U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D. C.  20549





FORM
10-Q


(Mark
One)


x QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934





For the
fiscal quarter ended December
31, 2009





o TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT





For the
transition period from  to
__________________





Commission
file number 0-17580








SYNERGX
      SYSTEMS INC.(Exact
      name of small business issuer as specified in its
  charter)








Delaware
            
            11-2941299(State
      or jurisdiction of incorporation or organization)
            
            (IRS
      employer identification Number)








209
      Lafayette Drive, Syosset, New York   11791(Address
      of Principal Executive Offices) (Zip code)(516)
      433-4700(Issuer’s
      telephone number)





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. Yes x   
No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).  Yes o  No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer o
            Accelerated filer oNon-accelerated filer o  (Do not check if a smaller reporting company)
            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 o  No x





There
were 5,210,950 shares outstanding of registrant’s common stock, par value $.001
per share, as of February 8, 2010.
















INDEX








PagePart
      I – Financial Information (unaudited)Item
      1.
            Financial
      Statements.Condensed
      Consolidated Balance Sheet at December 31, 2009 and September 30,
      2009
            1Condensed
      Consolidated Statements of Operations for the Three Months Ended December
      31, 2009 and 2008
            2Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended December
      31, 2009 and 2008
            3Notes
      to the Condensed Consolidated Financial Statements
            4Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            10Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            16Item
      4.
            Controls
      and Procedures
            16Part
      II – Other InformationItem
      1.
            Legal
      Proceedings
            17Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            17Item
      3.
            Defaults
      Upon Senior Securities
            17Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            17Item
      5.
            Other
      Information
            17Item
      6.
            Exhibits
            17Signatures
            
            18











SYNERGX
SYSTEMS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





December
      31,
                2009
              
              
              September
      30,
                2009ASSETSCURRENT
      ASSETSCash
              
              $
              1,608,991
              
              
              $
              1,502,471Accounts
      receivable, principally trade, less allowance for doubtful accounts of
      $265,192 and $297,091, respectively
              
              
              3,059,198
              
              
              
              4,030,780Inventories
              
              
              1,802,431
              
              
              
              1,830,773Prepaid
      expenses and other current assets
              
              
              363,054
              
              
              
              312,811TOTAL
      CURRENT ASSETS
              
              
              6,833,674
              
              
              
              7,676,835PROPERTY
      AND EQUIPMENT -at cost, less accumulated depreciation and amortization of
      $2,414,377 and $2,354,000, respectively
              
              
              510,680
              
              
              
              559,332OTHER
      ASSETS
              
              
              175,911
              
              
              
              186,033TOTAL
      ASSETS
              
              $
              7,520,265
              
              
              $
              8,422,200LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESNotes
      payable to bank
              
              $
              1,475,007
              
              
              $
              1,496,524Notes
      payable – current portion
              
              
              21,335
              
              
              
              26,005Accounts
      payable and accrued expenses
              
              
              1,566,220
              
              
              
              1,881,793Deferred
      revenue
              
              
              887,062
              
              
              
              1,045,667TOTAL
      CURRENT LIABILITIES
              
              
              3,949,624
              
              
              
              4,449,989Notes
      payable - less current portion
              
              
              28,329
              
              
              
              30,656TOTAL
      LIABILITIES
              
              
              3,977,953
              
              
              
              4,480,645STOCKHOLDERS'
      EQUITYPreferred
      stock, 2,000,000 shares authorized, $.01 par value
                -
      none issued and outstandingCommon
      stock, 10,000,000 shares authorized, $.001 par value;
                issued
      and outstanding 5,210,950 shares
              
              
              5,211
              
              
              
              5,211Additional
      Paid in Capital
              
              
              6,864,649
              
              
              
              6,861,721Accumulated
      deficit
              
              
              (3,327,548
              )
              
              
              (2,925,377
              )TOTAL
      STOCKHOLDERS' EQUITY
              
              
              3,542,312
              
              
              
              3,941,555TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              7,520,265
              
              
              $
              8,422,200










1





SYNERGX
SYSTEMS INC. AND SUBSIDIARIES


CONDENSED  CONSOLIDATED
STATEMENTS OF OPERATIONS





(Unaudited)





For
      the three months ended
                December
      31,2009
              
              
              
              2008Product
      sales
              
              $
              1,579,099
              
              
              $
              3,793,746Subcontract
      sales
              
              
              91,093
              
              
              
              569,634Service
      revenue
              
              
              1,281,163
              
              
              
              1,295,071Total
      revenues
              
              
              2,951,355
              
              
              
              5,658,451Cost
      of product sales
              
              
              1,442,604
              
              
              
              2,873,537Cost
      of subcontract sales
              
              
              77,140
              
              
              
              439,253Cost
      of service revenue
              
              
              755,270
              
              
              
              795,517Selling,
      general and administrative
              
              
              991,182
              
              
              
              1,253,319Depreciation
      and amortization
              
              
              63,123
              
              
              
              62,933Total
      operating expenses
              
              
              3,329,319
              
              
              
              5,424,559(Loss)
      income from operations
              
              
              (377,964
              )
              
              
              233,892Interest
      expense
              
              
              (20,207
              )
              
              
              (8,163
              )(Loss)
      income before provision for income taxes
              
              
              (398,171
              )
              
              
              225,729Provision
      for income taxes:Current
              
              
              4,000
              
              
              
              2,000Net
      (loss) income
              
              $
              (402,171
              )
              
              $
              223,729(Loss)
      Income Per Common Share:Basic  and
      diluted (loss) income per share
              
              $
              (0.08
              )
              
              $
              0.04Weighted
      average number ofcommon
      shares outstanding – basic and dilutive
              
              
              5,210,950
              
              
              
              5,210,950










2





SYNERGX
SYSTEMS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





(Unaudited)







For
      the three months ended

              December
      31,2009
            
            
            2008OPERATING
      ACTIVITIESNet
      (loss) income
            
            $
            (402,171
            )
            
            $
            223,729Adjustments
      to reconcile net (loss) income  to net cash (used in)
      provided byoperating
      activities:Depreciation
      and amortization *
            
            
            70,248
            
            
            
            70,058Share-based
      compensation
            
            
            2,928
            
            
            
            3,231Changes
      in operating assets and liabilities:Accounts
      receivable, net
            
            
            971,582
            
            
            
            (817,825
            )Inventories,
      net
            
            
            28,342
            
            
            
            (424,630
            )Prepaid
      expenses and other current assets
            
            
            (50,243
            )
            
            
            263,041Other
      assets
            
            
            -
            
            
            
            (383
            )Accounts
      payable and accrued expenses
            
            
            (315,573
            )
            
            
            652,160Deferred
      revenue
            
            
            (158,605
            )
            
            
            21,764NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            146,508
            
            
            
            (8,855
            )INVESTING
      ACTIVITIESPurchases
      of property and equipment
            
            
            (11,474
            )
            
            
            (9,690
            )NET
      CASH  (USED IN) INVESTING ACTIVITIES
            
            
            (11,474
            )
            
            
            (9,690
            )FINANCING
      ACTIVITIESPrincipal
      payments on notes payable
            
            
            (6,997
            )
            
            
            (6,824
            )Proceeds
      from and (payments of)  note payable bank-net
            
            
            (21,517
            )
            
            
            612,419NET
      CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
            
            
            (28,514
            )
            
            
            605,595NET
      INCREASE  IN CASH
            
            
            106,520
            
            
            
            587,050Cash
      at beginning of the period
            
            
            1,502,471
            
            
            
            262,742Cash
      at end of the period
            
            $
            1,608,991
            
            
            $
            849,792SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid during the period for:Income
      taxes
            
            $
            11,105
            
            
            $
            3,982Interest
            
            $
            19,755
            
            
            $
            7,419*
      Depreciation of $7,125 is included in cost of product and service
      sales for the three months endedDecember
      31, 2009 and 2008, respectively.










3


SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




NOTE
1. GOING CONCERN UNCERTAINTY





As
discussed in the accompanying financial statements, the Company has continued to
incur losses from operations. In addition, in an attempt to achieve
profitability and positive cash flow, management has instituted a cost reduction
program that included a reduction in labor and other costs. Further, due to the
uncertain economic conditions, recurring losses, and the current unfavorable
lending climate, there can be no assurance that the Company will be able to
generate sufficient cash flow to pay off its entire bank line or that it will be
successful in arranging a new line of credit on acceptable terms for an amount
sufficient to continue its operations successfully. As a result, these factors
raise substantial doubt with respect to the Company’s ability to continue as a
going concern.




The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
of liabilities that may result should the Company be unable to continue as a
going concern




NOTE
2.  BASIS OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and on a basis that
is consistent with the accounting principles applied in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009.  Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.  In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary in order not to
make the financial statements misleading have been included. Results for the
three months ended December 31, 2009 are not necessarily indicative of the
results that may be expected for the full fiscal year ending September 30, 2010.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Synergx Systems Inc. (“Synergx” or “the Company”)
and Subsidiaries’ annual report on Form 10-K for the year ended September 30,
2009.  The Company evaluated subsequent events through the date of
issuance of the financial statements.




The
preparation of financial statements in conformity with GAAP requires that we
make estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period.  These judgments can be subjective and complex,
and consequently actual results could differ materially from those estimates and
assumptions.  We base our estimates on historical experience and on
various other assumptions we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carry value
of assets and liabilities that are not readily apparent from other
sources.





NOTE
3.  REVENUE RECOGNITION





Product
sales include sales of systems, which are similar in nature, that involve fire
alarm, life safety and security (CCTV and card access), transit (train station
platforms) and communication (paging, announcement and
audio/visual).  Product sales represent sales of products along with
the integration of technical services at a fixed price under a contract with an
electrical contractor or end user customer (building owner or tenant), or
customer agent.  Product sales for long term contracts are recognized,
using the percentage-of-completion method of accounting.  The effects
of changes in contract terms are reflected in the accounting period in which
they become known.  Contract terms provide for billing schedules that
differ from revenue recognition and give rise to costs and estimated profits in
excess of billings, and billings in excess of costs and estimated
profits.  Costs and estimated profits in excess of billing were
$82,000 and $103,000 at December 31, 2009 and September 30, 2009, respectively
and have been included in other current assets.  Billings in excess of
costs and estimated profits were $181,000 and $323,000 at December 31, 2009 and
September 30, 2009, respectively and have been included in deferred
revenue.  Product sales for short term contracts are recognized when
the services are performed or the product has been delivered, which is when
title to the product and risk of loss have been substantially transferred to the
customer and collection is reasonably assured.




Subcontract
sales principally represent revenues related to electrical installation of
wiring and piping performed by others for the Company when the Company acts as
the prime contractor and sells its products along with electrical
installation.  Revenue is recognized when these services are performed
at the job site.




Service
revenue from separate maintenance contracts is recognized on a straight-line
basis over the terms of the respective contract, which is generally one
year.  The unearned service revenue from these contracts is included
in current liabilities as deferred revenue.  Non-contract service
revenue is recognized when services are performed.





4


SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




NOTE
4.  SIGNIFICANT CUSTOMERS AND SUPPLIERS





The
Company does business directly and indirectly through electrical contractors to
the New York City Transit Authority.  Net sales to this authority
represented approximately 12% and 23% of total net sales in the three months
ended December 31, 2009 and 2008, respectively.




No
customer provided sales of 10% or more for the three months ended December 31,
2009.  One customer provided sales of 10% or more of total sales
(amounting to 15%) in the three months ended December 31, 2008.  No
customer owed the Company more than 10% of total accounts receivable at December
31, 2009 and one customer owed the Company an account receivable of $868,000 at
December 31, 2008,




Two
suppliers each accounted for more than 10% of the Company’s cost of sales for
the three months ended December 31, 2009 (those suppliers amounted to 34% and
10%, respectively).  Three suppliers accounted for more than 10% of
the Company’s cost of sales for the three months ended December 31, 2008
(amounting to 17%, 15% and 12%).







NOTE
5.  INVENTORIES





Inventories
are stated at the lower of cost (first–in, first–out) or market and consist
primarily of raw materials and parts for service.  The cost elements
of inventories include materials, labor and overhead.  In evaluating
whether inventories are stated at the lower of cost or market, the Company
considers such factors as the amount of inventory on hand, estimated time
required to sell or use such inventory and current and expected market
conditions.  Based on this evaluation, the Company records an
adjustment to cost of goods sold to reduce inventories to net realizable value
if required.   At December 31, 2009 and September 30, 2009
inventories are reported net of cumulative inventory write downs of $716,000 and
$710,000 respectively, for slow movement and obsolescence.





NOTE
6.  NOTE PAYABLE BANK





The
Company had a $2.5 million revolving credit facility (the “Credit Facility”)
with TD Banknorth (“the Bank”) which expired on October 1, 2009 and at that
time certain events of default existed under the loan agreement.  At the
expiration date, the Bank did not call the loan but has advised the Company that
it would not advance any additional funds.  In January 2010, the Company
entered into a forbearance agreement with the Bank to extend the facility until
April 30, 2010, which would allow the Company additional time to satisfy its
obligation to the Bank or to obtain alternative financing. If there is further
deterioration in the Company’s financial condition, however, the Bank shall have
the right to immediately exercise any and all rights and remedies provided under
the Credit Facility, including a demand for immediate payment.  The
forbearance agreement required a principal payment of $200,000 at the time of
closing in January 2010 (which was made at that time) and an increase in the
interest rate (retroactive to December 1, 2010) from prime plus 2% (5.25%) to
the Bank’s base rate plus 3% (6.25% from December 1, 2009 through December 31,
2009) for the duration of the extension period. The agreement requires monthly
principal payments of $15,000 in January 2010 increasing to $25,000 per month in
February, March and April of 2010. The Bank also charged, and the Company paid,
a loan modification and extension fee of $25,000.




The
Company’s debt to the Bank is secured by all assets of the Company and all of
its operating subsidiaries.  Outstanding debt to the Bank is measured
against a borrowing base, which is calculated based on eligible accounts
receivable and inventories.




The
agreement with the Bank includes certain restrictive covenants, which among
other things, impose limitations on declaring or paying dividends, acquisitions,
and making capital expenditures.  The Company is also required to maintain
certain financial ratios and tangible net worth covenants.  As of September
30, 2009, the Company was not in compliance with certain of its
covenants.  Compliance with these covenants is not a continued
requirement by the bank in conjunction with the agreement to extend the facility
to April 30, 2010.




As of
December 31, 2009 and September 30, 2009, $1,475,000 and $1,497,000,
respectively, was owed to the Bank.







5


SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




NOTE
7.  EARNINGS (LOSS) PER SHARE





The
Financial Accounting Standards Board (“FASB”) has issued guidance which requires
companies to report basic and diluted earnings per share (“EPS”)
computations.  Basic EPS excludes dilution and is based on the
weighted-average common shares outstanding and diluted EPS gives effect to
potential dilution of securities that could share in the earnings of the
Company.





For
      the Three Months
              Ended
      December 31,2009
            
            
            2008Basic
      and Diluted EPS ComputationNet
      (loss) income
            
            $
            (402,171
            )
            
            $
            223,729Weighted
      average outstanding shares
            
            
            5,210,950
            
            
            
            5,210,950Basic
      and diluted net (loss) income per share
            
            $
            (0.08)
            
            
            $
            0.04


*All
stock options outstanding during the three months period ended December 31, 2009
and December 31, 2008 were anti-dilutive.  However, in the future the
stock options may be dilutive if the market price of the Company’s common stock
increases over $1.70.





NOTE
8.  INCOME TAXES




The
effective income tax rate differs from the statutory rate for the three months
ended December 31, 2009 and 2008 as no income tax benefit was recorded for the
loss incurred during the three months ended December 31, 2009 and no income tax
expense was recorded during the three months ended December 31, 2008 due to the
expected use of net operating loss carryforwards on the operating
profit.




The
Company accrues interest and penalties related to unrecognized tax benefits in
income tax expense. This methodology is consistent with previous
periods.  No accrual for interest and penalties related to uncertain
tax positions was required as of December 31, 2009.  As of December
31, 2009, the Company was subject to U.S. Federal and State Income Tax
examinations for the tax years ending September 30, 2006 through 2009, but at
the present time, no examinations are pending or in progress.




At
December 31, 2009, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $2.1 million that may be used to offset
future taxable income.  These loss carryforwards will expire in the
years 2026 through 2029.




NOTE
9.  RELATED PARTY TRANSACTIONS




At
September 30, 2008, Firecom, Inc. (“Firecom”) (a privately owned company
involved in the fire alarm and life safety business) owned 1,578,112 shares or
approximately 30% of the Company’s outstanding shares of common
stock.  In January 2009, Firecom purchased another 490,000 shares
increasing its beneficial ownership to 2,068,112 shares, equal to approximately
40% of the Company’s outstanding common stock.




Mr. Paul
Mendez, the Company’s President and Chief Executive Officer also serves as
Chairman of the Board of Directors and Chief Executive Officer of Firecom. On
June 10, 2008, the Company entered into an employment agreement with Mr. Mendez
under which the Company would pay Mr. Mendez an annual base salary of
$20,000.  The employment agreement was modified in January 2009 to
increase Mr. Mendez’s salary, retroactive to October 1, 2008, to an annual base
salary of $250,000. Mr. Mendez does not participate in the Company’s health-care
or other benefit plans.  Pursuant to the employment agreement, either
the Board of Directors of the Company or Mr. Mendez may terminate his employment
without cause and at any time. Mr. Mendez devotes approximately 50% of his time
to the affairs of the Company. In the employment agreement with the Company, Mr.
Mendez has agreed to certain non-competition and confidentiality
provisions.




Firecom
also provides the Company with a full time employee who serves as President of
the Company’s fire alarm products and services activities. For the three months
ended December 31, 2009 the Company paid Firecom $52,000 for the services of
this individual, which includes reimbursement for salary, payroll taxes and
other employee benefits.  These expenses are included in cost of
service revenue.  For the three months ended December 31, 2008, the
Company paid Firecom $53,000 for the same services. Also, for the three months
ended December 31, 2009, the Company paid $20,000 to Firecom for another
employee who serves in a fire alarm administrative function.  No
reimbursement for this employee was made during the three months ended December
31, 2008 as the employee began work for the Company in January
2009.




6


SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




NOTE
9.  RELATED PARTY TRANSACTIONS (continued)




The
Company and Firecom have entered into several transactions that are not
financially material to the revenues, gross profit or net income (loss) of the
Company.  Firecom has provided certain sales leads to the Company for
products Firecom does not sell. These sales leads have resulted in additional
sales of products to customers. The Company has paid Firecom a 2% sales
commission related to these sales which amounted to $6,000 for the three months
ended December 31, 2008 and there were no such transactions for the three months
ended December 31, 2009.  Firecom has manufactured and sold to the
Company certain fire alarm equipment made to the Company’s specifications. The
cost of this equipment to the Company was $3,000 for the three months ended
December 31, 2008 and there were no such transactions for the three months ended
December 31, 2009.  The Company from time to time has purchased and
sold certain products used in Firecom’s business.  During the three
months ended December 31, 2009 and 2008, these products were sold to Firecom for
$38,000 and $43,000, respectively.  The Company has a consulting
agreement with Firecom pursuant to which Firecom provides certain hardware and
software engineering and field trouble-shooting services.  The Company
has not incurred any expenses during the three months ended December 31, 2009
and 2008.  In offering these services, Firecom has agreed to keep
information confidential and refrain from use of the information in its
business.




As of
December 31, 2009 and September 30 ,2009, the Company owed Firecom $-0- and
$24,000, respectively, which is included in Accounts Payable. As of December 31,
2009 and September 30, 2009, Firecom owed the Company $31,000 and $63,000
respectively, which is included in Accounts Receivable.




Effective
October 1, 2009, the Company entered into a lease with Firecom to lease 1,500
square feet of office space and 500 square feet of warehouse space and use of
common areas at Firecom’s facility in Woodside, NY.  This facility
will serve as the Company’s new service center for New York City.  The
lease became effective October 1, 2009 and ends December 31,
2014.  Lease payments begin January 1, 2010 with base rent of $2,500
per month ($30,000 per year) and additional rent of approximately $15,000 per
year to cover capital improvements and building taxes.  The rent
payments begin January 1, 2010, and there are no charges for utilities services
or the use of common space.




NOTE
10.  SPECIAL COMMITTEE TO CONSIDER STRATEGIC
OPPORTUNITIES




In
October 2009, with consideration to the Company’s working capital requirements,
the Company’s Board of Directors formed a Special Committee of independent
outside directors to explore and consider various strategic alternatives
including proposals for additional debt or the issuance of additional equity
capital, the sale of one or more of the Company’s lines of business or the sale
of the Company in an effort to enhance stockholder value. The Special Committee
is authorized to negotiate on behalf of the Board of Directors and to consider,
pursue and accept or reject any proposals received, subject to required
stockholder approval and other terms that the Special Committee
determines.




The
Special Committee’s members include Harris Epstein and Ronald P. Fetzer. The
Special Committee has retained Ladenburg Thalmann as its independent financial
advisor to assist it in its evaluation of strategic alternatives. The
Special Committee has also retained independent legal counsel. There is no
assurance that the Special Committee will consummate a transaction for a
strategic alternative to address the Company’s capital needs.  See
Note 11 Subsequent Event – Merger Agreement.




7


SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




NOTE
11.  SUBSEQUENT EVENT - MERGER AGREEMENT




On
January 22, 2010, the “Company, Firecom and FCI Merger Corp., a newly-formed
wholly-owned subsidiary of Firecom (the “Merger Sub”), entered into an Agreement
and Plan of Merger (the “Merger Agreement”).




The
Merger Agreement provides for Firecom to acquire the Company through a merger of
Merger Sub with and into the Company (the “Merger”), with the Company to be the
surviving corporation.  Pursuant to the Merger Agreement, at the
effective time of the Merger, each issued and outstanding share of common stock
of the Company (other than any shares owned by Firecom or Merger Sub, by the
Company as treasury stock, or by any stockholders who are entitled to, and who
properly exercise, appraisal rights under Delaware law) will be cancelled and
will be converted automatically into the right to receive $0.60 in cash, without
interest.




The
Merger Agreement contains customary covenants and agreements, including
covenants relating to the conduct of the Company’s business between the date of
the signing of the Merger Agreement and the closing of the
Merger.  The completion of the Merger is subject to fulfillment of the
customary closing conditions, adoption of the Merger Agreement and the Merger by
vote of holders of a majority
of the outstanding shares of Common Stock at a special meeting to be called
after the Company files with and obtains clearance from the SEC staff of the
requisite proxy material and completion of the Merger by April 30,
2010.  One closing condition is that holders of not more than an
aggregate of 10% of the Company’s outstanding shares of Common Stock have sought
appraisal rights in accordance with Delaware General Corporation Law. The
transaction is not subject to a financing condition.




In
addition, during the period from the date of the Merger Agreement though
February 8, 2010 (the “Solicitation Period”), the Company, and its officers,
directors, employees and representatives, may solicit third parties to make a
Superior Proposal (as defined in the Merger Agreement) to acquire the
Company.  After the termination of the Solicitation Period, the
Company may negotiate and consider a Superior Proposal from a Permitted Party
(as defined in the agreement) or on an unsolicited basis after the termination
of the Solicitation Period (an “Unsolicited Party”).  The Company and
the Special Committee’s representatives solicited third parties
and  several interested parties have indicated an interest as of
February 8, 2010 and are considered Permitted Parties.  In the event
the Merger Agreement is terminated by reason of the Company’s consideration of a
Superior Proposal, the Company would not have to pay any termination fee to
Firecom with respect to a Superior Proposal submitted by a Permitted Party, but
would have to pay a fee in the amount of $200,000 with respect to a Superior
Proposal submitted by an Unsolicited Party.  In either event, upon
termination of the Merger Agreement, the Company would have to reimburse
Firecom’s expenses, not to exceed $100,000.




After the
Merger, the Company will be a privately-held corporation.




The
foregoing summary of certain terms of the Merger Agreement does not purport to
be complete, and is subject to and qualified in its entirety by reference to the
Merger Agreement, a copy of which is filed as Exhibit 2.1 to Form 8-K on January
22, 2010.




NOTE
12  NASDAQ DELISTING




The
Company’s common stock was delisted from the NASDAQ Stock Market (“NASDAQ”) on
August 17, 2009 because the Company’s common stock did not meet the minimum bid
price requirements of NASDAQ. The Company determined that it would be unlikely
that it would be able to meet the NASDAQ Stock Market’s listing criteria on an
ongoing basis and it would therefore be in the best interest of the Company and
its shareholders to allow its common stock to be delisted.




Since the
delisting the Company common stock has traded on the pink sheet market under the
symbol SYNX.PK.




Note 13.
FAIR VALUE OF FINANCIAL INSTRUMENTS






GAAP
establishes a framework for measuring fair value and requires certain
disclosures about fair value measurements. Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. GAAP also establishes a fair value hierarchy, which requires
an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. There are three levels of inputs
that may be used to measure fair value:




Level 1—Quoted
prices in active markets for identical assets or liabilities.




Level 2—Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.




Level 3—Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.







8


SYNERGX
SYSTEMS INC. AND SUBSIDIARIES
 NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




Note 13.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)




the
following tables set forth by level within the fair value hierarchy the
Company’s financial assets that were accounted for at fair value on a recurring
basis at December 31, 2009 and September 30, 2009 according to the valuation
techniques the Company used to determine their fair values:




Fair
Value Measurements Using Inputs Considered As:




Fair
      Value
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Cash
      9/30/09
            
            $
            1,502,471
            
            
            $
            1,502,471
            
            
            $
            -
            
            
            $
            -Total
      9/30/09
            
            $
            1,502,471
            
            
            $
            1,502,471
            
            
            $
            -
            
            
            $
            -Cash
      12/31/09
            
            $
            1,579,099
            
            
            $
            1,579,099
            
            
            $
            -
            
            
            $
            -Total
      12/31/09
            
            $
            1,579,099
            
            
            $
            1,579,099
            
            
            $
            -
            
            
            $
            -




NOTE
14.  NEW ACCOUNTING PRONOUNCEMENTS




In
June 2009, the FASB issued an amendment to the accounting and disclosure
requirements for the consolidation of variable interest entities (“VIEs”). The
elimination of the concept of a qualifying special-purpose entity (“QSPE”)
removes the exception from applying the consolidation guidance within this
amendment. This amendment requires an enterprise to perform a qualitative
analysis when determining whether or not it must consolidate a VIE. The
amendment also requires an enterprise to continuously reassess whether it must
consolidate a VIE. Additionally, the amendment requires enhanced disclosures
about an enterprise’s involvement with VIEs and any significant change in risk
exposure due to that involvement, as well as how its involvement with VIEs
impacts the enterprise’s financial statements. Finally, an enterprise will be
required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This amendment is effective for financial
statements issued for fiscal years beginning after November 15, 2009. The
Company does not believe the impact of this amendment on its consolidated
financial statements will be material.




In
June 2009, the FASB issued the FASB Accounting Standards Codification (the
“Codification”). The Codification became the single source for all authoritative
GAAP recognized by the FASB to be applied for financial statements issued for
periods ending after September 15, 2009. The Codification does not change
GAAP and did not have a material impact on its consolidated financial
statements.




Other
recently issued accounting pronouncements are not expected to have a material
impact on the Company’s financial position or results of
operations.




9




Item 2.Management's Discussion and
Analysis of Financial Condition and Results of Operations


This
quarterly report contains forward-looking statements.  These are
statements that relate to future periods and include statements regarding our
future strategic, operational and financial plans, anticipated or projected
revenues, expenses and operational growth, markets and potential customers for
our products and services, plans related to sales strategies and efforts, the
anticipated benefits of our relationships with strategic partners, our ability
to compete, the adequacy of our current facilities and the performance of our
current and future products and services.




You
can identify forward-looking statements by those that are not historical in
nature, particularly those that use terminology such as “may”, ”should”,
“expects”, “anticipates”, “estimates”, “believes”, ”plans”, or “projects”. Our
actual results may differ materially from any forward-looking statements. We
caution you not to place undue reliance on these forward-looking
statements.  The forward-looking events discussed in this quarterly
report may not occur, and actual events and results may differ materially and
are subject to risks and uncertainties.  The forward-looking
statements speak only as of the date hereof, and we expressly disclaim any
obligation to publicly revise these forward-looking statements to reflect events
or circumstances after the date of this filing.




References
to 2009 and 2008 within the Management’s Discussion and Analysis of Financial
Condition and Results of Operations refers to the three months ended December
31, 2009 and December 31, 2008, respectively.




Liquidity and Capital
Resources




The
current economic recession is making it very difficult to maintain revenue
levels and margins as projects are being postponed and customers are asking for
price reductions. Since the beginning of the 2009 calendar year, we have
incurred losses as a result of slower economic activity and delays in the
release of transit project shipments requested by New York City Transit. These
delays in transit project shipments continue to affect our revenues, income and
liquidity. To offset these price reductions and shipment delays, management has
implemented reductions in staffing levels and overheads in order to lower
operating expenses and return to profitability.  These cost reductions
took effect at different periods during 2009, the last being in August 2009, and
are expected to approximate $1,700,000 on an annualized basis.




The ratio
of the Company’s current assets to current liabilities (current ratio) remained
the same at approximately 1.73 to 1 at December 31, 2009 and at September 30,
2009. Working capital declined to $2.9 million at December 31, 2009 compared to
$3.2 million at September 30, 2009. This decline in working capital is
principally related to the cash requirement to fund the $402,171 net loss during
the three months ended December 31, 2009.




The
Company had a $2.5 million revolving credit facility (the “Credit Facility”)
with TD Banknorth (“the Bank”) which expired on October 1, 2009 and at that time
certain events of default existed under the loan agreement.  At the
expiration date, the Bank did not call the loan but advised the Company that it
would not advance any additional funds.  In January 2010, the Company
entered into a forbearance agreement with the Bank to extend the facility until
April 30, 2010, which would allow the Company additional time to satisfy its
obligation to the Bank or to obtain alternative financing. If there is further
deterioration in the Company’s financial condition, however, the Bank shall have
the right to immediately exercise any and all rights and remedies provided under
the Credit Facility, including a demand for immediate payment.  The
forbearance agreement required a principal payment of $200,000 at the time of
closing in January 2010 (which was made at that time) and an increase in the
interest rate (retroactive to December 1, 2010) from prime plus 2% (5.25%) to
the Bank’s base rate plus 3% (6.25% from December 1, 2009 through December 31,
2009) for the duration of the extension period. The agreement requires monthly
principal payments of $15,000 in January 2010 increasing to $25,000 per month in
February, March and April of 2010. The Bank also charged, and the Company paid,
a loan modification and extension fee of $25,000.




The
Company’s debt to the Bank is secured by all assets of the Company and all of
its operating subsidiaries.  Outstanding debt to the Bank is measured
against a borrowing base, which is calculated based on eligible accounts
receivable and inventories.




The
agreement with the Bank includes certain restrictive covenants, which among
other things impose limitations on declaring or paying dividends, acquisitions,
and making capital expenditures.  The Company is also required to maintain
certain financial ratios and tangible net worth covenants.  As of September
30, 2009, the Company was not in compliance with certain of its
covenants.




Compliance
with these covenants is not a continued requirement by the Bank in conjunction
with the agreement to extend the facility to April 30, 2010.




As
discussed in the accompanying financial statements, the Company has continued to
incur losses from operations. In addition, in an attempt to achieve
profitability and positive cash flow, management has instituted a cost reduction
program that included a reduction in labor and other costs. Further, due to the
uncertain economic conditions, recurring losses, and the current unfavorable
lending climate, there can be no assurance that the Company will be able to
generate sufficient cash flow to pay off its entire bank line or that it will be
successful in arranging a new line of credit on acceptable terms for an amount
sufficient to continue its operations successfully. As a result, these factors
raise substantial doubt with respect to the Company’s ability to continue as a
going concern.




The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
of liabilities that may result should the Company be unable to continue as a
going concern.




10


Item 2.Management's Discussion and
Analysis of Financial Condition and Results of Operations


Cash
Flows




Net cash
provided by operations for the three months ended December 31, 2009 was $146,508
as compared to $8,855 of cash being used by operations for the comparable prior
year period, an increase of $155,363.  The $146,508 of cash provided
by operations was primarily due to $475,503 of cash generated by net reductions
in operating assets and liabilities in 2009 (primarily related to collection of
accounts receivable due to the timing of payments on long standing projects)
which was partially offset by the net loss of $402,171 in 2009. In comparison
for the three months ended December 31, 2008, there was a net increase of
operating assets and liabilities of $305,873 (which resulted from an increase in
accounts receivables related to higher sales and increased inventories which
were purchased in anticipation of project releases). This increase partially
offset $223,729 of net income for the 2008 three month period.




In 2009,
the net cash inflow of $146,508 from operations less investing activities for
equipment purchases of $11,474 (compared to $9,690 of equipment purchases in
2008) and financing activities for note and bank debt payments of $28,514
resulted in net cash inflow of $106,520. This $106,520 inflow increased the
Company’s cash balance to $1,608,991 at September 30, 2009.  In 2008,
the Company’s $8,855 cash outflow, primarily caused by an increase in its
operating assets and operating liabilities, was offset by additional bank
borrowing of $612,419 so that at December 31, 2008 the Company’s bank debt was
$1,130,292 and it had $849,792 as its cash balance at December 31,
2008.




Results of
Operations




Three
      Months Ended
              December
      31,2009
            
            
            2008(In
      thousands of dollars)Product
      Sales
            
            $
            1,579
            
            
            $
            3,794Subcontract
      Sales
            
            
            91
            
            
            
            569Service
      Revenue
            
            
            1,281
            
            
            
            1,295Total
      Revenue
            
            $
            2,951
            
            
            $
            5,658Gross
      Profit Product
            
            $
            136
            
            
            $
            920Gross
      Profit Subcontract
            
            
            14
            
            
            
            131Gross
      Profit Service
            
            
            526
            
            
            
            499Total
      Gross Profit
            
            $
            676
            
            
            $
            1,550Gross
      Profit Product %
            
            
            9
            %
            
            
            24
            %Gross
      Profit Subcontract %
            
            
            15
            %
            
            
            23
            %Gross
      Profit Service %
            
            
            41
            %
            
            
            39
            %Total
      Gross Profit %
            
            
            23
            %
            
            
            27
            %





Revenues





The
Company's product sales decreased $2,215,000 or 58% during the three months
ended December 31, 2009 to $1,579,000 compared to $3,794,000 for the prior year
period. The decline in product sales was from decreases in sales of all product
categories, represented by fire alarm, audio/visual and security products
(primarily from transit projects).  The prior year 2008 period
benefited from the installation of a fire alarm system by the building owner and
tenants at a major new retail outlet center in our Long Island, NY territory
amounting to $635,000 (a job of this size is unusual for this area and is not
expected to occur often) and from the installation of the Company’s new Comtrak
system upgrade at a large building in New York City. Revenue from this upgrade
program began in December, 2008, amounted to $171,000 during the three months of
2008 and is on going and expected to be completed in 2012. Security and
communication product sales declined by over $1.0 million in 2009 primarily due
to continued delays by New York City Transit Authority in the release of subway
station security and communication projects. Sales of audio/visual products
declined  $430,000, in the 2009 period, because of the loss of the
principal sales people and project engineers of this product line and the
Company’s inability to find qualified replacements.




Subcontract
sales decreased by $478,000 during the current three month period to $91,000
from $569,000 in the comparable prior year period.  During the 2008
period, the Company was responsible as prime contractor for the electrical
installation of a major new retail outlet center amounting to sales of $387,000
and for several other large electrical installations projects compared to a few
small electrical installations in 2009.




Service
revenues decreased 1% during the current three month period (2009) as compared
to the prior year period due to a decline in call-in-service on fire alarm
systems (replacement parts and service required by buildings).




11




Item 2.Management's Discussion and
Analysis of Financial Condition and Results of Operations


Gross
Profit





Gross
profit from product sales for the three months ended December 31, 2009 decreased
85% to $136,000 compared to $920,000 for the prior year period. The decline in
absolute gross margin and the 15% decrease in gross margin percentage are
primarily attributable to the major decline in product sales and the inability
to absorb overhead due to the relative fixed nature of certain of these
costs.  Gross profit margin as a percentage of product sales was 9% in
2009 compared to 24% in 2008.




Gross
profit related to subcontract sales for the three months ended December 31, 2009
decreased in absolute terms as the Company was responsible for fewer number of
electrical installations by third parties (subcontract work). The three month
period of 2008 included one large installation at a major retail outlet center.
The higher gross profit margin percentage in 2008 was due to higher margin
percentage received on the major retail outlet center project compared to the
three months of 2009 as mark ups on electrical installations were lower on the
few small electrical installation in 2009.




Gross
profit from service revenues improved $27,000 to $526,000 during the three
months ended December 31, 2009 in spite of a decline in call-in-service on fire
alarm systems (replacement parts and service required by buildings). The
improvement resulted from certain reductions in the number of service
technicians as the Company reevaluated its customer support staffing levels
(during 2009). These cost reductions more than offset the decline in
call-in-service noted above.




Loss Before
Taxes





The
$623,900 increase in loss before income taxes during the three months ended
December 31, 2009 is primarily attributed to $901,000 of lower gross margin due
to the decline in product and subcontract sales and from higher depreciation of
$190 and interest expense of $12,044 in 2009. The increase in interest expense
of $12,044 is primarily due to the effect of higher borrowing levels during
2009. The decrease in gross profit plus higher depreciation and interest amounts
to $913,000, which was offset in part by a net $262,000 reduction in selling,
general and administrative expenses and by $27,000 of higher gross profit on
service revenue compared to 2008. The decrease in selling, general and
administrative expenses during the 2009 period was primarily due to cost
reductions efforts to lower overhead expenses. Savings from this effort came
from reductions of personnel in sales, administration, information technology,
and research and development and from lower costs for professional fees,
insurance premiums (due to negotiated reductions), and commissions (due to lower
sales). These cost reductions were net of $107,025 of additional costs incurred
in 2009 involving a Special Committee to explore strategic opportunities. See
Special Committee to Explore Strategic Opportunities and Subsequent Event –
Merger Agreement following.





Tax
Provision





The
Company’s current income tax expense for the three month periods of 2009 and
2008 represent minimum state and local income or franchise taxes. No income tax
benefit was recorded for the loss incurred during the three months ended
December 31, 2009 and no income tax expense was recorded during the three months
ended December 31, 2008 due to the expected use of net operating loss
carryforwards on the operating profit.





Order
Position





The
Company’s order position, excluding service, at December 31, 2009 was $8,690,000
as compared to $9,000,000 at September 30, 2009 and $11,800,000 at December 31,
2008, primarily from mass transit construction projects.  The Company
expects to fulfill a significant portion of its order position over the next
twelve months. Due to the fact that the Company’s products are sold and
installed as part of larger mass transit construction projects, there is
typically a delay between the booking of the contract and its revenue
realization.  The order position includes, and the Company continues
to bid on projects that might include, significant subcontractor labor
(electrical installation performed by others). The Company expects to be active
in seeking orders where the Company would act as a prime contractor and be
responsible for management of the project as well as electrical
installation.  The Company has not, however, been successful in
obtaining any significant new mass transit contracts and in November 2009
decided to withhold bidding on work involving transit authorities (See Plan of
Operations below).




12




Item 2.Management's Discussion and
Analysis of Financial Condition and Results of Operations


Plan of
Operations




During
fiscal 2010, management intends to maintain its cost reduction initiatives and
to focus on marketing programs for the sale of fire alarm and security products
and to further develop its service contract business. During 2010, management’s
focus on sale of security products will be to schools and hotels.




Effective
November 2009, the Company decided to withhold bidding on major transit related
projects since these projects extend over long periods of time and historically
have been subject to extensive delays in equipment approval and acceptance
(which is problematic in the need for maintaining staffing levels and project
profitability) and are subject to changes in funding by the related agencies for
these projects (which requires the Company to maintain a large bank line of
credit). However, the Company will continue to bid on projects of very short
duration that could be completed quickly, and make box type sales that do not
require extensive engineering labor. At December 31, 2009, outstanding orders to
electrical contractors (to New York City Transit Authority) for transit projects
totaled $5.3 million and completion of these projects are dependent on release
and completion dates requested by the transit authority.  One of these
project’s completion could extend to 2011. Sales of transit projects represented
12% or $343,000 and 23% or $1,345,000 respectively of the total sales in the
three months ended December 31, 2009 and 2008, respectively.




The
Company’s two audio/visual salespeople and two project engineers are no longer
with the Company. The Company does not believe it can find qualified
replacements for these employees. The Company’s inability to find qualified
employees, coupled with historical low gross margins on audio/visual sales, has
resulted in the Company being unable to pursue audio/visual projects in 2010.
The Company will complete certain audio/visual projects in 2010 but does not
expect to participate in future audio/visual sales. At December 31, 2009 orders
for audio/visual products amounted to $192,000.




Significant Customers and
Suppliers





The
Company does business directly and indirectly through electrical contractors to
New York City Transit Authority.  Net sales to this authority
represented approximately 12% and 23% of total net sales in the three months
ended December 31, 2009 and 2008, respectively.




No
customer provided sales of 10% or more for the three months ended December 31,
2009.  One customer provided sales of 10% or more of total sales
(amounting to 15%) in the three months ended December 31,
2008.  Accounts receivable from a significant customers amounted to
$868,000 at December 31, 2008, and no customer owed the Company more than 10% of
total accounts receivable at December 31, 2009.




Two
suppliers each accounted for more than 10% of the Company’s cost of sales for
the three months ended December 31, 2009 (those suppliers amounted to 34% and
10%, respectively.  Three suppliers accounted for more than 10% of the
Company’s cost of sales for the three months ended December 31, 2008 (amounting
to 17%, 15% and 12%).




Related Party
Transactions




At
September 30, 2008, Firecom (a privately owned company involved in the fire
alarm and life safety business) owned 1,578,112 shares or approximately 30% of
the Company’s outstanding shares of common stock.  In January 2009,
Firecom purchased another 490,000 shares increasing its beneficial ownership to
2,068,112 shares, equal to approximately 40% of the Company’s outstanding common
stock.




Mr. Paul
Mendez, the Company’s President and Chief Executive Officer also serves as
Chairman of the Board of Directors and Chief Executive Officer of Firecom. On
June 10, 2008, the Company entered into an employment agreement with Mr. Mendez
under which the Company would pay Mr. Mendez an annual base salary of
$20,000.  The employment agreement was modified in January 2009 to
increase Mr. Mendez’s salary, retroactive to October 1, 2008, to an annual base
salary of $250,000. Mr. Mendez does not participate in the Company’s health-care
or other benefit plans.  Pursuant to the employment agreement, either
the Board of Directors of the Company or Mr. Mendez may terminate his employment
without cause and at any time. Mr. Mendez devotes approximately 50% of his time
to the affairs of the Company. In the employment agreement with the Company, Mr.
Mendez has agreed to certain non-competition and confidentiality
provisions.




Firecom
also provides the Company with a full time employee who serves as President of
the Company’s fire alarm products and services activities. For the three months
ended December 31, 2009 the Company paid Firecom $72,000 for the services of
this individual, which includes reimbursement for salary, payroll taxes and
other employee benefits.  These expenses are included in cost of
service revenue.  For the three months ended December 31, 2008 the
Company paid Firecom $53,000 for the same services.  For the three
months ended December 31, 2009 the Company paid $20,000 to Firecom for another
employee who serves in a fire alarm administrative function.  No
reimbursement for this employee was made during the three months ended December
31, 2008 as the employee began work for the Company in January
2009.




13


Item 2.Management's Discussion and
Analysis of Financial Condition and Results of Operations


The
Company and Firecom have entered into several transactions that are not
financially material to the revenues, gross profit or net income (loss) of the
Company:




·
            Firecom
      has provided certain sales leads to the Company for products Firecom does
      not sell. These sales leads have resulted in additional sales of products
      to customers. The Company has paid Firecom a 2% sales commission related
      to these sales which amounted to $6,000 for the three months ended
      December 31, 2008 and there were no such transactions for the three months
      ended December 31, 2009.




·
            Firecom
      has manufactured and sold to the Company certain fire alarm equipment made
      to the Company’s specifications. This equipment was sold to the Company
      for $3,000 during the three  months ended December 31, 2008, and
      there were no such transactions for the three months ended December 31,
      2009.




·
            The
      Company from time to time has purchased and sold certain products used in
      Firecom’s business.  During the three months ended December 31,
      2009 and 2008, these products were sold to Firecom for $38,000 and
      $43,000, respectively.  Profit margins on sales to Firecom
      approximate the margins on sales to other
  customers.




The
Company has a consulting agreement with Firecom pursuant to which Firecom
provides certain hardware and software engineering and field trouble-shooting
services.  In offering these services, Firecom has agreed to keep
information confidential and refrain from use of the information in its
business.  We plan to investigate other cost saving measures with
Firecom and will enter into other agreement if they are beneficial to our
business.




As of
December 31, 2009 and September 30, 2009, the Company owed Firecom $18,000 and
$24,000, respectively, which is included in Accounts Payable. As of
December 31, 2009 and September 30, 2009, Firecom owed the Company $31,000 and
$63,000 respectively, which is included in Accounts
Receivable.




Special Committee to
Consider Strategic Opportunities




In
October 2009, with consideration to the Company’s working capital requirements,
the Company’s Board of Directors formed a Special Committee of independent
outside directors to explore and consider various strategic alternatives
including proposals for additional debt or the issuance of additional equity
capital, the sale of one or more of the Company’s lines of business or the sale
of the Company in an effort to enhance stockholder value. The Special Committee
is authorized to negotiate on behalf of the Board of Directors and to consider,
pursue and accept or reject any proposals received, subject to required
stockholder approval and other terms that the Special Committee
determines.




The
Special Committee’s members include Harris Epstein and Ronald P. Fetzer. The
Special Committee has retained Ladenburg Thalmann as its independent financial
advisor to assist it in its evaluation of strategic alternatives. The
Special Committee has also retained independent legal counsel. There is no
assurance that the Special Committee will procure or receive offers for a
strategic alternative to address the Company’s capital needs, and if it does,
that an agreement for a transaction will be reached, approved or consummated.
See Subsequent Event – Merger Agreement.




Subsequent Event - Merger
Agreement




On
January 22, 2010, the “Company, Firecom, and FCI Merger Corp., a newly-formed
wholly-owned subsidiary of Firecom (the “Merger Sub”), entered into an Agreement
and Plan of Merger (the “Merger Agreement”).  On January 14, 2010, the
Company reported that its Special Committee of the Board of Directors of the
Company (the “Special Committee”) had commenced discussions with Firecom
regarding a proposed merger transaction.




The
Merger Agreement provides for Firecom to acquire the Company through a merger of
Merger Sub with and into the Company (the “Merger”), with the Company to be the
surviving corporation.  Pursuant to the Merger Agreement, at the
effective time of the Merger, each issued and outstanding share of common stock
of the Company (other than any shares owned by Firecom or Merger Sub, by the
Company as treasury stock, or by any stockholders who are entitled to, and who
properly exercise, appraisal rights under Delaware law) will be cancelled and
will be converted automatically into the right to receive $0.60 in cash, without
interest.




The
Merger Agreement was entered into after negotiations between Firecom and the
Special Committee, completion of the due diligence review and analysis, receipt
by the Special Committee of an opinion from its financial advisor to the effect
that the merger consideration payable to the public stockholders of the Company
was fair, from a financial point of view, recommendation of the Special
Committee, and approval by the Company’s Board of Directors (with
representatives of Firecom having recused themselves from the Board
meeting).  On January 22, 2010, Ladenburg Thalmann & Co. Inc,
delivered an opinion to the Special Committee that, as of the date of the
opinion and subject to the limitations contained therein, the consideration to
be received by the Company’s stockholders pursuant to the Merger is fair to such
stockholders from a financial point of view.




14




Item 2.Management's Discussion and
Analysis of Financial Condition and Results of Operations


The
Merger Agreement contains customary representations and warranties of the
Company, Firecom and Merger Sub. The Merger Agreement also contains customary
covenants and agreements, including covenants relating to the conduct of the
Company’s business between the date of the signing of the Merger Agreement and
the closing of the Merger.  The completion of the Merger is subject to
various conditions set forth in the Merger Agreement, including fulfillment of
the customary closing conditions, adoption of the Merger Agreement and the
Merger by vote of holders of a majority of the outstanding shares of Common
Stock at a special meeting to be called after the Company files with and obtains
clearance from the SEC staff of the requisite proxy material and completion of
the Merger by April 30, 2010.  The Company’s stockholders will have
statutory appraisal rights in accordance with the Delaware General Corporation
Law.  One closing condition is that holders of not more than an
aggregate of 10% of the Company’s outstanding shares of Common Stock have sought
such appraisal rights.  The transaction is not subject to a financing
condition.  Upon the Merger, the Company will become a wholly-owned
subsidiary of Firecom.  As of the Effective Date, the directors of the
Company will resign and be replaced by designees of Firecom.




In
addition, during the period from the date of the Merger Agreement though
February 8, 2010 (the “Solicitation Period”), the Company, and its officers,
directors, employees and representatives, may solicit third parties to make a
Superior Proposal (as defined in the Merger Agreement) to acquire the
Company.  Any third party solicited during the Solicitation Period or
who contacted the Company during such Period, and who the Special Committee
believes in good faith to have the financial capability to effect a Takeover
Proposal, and who executes an Acceptable Confidentiality Agreement by February
16, 2010 would be a “Permitted Party.”  After the termination of the
Solicitation Period and until the earlier of the effectiveness of the Merger or
the termination of the Merger Agreement, the Company may negotiate and consider
a Superior Proposal from a Permitted Party or from a person who contacted the
Company on an unsolicited basis after the termination of the Solicitation Period
(an “Unsolicited Party”). The
Company and the Special Committee’s representatives solicited third parties and
several interested parties have indicated an interest as of February 8, 2010 and
are considered Permitted Parties. In the event the Merger Agreement is
terminated by reason of the Company’s consideration of a Superior Proposal, the
Company would not have to pay any termination fee to Firecom with respect to a
Superior Proposal submitted by a Permitted Party, but would have to pay a fee in
the amount of $200,000 with respect to a Superior Proposal submitted by an
Unsolicited Party.  In either event, upon termination of the Merger
Agreement, the Company would have to reimburse Firecom’s expenses, not to exceed
$100,000.




After the
Merger, the Company will be a privately-held corporation.  There will
be no public market for the Company’s Common Stock, no price quotations with
respect to sales prices of the Company’s Common Stock in the public market, the
registration of the Company’s Common Stock under the federal securities laws
will be terminated, and neither the Company nor its executive officers,
directors and 5% stockholders will be required to file periodic reports with the
SEC.




The
foregoing summary of certain terms of the Merger Agreement does not purport to
be complete, and is subject to and qualified in its entirety by reference to the
Merger Agreement, a copy of which is filed as Exhibit 2.1 to Form 8-K on January
22, 2010.




NASDAQ
Delisting




The
Company’s common stock was delisted from the NASDAQ Stock Market (“NASDAQ”) on
August 17, 2009 because the Company’s common stock did not meet the minimum bid
price requirements of NASDAQ. The Company determined that it would be unlikely
that it would be able to meet the NASDAQ Stock Market’s listing criteria on an
ongoing basis and it would therefore be in the best interest of the Company and
its shareholders to allow its common stock to be delisted.




Since the
delisting the Company common stock has traded on the pink sheet market under the
symbol SYNX.PK.




15




Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





Not
applicable





Item
4.  Controls and Procedures Evaluation of disclosure controls and
procedures.





(a)         
      Disclosure Controls and
      Procedures





The
Company’s management, with the participation of its principal executive officer
and principal financial officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)) as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s
principal executive officer and principal financial officer have concluded that,
as of the end of such period, the Company’s disclosure controls and procedures
were adequate and effective.





(b)        
      Changes in Internal
      Controls





There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended
December 31, 2009 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.








16







Part
II – OTHER INFORMATION





Item 1.  Legal
Proceedings.





In the
normal course of its operations, the Company has been, or from time to time may
be, named in legal actions seeking monetary damages.  While the
outcome of these matters cannot be estimated with certainty, and certain matters
are in early or discovery stages of litigation, management does not expect,
based upon consultation with legal counsel and insurance coverage, that such
actions will have a material effect on the Company's business or financial
condition.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.





Not
applicable





Item 3.  Defaults
Upon Senior Securities.





Not
applicable





Item
4.  Submission of Matters to a Vote of Security
Holders.





None





Item 5.  Other
Information.





None





Item
6.  Exhibits





(a)   
Exhibits





31.1
            Certification
      of Paul Mendez pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
      of John A. Poserina pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1
            Certifications
      of Paul Mendez and John A. Poserina pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002





17





SIGNATURES








Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.








SYNERGX
      SYSTEMS INC
              (Registrant)Date: February
      9, 2010
            /s/
            Paul
      MendezPaul
      MendezChief
      Executive OfficerDate: February
      9, 2010
            /s/
            John
      A. PoserinaJohn
      A. PoserinaChief
      Financial Officer(Principal
      Accounting and Financial Officer),Secretary
      And Director








18