Notes
to Consolidated Financial Statements
NOTE
A – ORGANIZATION, DESCRIPTION OF COMPANY’S BUSINESS AND BASIS OF PRESENTATION
Surge
Components, Inc. (“Surge”) was incorporated in the State of New York and commenced operations on November 24, 1981
as an importer of electronic products, primarily capacitors and discrete semi-conductors selling to customers located principally
throughout North America. On June 24, 1988, Surge formed Challenge/Surge Inc. (“Challenge”), a wholly-owned subsidiary
to engage in the sale of electronic component products and sounding devices from established brand manufacturers to customers
located principally throughout North America.
In
May 2002, Surge and an officer of Surge founded and became sole owners of Surge Components, Limited (“Surge Limited”),
a Hong Kong corporation. Under current Hong Kong law, Surge Limited is required to have at least two shareholders. Surge owns
999 shares of the outstanding common stock and the officer of Surge owns 1 share of the outstanding common stock. The officer
of Surge has assigned his rights regarding his 1 share to Surge. Surge Limited started doing business in July 2002. Surge Limited
operations have been consolidated with the Company. Surge Limited is responsible for the sale of Surge’s products to customers
located in Asia.
On
August 31, 2010, the Company changed its corporate domicile by merging into a newly-formed corporation, Surge Components, Inc.
(Nevada), which was formed in the State of Nevada for that purpose. Surge Components Inc. is the surviving entity.
In
February 2019, the Company converted into a Delaware corporation. The number of authorized shares of common stock was decreased
to 50,000,000 shares.
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1)
Principles of Consolidation:
The
consolidated financial statements include the accounts of Surge, Challenge, and Surge Limited (collectively the “Company”).
All material intercompany balances and transactions have been eliminated in consolidation.
The
accompanying interim consolidated financial statements have been prepared without audit, in accordance with the instructions to
Form 10-Q for interim financial reporting and the rules and regulations of the Securities and Exchange Commission.
The
results and trends in these interim consolidated financial statements for the six months ended May 31, 2020 and May 31, 2019 may
not be representative of those for the full fiscal year or any future periods.
(2)
Accounts Receivable:
Trade
accounts receivable are recorded at the net invoice value and are not interest bearing. The Company considers receivables past
due based on the payment terms. The Company reviews its exposure to amounts receivable and reserves specific amounts if collectability
is no longer reasonably assured. The Company also reserves a percentage of its trade receivable balance based on collection history
and current economic trends that might impact the level of future credit losses. The Company re-evaluates such reserves on a regular
basis and adjusts its reserves as needed. Based on the Company’s operating history and customer base, bad debts to date
have not been material.
(3)
Revenue Recognition:
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. generally
accepted accounting principles guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue,
the application of which will require significant judgment by the Company. The Company adopted the standard using the modified
retrospective approach in its fiscal year beginning December 1, 2017. The preponderance of the Company’s contracts with
customers are standard ship and bill arrangements where revenue is recognized at the time of shipment.
Revenue
is recognized for products sold by the Company when persuasive evidence of an arrangement exists, delivery has occurred, the price
is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer.
This occurs when product is shipped from the Company’s warehouse.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(3)
Revenue Recognition (continued):
For
direct shipments, revenue is recognized when product is shipped from the Company’s supplier. The Company has a long term
supply agreement with one of our suppliers. The Company purchases the merchandise from the supplier and has the supplier directly
ship to the customer through a freight forwarder. Title passes to customer upon the merchandise being received by a freight forwarder.
Direct shipments were approximately $993,000 and $702,000 for the six months ended May 31, 2020 and May 31, 2019 respectively.
The
Company also acts as a sales agent to certain customers in North America for one of its suppliers. The Company reports these commissions
as revenues in the period earned. Commission revenue totaled $199,054 and $211,167 for the six months ended May 31, 2020 and May
31, 2019 respectively.
The
Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.
The
Company and its subsidiaries currently have agreements with several distributors. There are no provisions for the granting of
price concessions in any of the agreements. Revenues under these distribution agreements were approximately $2,773,000 and $3,438,000
for the six months ended May 31, 2020 and May 31, 2019 respectively.
(4)
Inventories:
Inventories,
which consist solely of products held for resale, are stated at the lower of cost (first-in, first-out method) or net realizable
value. Products are included in inventory when the Company obtains title and risk of loss on the products, primarily when shipped
from the supplier. Inventory in transit principally from foreign suppliers at May 31, 2020 was $868,206. The Company, at May 31,
2020 has a reserve against slow moving and obsolete inventory of $250,565. From time to time the Company’s products are
subject to legislation from various authorities on environmental matters.
(5)
Depreciation and Amortization:
Fixed
assets are recorded at cost. Depreciation is generally calculated on a straight line method and amortization of leasehold improvements
is provided for on the straight-line method over the estimated useful lives of the various assets as follows:
Furniture,
fixtures and equipment
|
5 - 7 years
|
Computer equipment
|
5 years
|
Leasehold Improvements
|
Estimated useful life or lease term, whichever
is shorter
|
Maintenance
and repairs are expensed as incurred while renewals and betterments are capitalized.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(6)
Concentration of Credit Risk:
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable.
The Company maintains substantially all of its cash balances in a limited number of financial institutions. At May 31, 2020 and
November 30, 2019, the Company’s uninsured cash balances totaled $3,518,257 and $2,174,808, respectively.
(7)
Income Taxes:
The
Company’s deferred income taxes arise primarily from the differences in the recording of net operating losses, allowances
for bad debts, inventory reserves and depreciation expense for financial reporting and income tax purposes. A valuation allowance
is provided when it has been determined to be more likely than not that the likelihood of the realization of deferred tax assets
will not be realized. See Note J.
The
Company follows the provisions of the Accounting Standards Codification topic, ASC 740, “Income Taxes” (ASC 740).
There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company’s financial condition
or results of operations as a result of ASC 740.
The
Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is
no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2015, and state tax
examinations for years before fiscal years ending November 30, 2014. Management does not believe there will be any material
changes in our unrecognized tax positions over the next twelve months.
The
Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income
tax expense. As of the date of adoption of ASC 740, there was no accrued interest or penalties associated with any unrecognized
benefits, nor was any interest expense recognized during the six months ended May 31, 2020 and May 31, 2019.
(8)
Cash Equivalents:
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(9)
Use of Estimates:
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
(10)
Marketing and promotional costs:
Marketing
and promotional costs are expensed as incurred and have not been material to date. The Company has contractual arrangements with
several of its distributors which provide for cooperative advertising rights to the distributor as a percentage of sales. Cooperative
advertising is reflected as a reduction in revenues and has not been material to date.
(11)
Fair Value of Financial Instruments:
The
carrying amount of cash balances, accounts receivable, accounts payable and accrued expenses approximate their fair value based
on the nature of those items. Estimated fair values of financial instruments are determined using available market information
and appropriate valuation methodologies. Considerable judgment is required to interpret the market data used to develop the estimates
of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that could be realized in a current
market exchange.
(12)
Shipping Costs
The
Company classifies shipping costs as a component of selling expenses. Shipping costs totaled $1,564 and $3,781 for the six
months ended May 31, 2020 and May 31, 2019 respectively.
(13)
Earnings Per Share
Basic
earnings per share includes no dilution and is computed by dividing net (loss) income available to common stockholders by the
weighted average number of common shares outstanding for the period. In the period with a profit, the difference between reported
basic and diluted weighted-average common shares results from the assumption that all dilutive stock options and convertible preferred
stock exercised into common stock. Total potentially dilutive shares excluded from diluted weighted shares outstanding at
May 31, 2020 and May 31, 2019 totaled 432,000 and 118,386, respectively.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(14)
Stock Based Compensation
Stock
Based Compensation to Employees
The
Company accounts for its stock-based compensation for employees in accordance with Accounting Standards Codification (“ASC”)
718. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based
compensation issued to employees and non-employees over the related vesting period.
Stock
Based Compensation to Other than Employees
The
Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance
with ASC 718. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value
of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration
other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider
of goods or services. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized
over the term of the consulting agreement.
(15)
Leases
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("Topic 842").
Topic 842 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets.
Leases will be classified as either finance or operating, with classification affecting expense recognition in the income statement.
On
December 1, 2019, the Company adopted Topic 842 applying the optional transition method, which allows an entity to apply the new
standard at the adoption date with a cumulative effect adjustment to the opening balance of retained earnings in the period of
adoption. As a result of adopting Topic 842, the Company recognized assets and liabilities for the rights and obligations created
by operating leases totaling approximately $290,000.
The
Company determines if a contract contains a lease at inception based on whether it conveys the right to control the use of an
identified asset. Substantially all of the Company's leases are classified as operating leases. The Company records operating
lease right-of-use assets within “Other assets” and lease liabilities are recorded within “current and noncurrent
liabilities” in the consolidated balance sheets. Lease expenses are recorded within “General and administrative expenses”
in the consolidated statements of operations. Operating lease payments are presented within “Operating cash flows”
in the consolidated statements of cash flows.
Operating
lease right-of-use assets and lease liabilities are recognized based on the net present value of future minimum lease payments
over the lease term starting on the commencement date. The Company generally is not able to determine the rate implicit in its
leases and, as such, applies an incremental borrowing rate based on the Company's cost of borrowing for the relevant terms of
each lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Lease terms may
include an option to extend or terminate a lease if it is reasonably certain that the Company will exercise such options. The
Company has elected the practical expedient to not separate lease components from non-lease components, and also has elected not
to record a right-of-use asset or lease liability for leases which, at inception, have a term of twelve months or less. Variable
lease payments are recognized in the period in which the obligation for those payments is incurred.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
C – FIXED ASSETS
Fixed
assets consist of the following:
|
|
May 31,
|
|
|
November 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Furniture and Fixtures
|
|
$
|
327,971
|
|
|
$
|
327,971
|
|
Leasehold Improvements
|
|
|
1,022,556
|
|
|
|
1,022,556
|
|
Computer Equipment
|
|
|
1,093,945
|
|
|
|
1,075,949
|
|
Less-Accumulated Depreciation
|
|
|
(2,324,629
|
)
|
|
|
(2,305,724
|
)
|
Net Fixed Assets
|
|
$
|
119,843
|
|
|
$
|
120,752
|
|
Depreciation
and amortization expense for the six months ended May 31, 2020 and May 31, 2019 was $18,905 and $19,252, respectively.
NOTE
D – FINANCING LEASE OBLIGATIONS
The
Company is obligated under financing leases for telephone equipment. The Company leases equipment under two capital lease arrangements
with NEC Financial Services. Pursuant to the leases, the lessor retains actual title to the leased property until the termination
of the lease, at which time the equipment can be purchased for one dollar for each lease. The terms of the leases are 60 months
with a combined monthly payment of $815, respectively. The assumed interest rates on the leases are 9.342%. The leases terminate
in 2022.
Future
minimum lease payments under these financing lease obligations as of May 31, 2020 are as follows:
2020
|
|
$
|
9,779
|
|
2021
|
|
$
|
9,779
|
|
2022
|
|
$
|
4,261
|
|
|
|
|
|
|
Total
|
|
$
|
23,819
|
|
Less: interest portion
|
|
|
2,735
|
|
Present value of net minimum lease payments
|
|
$
|
21,084
|
|
Less: current portion
|
|
|
7,444
|
|
Non-current portion
|
|
$
|
13,640
|
|
Financing lease obligations mature as follows:
|
|
|
|
|
|
|
|
Twelve Months Ended May 31:
|
|
|
|
|
|
|
|
2020
|
|
$
|
7,444
|
|
2021
|
|
$
|
9,657
|
|
2022
|
|
$
|
3,983
|
|
|
|
|
|
|
Principal payments remaining
|
|
$
|
21,084
|
|
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
E – LOANS PAYABLE
In
February 2017, the Company obtained a line of credit with a bank for up to $3,000,000 (the “Credit Line”). Borrowings
under the Credit Line are due upon demand and accrue interest at the greater of the prime rate or the LIBOR rate plus two percent
(and may be increased by three percent in the event the Company fails to (i) repay all amounts due on the Credit Line upon demand
or (ii) comply with any terms or conditions relating to the Credit Line). The Credit Line is collateralized by substantially all
of the assets of the Company. As of May 31, 2020, the balance on the Credit Line was $0. As of May 31, 2020, the Company was in
compliance with the debt covenants under the Credit Line.
The
Company in May 2020 received loan proceeds in the amount of approximately $449,700 under the Paycheck Protection Program (“PPP”).
The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for
loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business.
The loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible
purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will
be reduced if the borrower terminates employees or reduces salaries during the period.
The
unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first
six months. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes
that its use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot assure you that we will not
take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.
NOTE
F – ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
May 31,
|
|
|
November 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
218,487
|
|
|
$
|
233,784
|
|
Preferred stock dividends
|
|
|
149,069
|
|
|
|
146,569
|
|
Other accrued expenses
|
|
|
135,893
|
|
|
|
200,848
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
503,449
|
|
|
$
|
581,201
|
|
NOTE
G – RETIREMENT PLAN
In
June 1997, the Company adopted a qualified 401(k) retirement plan for all full-time employees who are twenty-one years of age
and have completed twelve months of service. The plan allows total employee contributions of up to fifteen percent (15%) of the
eligible employee’s salary through salary reduction. The Company makes a matching contribution of twenty percent (20%) of
each employee’s contribution for each dollar of employee deferral up to five percent (5%) of the employee’s salary.
Net assets for the plan, as estimated by Union Central, Inc., which maintains the plan’s records, were approximately $1,486,000
at November 30, 2019. Pension expense for the six months ended May 31, 2020 and May 31, 2019 was $558 and $1,196, respectively.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
H – SHAREHOLDERS’ EQUITY
[1]
Preferred Stock:
In
February 1996, the Company amended its Certificate of Incorporation to authorize the issuance of 1,000,000 shares of preferred
stock in one or more series. In August 2010, the number of preferred shares authorized for issuance was increased to 5,000,000
shares.
In
November 2000, the Company authorized 100,000 shares of preferred stock as Non-Voting Redeemable Convertible Series C Preferred
Stock (“Series C Preferred”). Each share of Series C Preferred is automatically convertible into 10 shares of our
common stock upon shareholder approval. If the Series C Preferred were converted into common stock on or before April 15, 2001,
these shares were entitled to cumulative dividends at the rate of $.50 per share per annum commencing April 15, 2001 payable on
June 30 and December 31 of each year. In November 2000, 70,000 shares of the Series C Preferred were issued in payment of financial
consulting services to its investment banker and a shareholder of the Company.
Between
April 2001 and July 2015, 60,000 shares of the series C shares were repurchased or converted to common stock. Dividends aggregating
$149,069 have not been paid for the semi-annual periods ended December 31, 2001 through the semi-annual payment due December 31,
2019. The Company has accrued these dividends. At May 31, 2020, there are 10,000 shares of Series C Preferred issued and outstanding.
In
October 2016, the Company authorized 75,000 shares of preferred stock as Voting Non-Redeemable Convertible Series D Preferred
Stock (“Series D Preferred”). None of the Series D Preferred Stock is outstanding as of May 31, 2020.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
H – SHAREHOLDERS’ EQUITY (Continued)
[2]
2010 Incentive Stock Plan
In
March 2010, the Company adopted, and in April 2010 the shareholders ratified, the 2010 Incentive Stock Plan (“2010 Stock
Plan”). The 2010 Stock Plan provides for the grant of options to officers, employees, directors or consultants to the Company
to purchase an aggregate of 1,500,000 common shares.
In
March 2019, one employee director exercised options to acquire 25,000 shares of common stock at $0.87 per share.
[3]
2015 Incentive Stock Plan
In
November 2015, the Company adopted and the shareholders ratified, the 2015 Incentive Stock Plan (“2015 Stock Plan”).
The 2015 Stock Plan provides for the grant of options to officers, employees, directors or consultants to the Company to purchase
an aggregate of 1,500,000 common shares.
In
May 2016 a total of 99,151 shares were issued to the Company’s officers as part of their 2015 bonus compensation under the
2015 Stock Plan.
In
May 2019, a total of 47,207 shares were issued to the Company’s officers as part of their 2018 bonus compensation under
the 2015 Stock Plan.
In
April 2020, the Company awarded one non-employee director 15,000 shares of its common stock under the 2015 Stock Plan. The Company
recorded a cost of $21,150 related to the issuance of these shares.
In
April 2020, a total of 27,500 shares were issued to one of the Company’s officers as part of their 2019 bonus compensation
under the 2015 Stock Plan. The Company recorded a cost of $41,250 relating to the issuance of these shares.
In
April 2020, the Company granted stock options to (a) four non-employee directors to each purchase 15,000 shares of common stock,
(b) one non-employee-director to purchase 25,000 shares of common stock, and (c) two Company officers to each purchase 50,000
shares of common stock at an exercise price of $1.41 per share, the market price of the common stock on the date of the grant. These
options vest immediately and expire five years from the grant date. The Company recorded a cost of $154,534 related to the granting
of these options.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
H – SHAREHOLDERS’ EQUITY (Continued)
Activity
in the Company’s stock plans for the period ended May 31, 2020 is summarized as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
Options outstanding December 1, 2019
|
|
|
147,000
|
|
|
$
|
1.01
|
|
Options issued in the six months ended May 31, 2020
|
|
|
185,000
|
|
|
$
|
1.41
|
|
Options exercised in the six months ended May 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
Options cancelled in the six months ended May 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
Options outstanding at May 31, 2020
|
|
|
332,000
|
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at May 31, 2020
|
|
|
332,000
|
|
|
$
|
1.22
|
|
The
intrinsic value of the exercisable options at May 31, 2020 totaled $59,220. At May 31, 2020 the weighted average remaining life
of the stock options is 2.9 years. At May 31, 2020 there was no unrecognized compensation cost related to the stock options granted
under the plan.
[4]
Compensation of Directors
Compensation
for each non-employee director is $2,500 per month (and $3,500 per month for a non-employee director that serves as the chairman
of more than two committees of the Board of Directors).
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
I – INCOME TAXES
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes using the enacted tax rates in effect in the years in which the
differences are expected to reverse.
The
Company’s deferred income taxes are comprised of the following:
|
|
May 31,
|
|
|
November 30,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
1,483,462
|
|
|
$
|
1,524,286
|
|
Allowance for bad debts
|
|
|
27,121
|
|
|
|
27,121
|
|
Inventory
|
|
|
60,746
|
|
|
|
60,746
|
|
Other
|
|
|
68,518
|
|
|
|
65,353
|
|
Depreciation
|
|
|
64,517
|
|
|
|
65,402
|
|
Total deferred tax assets
|
|
|
1,704,364
|
|
|
|
1,742,908
|
|
Valuation allowance
|
|
|
(796,470
|
)
|
|
|
(557,168
|
)
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
$
|
907,894
|
|
|
$
|
1,185,740
|
|
The
valuation allowance for the deferred tax assets relates principally to the uncertainty of the utilization of deferred tax assets
and was calculated in accordance with the provisions of ASC 740, which requires that a valuation allowance be established or maintained
when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The valuation
allowance increased by approximately $239,302 during the six months ended May 31, 2020. This valuation is based on management
estimates of future taxable income. Although the degree of variability inherent in the estimates of future taxable income is significant
and subject to change in the near term, management believes, that the estimate is adequate. The estimated valuation allowance
is continually reviewed and as adjustments to the allowance become necessary, such adjustments are reflected in the current operations.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
I – INCOME TAXES (Continued)
The
Company’s income tax expense consists of the following:
|
|
Six Months Ended
|
|
|
|
May 31,
2020
|
|
|
May 31,
2019
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
States
|
|
|
91,516
|
|
|
|
13,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,516
|
|
|
|
13,934
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
219,498
|
|
|
|
(49,227
|
)
|
States
|
|
|
58,348
|
|
|
|
(13,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
277,846
|
|
|
|
(62,313
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
369,362
|
|
|
$
|
(48,379
|
)
|
The
Company files a consolidated income tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of
approximately $5,676,000 for federal and state purposes, which expire through 2020. A reconciliation of the difference between
the expected income tax rate using the statutory federal tax rate and the Company’s effective rate is as follows:
|
|
Six Months ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2020
|
|
|
2019
|
|
U.S Federal Income tax statutory rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Valuation allowance
|
|
|
175
|
%
|
|
|
(33
|
)%
|
State income taxes
|
|
|
5
|
%
|
|
|
8
|
%
|
Other
|
|
|
-
|
|
|
|
-
|
|
Effective tax rate
|
|
|
201
|
%
|
|
|
(4
|
)%
|
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
J – OPERATING LEASE COMMITMENTS
The
Company leases its office and warehouse space through 2020 from a corporation that is controlled by officers/shareholders of the
Company (“Related Company”). Annual minimum rental payments to the Related Company approximated $180,000 for the year
ended November 30, 2019, and increase at the rate of three per cent per annum throughout the lease term.
Pursuant
to the lease, rent expense charged to operations differs from rent paid because of scheduled rent increases. Accordingly, the
Company has recorded deferred rent. Rent expense is calculated by allocating to rental payments, including those attributable
to scheduled rent increases, on a straight line basis, over the lease term.
In
June 2019, the Company renewed its lease to rent office space and a warehouse in Hong Kong for two years. Annual minimum rental
payments for this space are approximately $68,460.
In
January 2019, the Company entered into a lease to rent warehouse space in Hong Kong for two years. Annual minimum rental payments
for this space are approximately $36,840.
The
Company’s future minimum rental commitments at May 31, 2020 are as follows:
Twelve
Months Ended May 31,
2021
|
|
$
|
152,013
|
|
2022
|
|
$
|
5,705
|
|
|
|
|
|
|
|
|
$
|
157,718
|
|
Net
rental expense for the six months ended May 31, 2020 and May 31, 2019 were $181,325 and $173,903 respectively, of which $133,437
and $131,612 respectively, was paid to the Related Company.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
K – EMPLOYMENT AND OTHER AGREEMENTS
In
February 2016, the Company entered into revised employment agreements with two officers of the Company. Pursuant to these agreements,
the base salary for one officer is $275,000 and the base salary for the other officer is $225,000. The agreements continue until
terminated by either party.
The
Company’s Compensation Committee may award these officers with bonuses and will review the base salary amounts for each
of the officers on an annual basis to determine if any changes to the base salary amounts need to be made and may also award these
officers with annual bonuses. Pursuant to the employment agreements, the officers are prohibited from engaging in activities
which are competitive with those of the Company during their employment with the Company and for one year following termination.
If the agreement is terminated other than for cause, the officer would be entitled to all base salary earned through the date
of termination, accrued but unused vacation, all vested equity, and bonus amounts payable to the officer through the date of termination.
The officers would also be entitled to receive an additional thirty-six months of annual compensation equal to the average of
his base salary and bonus for the three calendar years prior to the date of termination, payable in accordance with the Company’s
regular payroll practice over a 52-week period.
NOTE
L – MAJOR CUSTOMERS
The
Company had two customers who each accounted for 16% and 12% of net sales for the six months ended May 31, 2020 and two customers
who accounted for 12% and 13% of net sales for the six months ended May 31, 2019. The Company had two customers who accounted
for 18% and 11% of accounts receivable at May 31, 2020 two customers who accounted for 11% and 12% of accounts receivable at May
31, 2019.
NOTE
M – MAJOR SUPPLIERS
During
the six months ended May 31, 2020 and May 31, 2019 there was one foreign supplier accounting for 40% and 40% of total inventory
purchased.
The
Company purchases substantially all of its products overseas. For the six months ended May 31, 2020, the Company purchased 45%
of its products from Taiwan, 14% from Hong Kong, 34% from elsewhere in Asia and less than 1% overseas outside of Asia. The Company
purchases the balance of its products in the United States.
NOTE
N – EXPORT SALES
The
Company’s export sales were as follows:
|
|
Six Months Ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2020
|
|
|
2019
|
|
Canada
|
|
|
1,529,736
|
|
|
|
2,360,932
|
|
China
|
|
|
2,472,615
|
|
|
|
2,804,193
|
|
Other Asian Countries
|
|
|
448,001
|
|
|
|
1,055,605
|
|
South America
|
|
|
138,110
|
|
|
|
247,230
|
|
Europe
|
|
|
563,369
|
|
|
|
678,907
|
|
Revenues
are attributed to countries based on location of customer.
NOTE
O – SUBSEQUENT EVENTS
In
early January 2020, an outbreak of a respiratory illness caused by the Coronavirus was identified in Wuhan, China. As part of
its effort to combat the virus, the government of China has placed travel restrictions throughout parts of China. This has resulted
in some of the Company’s customers and suppliers being closed for an extended period or operating at significantly below
their normal capacity and will also affect our suppliers that source some of their materials from China. Conditions in China have
improved. Some customers and suppliers are back to full operation but others are taking longer. The duration and intensity of
this global health emergency and related disruptions is uncertain, although there has been some improvement globally, including
Asia, America and Europe. The duration of this crisis and its impact on both the Company’s customers and supply chain is
expected to have a material impact on the consolidated results of operations, cash flows and financial condition, but cannot be
reasonably estimated at this time. As an update, the unprecedented virus has grown significantly especially in America and has
significantly impacted the Company’s customers. The Company has experienced order cancellations and order hold notices from
customers and expects this to continue.