,907 for the six month ended June 30, 2008 as compared to a profit of $47,554 in the comparable period in 2007. The increase in loss is directly related to an increase of non-cash charges such as depreciation & amortization of the Michigan facilities and associated non-cash financing and operating charges which did not exist in the comparable period in 2007. The Company further expanded its Michigan operations by adding packaging lines, increasing its space by 60,000 square feet and creating a distribution center for its products. Costs associated with this expansion were also charged in the first six months of 2008. 18 Corporate Expenses: The Company's allocation to corporate expenses increased by 51% to $968,178 for the six months ended June 30, 2008 as compared to $585,241 for the six months ended June 30, 2007. Corporate expenses represent 27% of overall operating expense of the Company. Operating expenses for all operations including corporate expenses totaled $3.6 million in for the six months ended June 30, 2008. Corporate expenses reflected the charges needed to operate the public corporation, Synergy Brands Inc. These included all the regulatory costs, board fees, governance fees, legal and accounting expenses and employees that oversee the operations of the Company's assets. Below is a detailed review of the Company's performance. PHS and QFB (Grocery and HBA operations) PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States as well as in Canada. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, whereas a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply which in turn is designed to increase sales to its customers through this unique focus. PHS concentrates on what it perceives to be the fastest moving consumer product items and uses promotional savings to streamline and reduce their sale prices. PHS focuses on approximately 1,000 products manufactured by the top Grocery and HBA Companies in the United States and as a result the Company believes that they have a competitive advantage in comparison to the traditional wholesaler, which may concentrate on over 10,000 different items. 19 PHS SEGMENT INFORMATION OF OPERATING BUSINESSES PHS Group CHANGE SIX MONTHS ENDED 6/30/08 Revenue 44,535,305 15.73% Gross Profit 4,466,869 48.80% SG&A 2,681,351 112.89% Operating Profit 1,487,108 -14.30% Net Profit 564,807 -41.41% Interest and financing expenses 916,473 19.32% SIX MONTHS ENDED 6/30/07 Revenue 38,481,250 Gross Profit 3,001,939 SG&A 1,259,479 Operating Profit 1,735,218 Net Profit 964,028 Interest and financing expenses 768,063 PHS increased its revenues by 16% to $44.5 million for six months ended June 30, 2008 as compared to $38.4 million for the six months ended June 30, 2007. The increase in PHS business is attributable to additional vendors and customers, a growing private label and Company label grocery program designed to sell proprietary products, more specifically in the baking mix and spice market, to national chains in the United States and Canada, and organic growth in sales to its customers in the Northeastern section of the United States. PHS increased its gross profit by increasing Direct Store Delivery sales, developing a private label market to national chains, as well as focusing on promotional merchandise offered by its vendors. The overall gross profit percentage increased from 7.8% to 10.0%. PHS has been able to maintain its sales and customer base while increasing gross profit by 49%. This has been achieved through its wholesale operations by generating incremental retail sales as opposed to lower margin wholesale revenues. Additionally, PHS has taken advantage of promotional rebates, which further enables its cost of foods to be reduced. PHS plans to continue this approach, but it does rely on manufacturer promotions to achieve its targeted results. Any material changes in manufacturer promotional rebate policies may have an adverse effect on PHS's cost of goods. Continuing the development of private label grocery products produced for the benefit of PHS customers is another objective currently being developed and executed by PHS as well as designing brands labels controlled by PHS. Net profit was $564,807 for the six months ended June 30, 2008 as compared to a profit of $964,028 for the six months ended June 30, 2007. The decrease in profit is attributable to higher non cash charges such as depreciation and amortization in connection with the acquisition of QFB which did not operate in the comparable period. Profit for PHS would have increased before the non cash charges that were attributable to the acquisition of QFB. 20 DISCONTINUED OPERATIONS In December 2006, the Company instituted a plan to discontinue its Pro-Set segment. In the second quarter of 2008, the Company sold its cigar segment. Accordingly, the results of Pro-Set, and the cigar segment have been presented as discontinued operations. The Company recorded a charge of $200,367 on the disposal of the cigar segment at March 31, 2008. The table below summarizes the historical financial operations of Proset and GRC segment for the periods being discussed. Six Months Ended Six Months Ended June 30, 2008 June 30, 2007 ------------- -------------- Net Sales $289,059 $935,723 Cost of sales Cost of product 157,814 603,671 Shipping and handling costs 22,727 43,471 ------------- -------------- 180,541 647,142 Gross Profit 108,518 288,581 Operating expenses: General and administrative 161,120 391,926 Depreciation and amortization 5,136 75,573 ------------- -------------- 166,256 467,499 Operating loss (57,738) (178,918) Other Income (expenses): Loss on disposal (200,367) - Other income (expenses) 6 - ------------- -------------- (200,361) - Net loss before income taxes (258,099) (178,918) Income tax expense - - ------------- -------------- Net loss from discontinued operations $(258,099) $(178,918) 21 CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2008 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2007.
SEGMENT CORPORATE SEGMENTS THREE MONTHS ENDED 6/30/08 Revenue $24,110,156 $24,110,156 13.28% Gross Profit 2,422,268 2,422,268 40.88% SG&A 1,395,451 1,980,692 95.26% Operating Profit 877,612 290,348 -58.48% Net Profit (loss) from continuing operations attributable to common shareholders 428,682 (240,916) 197.60% Per share continuing operations 0.04 (0.02) Non Cash Charges 595,184 200.06% Net Profit (loss)before non-cash charges attributable to shareholders 354,268 -20.42% Per share 0.03 Net profit (loss) attributable to shareholders (240,916) 246.74% Net profit (loss) per common share (0.02) Interest and financing expense 448,930 572,809 10.74% Non Cash Charges * Depreciation & Amortization 151,228 Operating non-cash charges 289,550 Financing charges 154,406 ------------------- Total 595,184 THREE MONTHS ENDED 6/30/07 Revenue $21,284,060 $21,284,060 Gross Profit 1,719,331 1,719,331 SG&A 645,272 1,014,372 Operating Profit 1,070,438 699,315 Net Profit (loss) from continuing operations attributable to common shareholders 711,280 246,837 Per share continuing operations 0.08 0.03 Non Cash Charges 198,358 Net Profit (loss)before non-cash charges attributable to shareholders 445,195 Per share 0.05 Net loss from discontinued operations (82,658) Per share discontinued operations (0.01) Net profit (loss) attributable to shareholders 164,179 Net loss per common share 0.02 Interest and financing expense 359,158 517,252 Non Cash Charges * Depreciation & Amortization 5,644 Operating non-cash charges 85,083 Financing charges 107,631 ------------------- Total 198,358 * Management believes such non-GAAP financial presentation better reflects fundamential business performance for the Quarter, but such non-GAAP measures should be viewed in addition to, and not as an alternative for, the Company's results prepared and presented in accodrance with GAAP.
Synergy Brands Synergy Brands Inc. operates as a holding Company, which owns PHS Group and its related grocery businesses (QFB), as well as the 20% stake it owns in Interline Travel and Tours (aka PERX). In addition, Synergy Brands continues to report the disposition of its discontinued operations. Revenues increased by 13% to $24,110,156 for the three months ended June 30, 2008 while gross profit increased by 41% to $2,422,268 for the three months ended June 30, 2008 as compared to the same comparable period in 2007. The increase of sales is directly attributable to the Michigan operation, which nearly doubled from the prior period, as well as an increase in sales in Canada. SG&A increase by 95% to $1,980,692 for the three months ended June 30, 2008 as compared to the same comparable period in 2007. It is important to note that in the second quarter of 2007, the Company co-packed its production in Michigan, while in the second quarter of 2008, the Company directly manufactured its goods in Michigan. The manufacturing process as well as increased costs contributed to the increase in SG&A on a comparable basis. Net loss from continuing operations increased to $240,916 for the three month ended June 30, 2008 as compared to a profit of $246,837 in the comparable period in 2007. The increase in loss is directly related to an increase of non-cash charges and corporate expenses related to additionally required regulatory filings. The Company further expanded its Michigan operations by adding packaging lines, increasing its space by 60,000 square feet and creating a distribution center for its products. Costs associated with this expansion were charged in 2008. 22 Corporate Expenses: The Company's allocation to corporate expenses increased by 59% to $585,241 for the three months ended June 30, 2008 as compared to $369,100 for the three months ended June 30, 2007. Corporate expenses represent 30% of overall operating expense of the Company. Operating expenses for all operations including corporate expenses totaled $2.0 million in the three months ended June 30, 2008. Corporate expenses reflected the charges needed to operate the public corporation, Synergy Brands Inc. These included all the regulatory costs, board fees, governance fees, legal and accounting expenses and employees that oversee the operations of the Company's assets. Below is a detailed review of the Company's performance. PHS and QFB (Grocery and HBA operations) PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States as well as in Canada. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, whereas a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply which in turn is designed to increase sales to its customers through this unique focus. PHS concentrates on what it perceives to be the fastest moving consumer product items and uses promotional savings to streamline and reduce their sale prices. PHS focuses on approximately 1,000 products manufactured by the top Grocery and HBA Companies in the United States and as a result the Company believes that they have a competitive advantage in comparison to the traditional wholesaler, which may concentrate on over 10,000 different items. 23 PHS SEGMENT INFORMATION OF OPERATING BUSINESSES PHS Group CHANGE THREE MONTHS ENDED 6/30/08 Revenue 24,110,156 13.28% Gross Profit 2,422,268 40.88% SG&A 1,395,451 116.26% Operating Profit 877,612 -18.01% Net Profit 428,682 -39.73% Interest and financing expenses 448,930 25.00% THREE MONTHS ENDED 6/30/07 Revenue 21,284,060 Gross Profit 1,719,331 SG&A 645,272 Operating Profit 1,070,438 Net Profit 711,280 Interest and financing expenses 359,158 PHS increased its revenues by 13% to $24.1 million for three months ended June 30, 2008 as compared to $21.2 million for the three months ended June 30, 2007. The increase in PHS business is attributable to additional vendors and customers, a growing private label and Company label grocery program designed to sell proprietary products, more specifically in the baking mix and spice market, to national chains in the United States and Canada, and organic growth in sales to its customers in the Northeastern section of the United States. PHS increased its gross profit by increasing Direct Store Delivery sales, developing a private label market to national chains, as well as focusing on promotional merchandise offered by its vendors. The overall gross profit percentage increased from 8.1% to 10.0%. PHS has been able to maintain its sales and customer base while increasing gross profit by 41%. This has been achieved through its wholesale operations by generating incremental retail sales as opposed to lower margin wholesale revenues. Additionally, PHS has taken advantage of promotional rebates, which further enables its cost of foods to be reduced. PHS plans to continue this approach, but it does rely on manufacturer promotions to achieve its targeted results. Any material changes in manufacturer promotional rebate policies may have an adverse effect on PHS's cost of goods. Continuing the development of private label grocery products produced for the benefit of PHS customers is another objective currently being developed and executed by PHS as well as designing brands labels controlled by PHS. Net profit was $428,682 for the three months ended June 30, 2008 as compared to a profit of $711,280 for the three months ended June 30, 2007. The decrease in profit is attributable to higher non cash charges such as depreciation and amortization in connection with the acquisition of QFB which did not operate in the comparable period. Profit for PHS would have increased before the non cash charges that were attributable to the acquisition of QFB. 24 DISCONTINUED OPERATIONS In December 2006, the Company instituted a plan to discontinue its Pro-Set segment. In the second quarter of 2008, the Company sold its cigar segment. Accordingly, the results of Pro-Set, and the cigar segment have been presented as discontinued operations. The table below summarizes the historical financial operations of Proset and GRC segment for the periods being discussed.
Three Months Ended Three Months Ended June 30, 2008 June 30, 2007 ----------------- ----------------- Net Sales - $513,795 Cost of sales Cost of product - 334,839 Shipping and handling costs - 23,778 ----------------- ----------------- - 358,617 Gross Profit - 155,178 Operating expenses: General and administrative - 201,377 Depreciation and amortization - 36,459 ----------------- ----------------- - 237,836 Operating loss - (82,658) Net loss before income taxes - (82,658) Income tax expense - - ----------------- ----------------- Net loss from discontinued operations - $(82,658) ----------------- -----------------
25 LIQUIDITY AND CAPITAL RESOURCES
June 30, 2008 2007 Working Capital $ 4,726,799 $ 6,744,693 Assets 30,740,141 28,652,403 Liabilities 22,154,481 21,405,837 Equity 8,585,660 7,246,466 Receivable turnover (days) 13 17 Inventory Turnover (days) 12 24 Net cash (used in) provided by operating activies (313,032) 50,012 Net cash provided by investing activites 244,159 253,801 Net cash (used in) financing activites (419,602) (925,576)
The Company's working capital decreased by $2 million at June 30, 2008 to $4.7 million due to a combination of several factors including amortization of debt and the purchase of the baking mix plant. Liquidity for the Company predominately involves the need to finance accounts receivables, inventory, and fixed costs. The cash flow realized from the Company's gross profit has been sufficient to cover the Company's operating expenses. However, the Company relies on debt and equity financing in order to support the interest that it pays in support of financing its receivables and inventory. The Company historically has not been able to date to completely support its financing costs solely from operations and has relied on equity and debt financing to bridge the gap. The Company generated a net loss attributable to Common Shareholders of approximately $858,000 for the six months ended June 30, 2008. Financing costs totaled $1,169,550 and non-cash charges totaled approximately $1,087,000 for the period. Reductions in certain financing expenses through equity conversions and debt repayments through operating or capital transactions have been and should continue to be beneficial to the Company's performance. The capital resources that were utilized by the Company consisted of $10.6 million in long-term notes, $5.4 million in short term notes and $3.65 million of non-redeemable preferred stock, as of June 30, 2008. The Company's objectives are to reduce its debt through the issuance of equity, cash flow from operation, dispositions of assets as well as refinancing its current obligations at lower rates. In 2007, the Company refinanced its $6 million dollar senior line of credit with a $8.0 million 10 year term facility and materially reduced its interest rate to 11.75%. However, there is no assurance that the Company will be able to achieve its stated objectives. The Company's liquidity relies in material part on the turnover of it inventory and accounts receivable. The Company turns its receivables on average every 13 days and the Company has turned its overall inventory on average approximately every 12 days. The Company believes that its collection procedures and procurement policies are consistent with industry standards. However, 26% of the Company's assets consist of trade receivables and inventory. The Company must maintain a strict policy on insuring collections of receivables and adequate procurement based upon customer demands to optimize its profit potential. The Company's sales are reliant in significant part on extending credit that ranges from 10 to 60 days. As a result, the Company must have financing facilities that will continue to allow the Company to procure inventory and extend accounts receivable credits. The Company has strict credit policies and reviews; however credit extensions may pose material financial risks to the Company. In addition the Company relies on performance incentives from its manufacturers that are based upon sales. Provided the Company maintains its performance standards with the manufacturers with whom it contracts for procurement of goods its estimates of incentives that are due should remain accurate. However, if the respective manufacturer changes their policies or the Company does not meet the manufacturer standards, incentives may be reduced and may cause a material problem for the company. 26 Management believes that continued cost containment, improved financial and operating controls, debt reduction, and a focused sales and marketing effort should provide sufficient cash flow from operations in the near term and the Company is working toward reliance on such financial sources and attributes to cover its cash flow requirements but achievement of these goals, however, will likely continue to be dependent upon the Company's attainment of increased revenues, improved operating costs, reduced financing cost and trade support levels that are consistent with management's plans. Such operating performance will likely continue to be subject to financial, economic and other factors likely to be beyond its control, and there can be no assurance that the Company's goals will be achieved. In the interim while such goals are being pursued achievement of positive cash flow has been and continues to be reliant on equity and debt financing, including the Company's exchange of notes payable for common shares and its issuance of further common and preferred stock in private placements and the Company is hopeful that the market will continue to recognize the Company's stature so that such financing method will continue to be available in the future because, at least in the near future, the Company is likely to continue to use such financing opportunities to maintain adequate cash flow. Expected interest payments on notes payable for the period ended June 30, 2008, are as follows: 06/30/09 06/30/10 06/30/11 06/30/12 Total $610,000 $163,000 $217,000 $740,000 $1,730,000 Principal repayments on notes payable for the period ended June 30, are as follows: 06/30/09 $ 5,793,000 06/30/10 $ 1,553,000 06/30/11 $ 2,071,000 06/30/12 $ 7,058,000 ----------- $16,475,000 Discounts and rounding $ (435,115) ----------- Total $16,039,885 =========== CRITICAL ACCOUNTING POLICIES. The discussion and analysis of the Company's financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on going basis, management evaluates its estimates. Management uses authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. Management believes that the following critical accounting policies affect its more significant judgments and estimates in the preparation of the Company's financial statements. ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable are due from businesses engaged in the distribution of grocery, health and beauty products as well as from consumers who purchase health and beauty products. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral may be required. Accounts receivable are due within 10 - 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. Estimates are used in determining the allowance for doubtful accounts based on the Company's historical collections experience, current trends, credit policy and a percentage of its accounts receivable by aging category. In determining these percentages, the Company looks at historical write-offs of its receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from its customers. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. VALUATION OF DEFERRED TAX ASSETS. Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily comprised of reserves, which have been deducted for financial statement purposes, but have not been deducted for income tax purposes as well as net operating loss carry forwards. The Company annually reviews the deferred tax asset accounts to determine if is appears more likely than not that the deferred tax assets will be fully realized. At June 30, 2008, the Company has established a full valuation allowance. 27 VALUATION OF LONG-LIVED ASSETS. The Company reviews its long-lived assets periodically to determine potential impairment by comparing the carrying value of the assets with expected net cash flows expected to be provided by the operating activities of the business or related products. Should the sum of the expected future net cash flows be less than the carrying value, the Company would determine whether an impairment loss should be recognized. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the Asset. Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset. SEASONALITY Sales by PHS Group usually peak at the end of the calendar quarter, when the Company's suppliers offer promotions which lower prices and, in turn, the Company is able to lower its prices and increase sales volume. Suppliers tend to promote at quarter end and as a result reduced products costs may increase sales. INFLATION The Company believes that inflation, under certain circumstances, could be beneficial to the Company's major business, PHS Group. When inflationary pressures drive product costs up, the Company's customers sometimes purchase greater quantities of product to expand their inventories to protect against further pricing increases. This enables the Company to sell greater quantities of products that are sensitive to inflationary pressures. However, inflationary pressures frequently increase interest rates. Since the Company is dependent on financing, any increase in interest rates will increase the Company's credit costs, thereby reducing its profits. However, inflation increases prices which maybe a natural hedge to an increase in interest in the Company's consumer business. However, in certain times rising prices may cause a decline in sales that would result in a reduced operating profit. Because of the Company's entry into the baking mix market, spice business and packaged meals it relies on commodities such as wheat, corn, flour and sugar. In addition, rise in fuel prices causes additional freight and shipping costs. Inflationary trends in these commodities may cause price increases as well as supply problems. The Company believes it has adequate systems in place to insure supply, but inflationary trends may make the Company's products less attractive to its customers. Item 4-Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated our disclosure controls and procedures as of and have found such to be effective as of the end of the period covered by this report. Under rules promulgated by the SEC, disclosure controls and procedures are defined as those controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Based on the evaluation of our disclosure controls and procedures, management determined that such controls and procedures were effective in timely alerting them to material information relating to the Company (including its Consolidated Subsidiaries) required to be included in the Company's periodic reports. Management's Annual Report on Internal Control Over Financial Reporting The financial statements, financial analyses and all other information included in this Quarterly Report on Form 10-Q were prepared by the Company's management, which is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in its reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. The Company's disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. The Company's internal controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its financial statements in conformity with GAAP. 28 The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: i. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; ii. Provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and iii. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition and use or disposition of the Company's assets that could have a material effect on the financial statements. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. Management assessed the design and effectiveness of the Company's internal control over financial reporting as of June 30, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on management's assessment using this framework, it believes that, as of June 30, 2008, the Company's internal control over financial reporting is effective. The Company's management, including its principal executive officer and the principal financial officer, does not expect that the Company's disclosure controls and procedures and its internal control processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. The Company monitors its disclosure controls and procedures and internal controls and makes modifications as necessary; the Company's intent in this regard is that the disclosure controls and procedures and the internal controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. 29 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the fiscal quarter ended June 30, 2008, there has been no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Further, there were no significant changes in the internal controls or in other factors that significantly affected these controls, during the period ended June 30, 2008, the date of the conclusion of the evaluation of disclosure controls and procedures. Part II - OTHER INFORMATION Item 1A - Risk Factors There have been no material changes to the Company's risk factors as previously disclosed in Item 1A "Risk Factors" in our 2007 Form 10-K for the fiscal year ended December 31, 2007. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds None Item 4 - Submission of Matters to a Vote of Security Holders (a) Election of the Company's board of directors, wherein the following person's were elected, such persons being all of the same persons acting as directors, except for Randall J. Perry who did not seek re-election, the Company having reduced its board to five members. For Withheld 1. Mair Faibish 7,339,268 124,278 2. Frank Bellis, Jr. 7,386,128 87,418 3. Lloyd Miller 7,385,201 88,345 4. Joel Sebastion 7,385,983 87,563 5. Bill Rancic 7,379,178 103,368 (b) To elect auditors, Where Holtz Rubenstein Reminick, LLP was elected for December 31, 2008 For Against Abstain 6,906,559 19,982 336,428 Item 6- Exhibits and Reports on Form 8-K (1) 31.1 Certification Pursuant to Exchange Act Rule 13a - 14(a) / 15d-14(a) signed by the Chief Executive Officer. 31.2 Certification Pursuant to Exchange Act Rule 13a - 14(a) / 15d-14(a) signed by the Chief Financial Officer. 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer. 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by Chief Financial Officer. (2) There was one report filed on 8-K for the relevant period. On April 19, 2008 the Company entered into an agreement to sell its ownership in Gran Reserve Corporation ("GRC"). The purchase price was $400,000 of which $350,000 thereof is being financed by a promissory, note, with a five year term at an annual interest rate 5%. 30 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Synergy Brands, Inc. /s/ Mair Faibish ---------------- By: Mair Faibish Chief Executive Officer Date: August 14, 2008 ---------------------- /s/ Mitchell Gerstein ---------------------- By: Mitchell Gerstein Chief Financial Officer Date: August 14, 2008 ---------------------- 31 Exhibit 31.1 Certification Pursuant To Exchange Act Rule 13-a-14(a)/-15d-14(a) I, Mair Faibish, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies and material weaknesses we find in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2008 /s/ Mair Faibish Mair Faibish, Chief Executive Officer 32 Exhibit 31.2 Certification Pursuant To Exchange Act Rule 13-a-14(a)/-15d-14(a) I, Mitchell Gerstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Synergy Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15(d) - 15(f) ) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies and material weaknesses we find in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2008 /s/ Mitchell Gerstein Mitchell Gerstein, Chief Financial Officer 33 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of Synergy Brands Inc., (the "Company"), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2008 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2008 /s/ Mair Faibish ---------------- Mair Faibish, Chief Executive Officer Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350 (adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Financial Officer of Synergy Brands, Inc. (the "Company"), hereby certify that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2008 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2008 /s/ Mitchell Gerstein --------------------- Mitchell Gerstein, Chief Financial Officer 34