UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 28, 2021

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File No. 000-27688

 

SURGE COMPONENTS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   11-2602030
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     

95 East Jefryn Boulevard

Deer Park, New York

  11729
(Address of principal executive offices)   (Zip Code)

 

(631) 595-1818
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒  No ☐

 

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

 

Large Accelerated Filer Accelerated Filer
Non-accelerated Filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

Securities registered pursuant to Section 12(b) of the Act: None

 

The registrant’s common stock outstanding as of April 14, 2021, was 5,473,556 shares of common stock. The registrant’s common stock trades on the OTC Markets under the stock symbol “SPRS.”

 

 

 

 

 

 

SURGE COMPONENTS, INC

 

TABLE OF CONTENTS

 

    Page
PART I - FINANCIAL INFORMATION    
     
Item 1. Financial Statements   1
     
Consolidated Balance Sheets as of February 28, 2021 (unaudited) and November 30, 2020   1
     
Consolidated Statements of Operations for the three months ended February 28, 2021 and February 29, 2020 (unaudited)   3
     
Consolidated Statements of Changes in Shareholders Equity for the three months ended February 28, 2021 and February 29, 2020 (unaudited)   4
     
Consolidated Statements of Cash Flows for the three months ended February 28, 2021 and February 29, 2020 (unaudited)   5
     
Notes to Consolidated Financial Statements (unaudited)   7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   22
     
Item 4. Controls and Procedures   22
     
PART II - OTHER INFORMATION    
     
Item 1. Legal Proceedings   23
     
Item 1A. Risk Factors   23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   23
     
Item 3. Defaults Upon Senior Securities   23
     
Item 4. Mine Safety Disclosures   23
     
Item 5. Other Information   23
     
Item 6. Exhibits   24
     
SIGNATURES   25

 

i

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

    February 28,
2021
    November 30,
2020
 
  (unaudited)          
ASSETS              
Current assets:                
Cash   $ 4,886,199     $ 4,387,929  
Accounts receivable - net of allowance for doubtful accounts of $144,818     5,737,882       6,455,263  
Inventory, net     3,385,108       3,410,534  
Prepaid expenses and income taxes     518,071       533,862  
Total current assets     14,527,260       14,787,588  
                 
Fixed assets – net of accumulated depreciation and amortization of $2,360,758 and $2,343,627     263,577       102,235  
Operating Lease Right of Use Asset     1,640,814       1,636,411  
Deferred income taxes     1,265,234       1,307,558  
Other assets     22,607       22,607  
                 
Total assets   $ 17,719,492     $ 17,856,399  

 

See notes to consolidated financial statements

 

1

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

(Continued)

 

    February 28,
2021
   

November 30,

2020

 
    (unaudited)        
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 3,534,964     $ 3,880,805  
Operating lease liabilities, current maturities     175,521       233,546  
Financing lease payable, current maturities     8,742       8,475  
Accrued expenses and taxes     623,543       565,922  
Accrued salaries     538,926       677,256  
Total current liabilities     4,881,696       5,366,004  
Operating lease liabilities net of current maturities     1,504,709       1,430,144  
Financing lease payable, net of current maturities     6,299       8,627  
Note payable to bank     449,700       449,700  
                 
Total liabilities     6,842,404       7,254,475  
                 
Commitments and contingencies                
                 
Shareholders’ equity:                
Preferred stock - $.001 par value, 5,000,000 shares authorized:                
Series C–100,000 shares authorized, 10,000 and 10,000 shares issued and outstanding, redeemable, convertible, and a liquidation preference of $5 per share     10       10  
Series D – 75,000 shares authorized, none issued or outstanding, voting, convertible, redeemable.                
Common stock - $.001 par value, 50,000,000 shares authorized, 5,473,556 and 5,437,526 shares issued and outstanding     5,473       5,437  
Additional paid-in capital     16,948,496       16,948,532  
Accumulated deficit     (6,076,891 )     (6,352,055 )
Total shareholders’ equity     10,877,088       10,601,924  
                 
Total liabilities and shareholders’ equity   $ 17,719,492     $ 17,856,399  

 

See notes to consolidated financial statements.

 

2

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended

 
    February 28,
2021
    February 29,
2020
 
Net sales   $ 8,156,302     $ 6,789,138  
Cost of goods sold     5,856,022       4,903,362  
Gross profit     2,300,280       1,885,776  
                 
Operating expenses:                
Selling and shipping expenses     681,132       656,838  
General and administrative expenses     1,245,981       1,189,240  
Depreciation and amortization     17,131       9,364  
Total operating expenses     1,944,244       1,855,442  
                 
Income before other income and income taxes     356,036       30,334  
                 
Other (expense) income:                
Interest expense     (383 )     (567 )
Other income     310       518  
                 
Other income (expense):     (73 )     (49 )
                 
Income before income taxes     355,963       30,285  
                 
Income taxes     78,299       294,087  
                 
Net income (loss)   $ 277,664     $ (263,802 )
Dividends on preferred stock     2,500       2,500  
                 
Net income (loss) available to common shareholders   $ 275,164     $ (266,302 )
                 
Net income (loss) per share available to common shareholders:                
Basic   $ .05     $ (.05 )
Diluted   $ .05     $ (.05 )
                 
Weighted Shares Outstanding:                
Basic     5,439,928       5,320,026  
Diluted     5,622,433       5,320,026  

 

See notes to consolidated financial statements.

 

3

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Changes in Shareholders’ Equity

Three months ended February 28, 2021 and February 29, 2020

 

                    Additional              
    Series C Preferred     Common     Paid-In     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Deficit     Total  
Balance – December 1, 2019     10,000     $ 10       5,320,026     $ 5,319     $ 16,666,465     $ (7,863,355 )   $ 8,808,439  
Preferred stock dividends     -       -       -       -       -       (2,500 )     (2,500 )
Issuance of shares as compensation     -       -       -       -       -       -       -  
Net Income     -       -       -       -       -       (263,802 )     (263,802 )
Balance – February 29, 2020     10,000     $ 10       5,320,026     $ 5,319     $ 16,666,465     $ (8,129,657 )   $ 8,542,137  

 

 

                    Additional              
    Series C Preferred     Common     Paid-In     Accumulated        
    Shares     Amount     Shares     Amount     Capital     Deficit     Total  
Balance – December 1, 2020     10,000     $ 10       5,437,526     $ 5,437     $ 16,948,532     $ (6,352,055 )   $ 10,601,924  
Preferred stock dividends     -       -       -       -       -       (2,500 )     (2,500 )
Issuance of shares as compensation     -       -       -       -       -       -       -  
Stock option exercise     -       -       36,030       36       (36 )     -       -  
Net Income     -       -       -       -       -       277,664       277,664  
Balance – February 28, 2021     10,000     $ 10       5,473,556     $ 5,473     $ 16,948,496     $ (6,076,891 )   $ 10,877,088  

 

See notes to consolidated financial statements.

 

4

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(Unaudited)

 

    Three Months Ended  
   

February 28,

2021

   

February 29,

2020

 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net Income (loss)   $ 277,664     $ (263,802 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Depreciation and amortization     17,131       9,364  
Depreciation of operating leases     14,717       -  
Deferred income taxes     42,324       241,576  
Allowance for doubtful accounts     -       -  
                 
CHANGES IN OPERATING ASSETS AND LIABILITIES:                
Accounts receivable     717,381       552,274  
Inventory     25,426       453,976  
Prepaid expenses and income taxes     15,791       144,394  
Other assets     (2,580 )     (2,580 )
Accounts payable     (345,841 )     (353,174 )
Accrued expenses     (83,209 )     (172,316 )
                 
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES     678,804       609,712  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Acquisition of fixed assets     (178,473 )     (15,343 )
                 
NET CASH FLOWS USED IN INVESTING ACTIVITIES   $ (178,473 )   $ (15,343 )

  

5

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(Continued)

 

    Three Months Ended  
   

February 28,

2021

   

February 29,

2020

 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Repayment of financing lease obligations   $ (2,061 )   $ (1,878 )
                 
NET CASH FLOWS USED IN FINANCING ACTIVITIES     (2,061 )     (1,878 )
                 
NET CHANGE IN CASH     498,270       592,491  
                 
CASH AT BEGINNING OF PERIOD     4,387,929       2,739,305  
                 
CASH AT END OF PERIOD   $ 4,886,199     $ 3,331,796  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
                 
Income taxes paid   $ 55,828     $ 47,355  
                 
Interest paid   $ 383     $ 567  
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:                
Accrued dividends on preferred stock   $ 2,500     $ 2,500  

 

See notes to consolidated financial statements.

 

6

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

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 10Q for interim financial reporting and the rules and regulations of the Securities and Exchange Commissions. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. The results and trends in these interim consolidated financial statements for the three months ended February 28, 2021 and February 29, 2020 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.

 

7

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(3) Revenue Recognition (continued):

 

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.

 

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 $618,000 and $274,000 for the three months ended February 28, 2021 and February 29, 2020 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 $43,588 and $76,675 for the three months ended February 28, 2021 and February 29, 2020 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 $1,933,000 and $1,357,000 for the three months ended February 28, 2021 and February 29, 2020 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 February 28, 2021 was $725,201. The Company, at February 28, 2021, has a reserve against slow moving and obsolete inventory of $252,565. 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.

 

(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 February 28, 2021 and November 30, 2020, the Company’s uninsured cash balances totaled $4,321,703 and $3,823,433, respectively.

 

8

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(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 I.

 

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, 2016, and state tax examinations for years before fiscal years ending November 30, 2015 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 three months ended February 28, 2021 and February 29, 2020.

 

(8) Cash Equivalents:

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

(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 $1,372 and $1,342 for the three months ended February 28, 2021 and February 29, 2020 respectively.

 

9

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(13) Earnings Per Share

 

Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. 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 February 28, 2021 and February 29, 2020 totaled 102,495 and 164,370, respectively.

 

(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.

 

10

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE C – FIXED ASSETS

 

Fixed assets consist of the following:

 

    February 28,     November 30,  
    2021     2020  
Furniture and Fixtures   $ 327,971     $ 327,971  
Leasehold Improvements     1,022,556       1,022,556  
Computer Equipment     1,273,808       1,095,335  
Less-Accumulated Depreciation     (2,360,758 )     (2,343,627 )
Net Fixed Assets   $ 263,577     $ 102,235  

 

Depreciation and amortization expense for the three months ended February 28, 2021 and February 29, 2020 was $17,131 and $9,364, 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 February 28, 2021 are as follows:

 

2021   $ 9,779  
2022   $ 6,521  
Total   $ 16,300  
Less: interest portion     1,259  
Present value of net minimum lease payments   $ 15,041  
Less: current portion     8,742  
Non-current portion   $ 6,299  

 

Financing lease obligations mature as follows:      
       
Three months ended February 28, 2021:      
       
2021   $ 8,742  
2022   $ 6,299  
Principal payments remaining   $ 15,041  

 

11

 

 

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 the assets of the Company. As of February 28, 2021, the balance on the Credit Line was $0. As of February 28, 2021, the Company was in compliance with the covenant for the debt service coverage ratio for 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 five years at an interest rate of 1%, with a deferral of payments for the first twelve months. During April 2021, the Company was notified that the full $449,700 of the PPP loans received by the Company have been forgiven by the SBA.

 

NOTE F – ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

    February 28,     November 30,  
    2021     2020  
Commissions   $ 238,061     $ 215,052  
Preferred stock dividends     154,069       151,569  
Other accrued expenses     231,413       199,301  
    $ 623,543     $ 565,922  

 

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 $1,776,000 at November 30, 2020. Pension expense for the three months ended February 28, 2021 and February 29, 2020 was $1,449 and $387, respectively.

 

12

 

 

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.

 

Dividends aggregating $154,069 have not been paid for the semi-annual periods ended December 31, 2001 through the semi-annual payment due December 31, 2020. The Company has accrued these dividends. At February 28, 2021, 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 February 28, 2021.

 

[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.

  

[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.

 

13

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE H – SHAREHOLDERS’ EQUITY (Continued)

 

[3] 2015 Incentive Stock Plan (continued)

 

Activity in the Company’s stock plans for the period ended February 28, 2021 is summarized as follows:

 

    Shares     Weighted
Average
Exercise
Price
 
Options outstanding December 1, 2020     255,000     $ 1.34  
Options issued in the three months ended February 28, 2021     -     $ -  
Options exercised in the three months ended February 28, 2021     (70,000 )   $ (1.15 )
Options cancelled in the three months ended February 28, 2021     -     $ -  
Options outstanding at February 28, 2021     185,000     $ 1.41  
Options exercisable at February 28, 2021     185,000     $ 1.41  

 

The intrinsic value of the exercisable options at February 28, 2021 totaled $355,200. At February 28, 2021 the weighted average remaining life of the stock options is 4.15 years. At February 28, 2021, 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).

 

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:

 

    February 28,     November 30,  
    2021     2020  
Deferred Tax Assets                
Net operating loss   $ 995,631     $ 1,066,794  
Allowance for bad debts     30,413       30,413  
Inventory     61,269       60,746  
Deferred rent     10,064       2,460  
Other     113,190       97,673  
Depreciation     54,667       63,632  
Total deferred tax assets     1,265,234       1,321,718  
Valuation allowance     -       (14,160 )
Deferred Tax Assets   $ 1,265,234     $ 1,307,558  

 

14

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE I – INCOME TAXES (Continued)

 

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 decreased by approximately $14,000 during three months ended February 28, 2021. 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.

 

The Company’s income tax expense consists of the following:

 

    Three Months Ended  
    February 28,
2021
    February 29,
2020
 
Current:            
Federal   $ -     $ -  
States     35,975       52,511  
      35,975       52,511  
                 
Deferred:                
Federal     42,324       190,845  
States     -       50,731  
      42,324       241,576  
Provision for income taxes   $ 78,299     $ 294,087  

 

The Company files a consolidated income tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of approximately $3,706,000 for federal and state purposes, which expire through 2025. 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:

 

    Three months ended  
    February 28,     February 29,  
    2021     2020  
U.S Federal Income tax statutory rate     21 %     21 %
Valuation allowance     (4 )%     945 %
State income taxes     5 %     5 %
Other     -       -  
Effective tax rate     22 %     971 %

 

15

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE J – OPERATING LEASE COMMITMENTS

 

The Company leases its office and warehouse space through 2030 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, 2020, and increase at the rate of two per cent per annum throughout the lease term.

 

The Company has a lease to rent office space and a warehouse in Hong Kong through June 2021. Annual minimum rental payments for this space are approximately $68,460.

 

The Company has a lease to rent warehouse space in Hong Kong through December 31, 2022. Annual minimum rental payments for this space are approximately $36,840.

 

The Company’s future minimum rental commitments at February 28, 2021 are as follows:

 

Twelve Months Ended February 28,

 

2022   $ 251,203  
2023     226,064  
2024     199,227  
2025     203,211  
2026     207,276  
2027 and after     1,003,787  
    $ 2,090,768  

 

Net rental expense for the three months ended February 28, 2021 and February 29, 2020 were $106,217 and $91,678 respectively, of which $67,650 and $66,719 respectively, was paid to the Related Company.

 

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 three customers who each accounted for 15% and 14% and 11% of net sales for the three months ended February 28, 2021 and three customer who accounted for 20% and 11% and 11% of net sales for three months ended February 29, 2020. The Company had two customers who accounted for 26% and 10% of accounts receivable February 28, 2021 and two customers who accounted for 20% and 11% of accounts receivable at February 29, 2020.

 

16

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE M – MAJOR SUPPLIERS

 

During the three months ended February 28, 2021 and February 29, 2020 there was one foreign supplier accounting for 34% and 39% of total inventory purchased.

 

The Company purchases substantially all of its products overseas. For the three months ended February 28, 2021, the Company purchased 44% of its products from Taiwan, 16% from Hong Kong, 35% 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:

 

    Three Months Ended  
    February 28,     February 29,  
    2021     2020  
Canada     954,765       636,417  
China     1,308,802       1,153,406  
Other Asian Countries     413,640       214,762  
South America     37,477       115,022  
Europe     431,570       283,762  

 

Revenues are attributed to countries based on location of customer.

 

NOTE P – SUBSEQUENT EVENTS

 

In early January 2020, an outbreak of a respiratory illness caused by the Coronovirus was identified in Wuhan, China. In response to the resulting pandemic, governments around the world took various preventative steps up to and including full or partial shutdowns. As a result of the drop in production in our suppliers and customers, the Company experienced order cancellations and order hold notices from customers. Although business has improved in the first quarter of 2021, the effects of the pandemic will have an ongoing impact on the Company’s business. 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.

 

17

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

This report contains forward-looking statements. All statements other than statements of historical facts contained herein, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Furthermore, we cannot at this time assess the affect that the global outbreak of the novel Coronavirus may have on the Company.

 

In some cases, forward-looking statements can be identified by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading “Risk Factors” in our most recent Annual Report on Form 10-K. Also, these forward-looking statements represent our estimates and assumptions only as of the date of the filing of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of the filing of this report.

 

Overview

 

The Company operates with two sales groups, Surge Components (“Surge”) and Challenge Electronics (“Challenge”). Surge is a supplier of electronic products and components. These products include capacitors, which are electrical energy storage devices, and discrete semiconductor components, such as rectifiers, transistors and diodes, which are single function low power semiconductor products that are packaged alone as compared to integrated circuits such as microprocessors. The products sold by Surge are typically utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, audio products, temperature control products, lighting products, energy related products, computer related products, various types of consumer products, garage door openers, household appliances, power supplies and security equipment. These products are sold to both original equipment manufacturers, commonly referred to as OEMs, who incorporate them into their products, and to distributors of the lines of products we sell, who resell these products within their customer base. These products are manufactured predominantly in Asia by approximately sixteen independent manufacturers. We act as the master distribution agent utilizing independent sales representative organizations in North America to sell and market the products for one such manufacturer pursuant to a written agreement. When we act as a sales agent, our supplier who sold the product to the customer that we introduced to our supplier pays us a commission. The amount of the commission is determined on a sale by sale basis depending on the profit margin of the product. Commission revenue totaled $43,588 and $76,675 for the three months ended February 28, 2021 and February 29, 2020 respectively.

 

Challenge is engaged in the sale of electronic components. In 1999, Challenge began as a division to sell audible components. We have been able to increase the types of products that we sell because some of our suppliers introduced new products, and we also located other products from new suppliers. Our core products include buzzers, speakers, microphones, resonators, alarms, chimes, filters, and discriminators. We now also work with our suppliers to have our suppliers customize many of the products we sell for many customers through the customers’ own designs and those that we work with our suppliers to have our suppliers redesign for them at our suppliers’ factories. We have an engineer on our staff who works with our suppliers on such redesigns and assists with the introduction of new product lines. We are continually looking to expand the line of products that we sell. We sell these products through independent representatives that earn a commission on the products we sell. We are also working with local, regional, and national distributors to sell these products to local accounts in every state.

 

The Company has a Hong Kong office to effectively handle the transfer business from United States customers purchasing and manufacturing in Asia after designing the products in the United States. This office has strengthened the Company’s global position, improving our capabilities and service to our customer base.

 

18

 

 

The world of business continues to change because of “disruptors,” which are significant changes in traditional business practices that did not previously exist. For example, customers continue to centralize purchasing from regional purchasing and are stretching their payment terms. These changes also include customers moving their manufacturing operations from North America to Asia, and the trend of globalization. Some of our customers have been involved in mergers and acquisitions, causing consolidation. This trend makes business more complicated and costly for the Company. The Company must have a presence in Asia to service and further develop the business. For these reasons, we established Surge Ltd., our Hong Kong subsidiary. Currency fluctuations may also have an effect on doing business outside of North America. Customers have moved to reduce their supply chain, which could adversely affect the Company. In some market segments, demand for electronic components have decreased, and in other segments, the demand is still strong. Some technologies have become obsolete, while customers develop new products using different kinds of components. Management expects 2021 to be a year of change, in regards to pandemic healing, challenge, in regards to maintaining consistent flow of products during shortages of certain products, and growth as we see our customers return to full production pace. These challenges could affect the Company in negative ways, possibly reducing sales and or profitability. In order for the Company to grow, we will depend on, among other things, the continued growth of the electronics and semiconductor industries, our ability to withstand intense price competition, our ability to obtain new customers, our ability to retain and attract sales and other key personnel in order to expand our marketing capabilities, our ability to secure adequate sources of products, which are in demand on commercially reasonable terms, our success in executing and managing growth, including monitoring an expanded level of operations and systems, controlling costs, the availability of adequate financing, the continued supply of products from our factories, and our ability to deal successfully, with new and future disruptors. The tariffs continue to impact the Company. At this time there is a shortage of electronics components which could impact the Company’s growth. Our lead times have stretched, but are still shorter than most of our competitors.

 

The Coronavirus is still impacting all of Asia, America and Europe and Surge Components. Some of our customers and suppliers who had shut down or slowed operations are back to normal but others are taking longer. We are hopeful that things will return to normal as soon as possible. We are doing everything we can to keep customers production running and to keep things as smooth and stable as possible. We do expect that this will continue to have a negative impact on our sales until all customers production is fully running. Some of our customers in China and elsewhere have reduced their future purchases from us and may continue to reduce, if they are not able to complete the manufacturing of their products due to the shortage of components from other suppliers. The Company has also experienced order cancellations and order hold notices from customers and we expect this could continue. The business with customers in different regions is impacted more or less based on the Covid status in that region. The duration of this crisis and its impact on both the Company’s customers and supply chain had a negative impact on the three months ended February 28, 2021 although revenue was greater than the same period last year. Although the coronavirus situation is still serious globally, the Company’s business has improved in the first quarter and our customers’ outlook for their business is stronger than it was previously. We cannot guaranty that the increase in subsequent quarters in 2021 will continue as the coronavirus conditions may change.

 

Critical Accounting Policies

 

Accounts Receivable

 

The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s estimates of recoverability of amounts due could be affected and the Company would adjust the allowance accordingly.

 

Revenue Recognition

 

Revenue is recognized 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. For direct shipments from our suppliers to our customer, revenue is recognized when product is shipped from the Company’s supplier. The Company acts as a sales agent for certain customers buying direct from one of its suppliers. The Company reports these commissions as revenues in the period earned.

 

The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.

 

19

 

 

Inventory Valuation

 

Inventories are recorded at the lower of cost or net realizable value. Write-downs of inventories to net realizable value are based on stock rotation, historical sales requirements and obsolescence as well as in the changes in the backlog. Reserves required for obsolescence were not material in any of the periods in the financial statements presented. If market conditions are less favorable than those projected by management, additional write-downs of inventories could be required. For example, each additional 1% of obsolete inventory would reduce operating income by approximately $36,000.

 

The Company does not have price protection agreements with any of its vendors and assumes the risk of changes in the prices of its products. The Company does not believe there to be a significant risk with regards to the lack of price protection agreements as many of its inventory items are purchased to fulfill purchase orders received.

 

Income Taxes

 

We have made a number of estimates and assumptions relating to the reporting of a deferred income tax asset to prepare our financial statements in accordance with generally accepted accounting principles. These estimates have a significant impact on our valuation allowance relating to deferred income taxes. Our estimates could materially impact the financial statements.

 

Results of Operations

 

Consolidated net sales for the three months ended February 28, 2021 increased by $1,367,164 or 20.1%, to $8,156,302 as compared to net sales of $6,789,138 for the three months ended February 29, 2020. We attribute the increase to an increase in business with new customers as well as an increase in business with existing customers. We can also attribute the increase to the impact of the coronavirus in Asia in the three months ended February 29, 2020. Net sales for the three months ended February 28, 2021 and February 29, 2020 reflect $256,837 and $383,368, respectively of tariff costs that the Company was able to pass on to its customers.

 

Our gross profit for the three months ended February 28, 2021 increased by $414,504 to $2,300,280, or 22%, as compared to $1,885,776 for the three months ended February 29, 2020. Gross margin as a percentage of net sales increased to 28.2% for the three months ended February 28, 2021 compared to 27.8% for the three months ended February 29, 2020. We attribute the increase to an increase in sales volume as well as sales of higher profit items in the three months ended February 28, 2021. Our industry will continue to receive pressure from customers for price reductions. Some of them further demand periodic price reductions on a quarterly or semi-annual basis, as opposed to annual fixed pricing. We work with electronic manufacturing service subcontractor customers who manufacture products for other customers who do not have their own manufacturing operations. At times we are not able to recover these price reductions from our suppliers. The Company has agreements with these subcontractor customers to provide periodic cost reductions through rebates in the amount of 5%. These reductions only affect future shipments of our products, and do not affect existing orders. These reductions can have a negative impact on our profit margins since they reduce the amount of commissions we can earn. Even though this rebate can impact the Company’s gross profit margin, these subcontractor customers represent very significant potential growth for the Company, because they can help the Company become an approved supplier at the customers they manufacture for, and they purchase our components for these customers. We believe it would be very difficult for the Company to achieve business at these customers without the help of these subcontractor customers. During the three months ended February 28, 2021, the Company was impacted by tariff costs on certain products imported from China, which went into effect as of July 6, 2018. The Company has been able to pass along a portion of these costs to its customers. The Company is also moving some customer deliveries directly to Hong Kong in order to mitigate some of these costs. In the first half of 2021, the Company expects the effects of the tariffs to be similar to 2020.

 

Selling and shipping expenses for the three months ended February 28, 2021 was $681,132, an increase of $24,294, or 3.7%, as compared to $656,838 for three months ended February 29, 2020. We attribute the increase to an increase in commissions and freight out expenses, offset by a decrease in travel and travel related costs.

 

20

 

 

General and administrative expenses for the three months ended February 28, 2021 was $1,245,981, an increase of $56,741, or 4.8%, as compared to $1,189,240 for the three months ended February 29, 2020. The increase is due primarily to increases in rent, utilities and general insurance expenses, computer expenses as well as consulting and settlement expenses, offset by decreases in salaries and related payroll taxes, health insurance expenses, temporary help expenses, professional fees and public company expenses,

 

Depreciation expense for the three months ended February 28, 2021 was $17,131, an increase of $7,767, or 82.9%, as compared to $9,364 for the three months ended February 29, 2020. The increase is due to the company purchasing new equipment during the three months ended February 28, 2020.

 

Tax expense for the three months ended February 28, 2021 was $78,299, a decrease of $215,788 as compared to a tax expense of $294,087 for the three months ended February 29, 2020. The changes result from our net income for such periods and management’s revised estimate of future taxable income and the related impact on the reported deferred tax. The change in the valuation allowance is based on management estimates of future taxable income. The degree of variability inherent in the estimates of future taxable income is significant and subject to change in the near term. The Company reviews its estimates of future taxable income in each reporting period and adjustments to the valuation allowance are reflected in the current operations.

 

As a result of the foregoing, net income for the three months ended February 28, 2021 was $277,664, compared to a net loss of $(263,802) for the three months ended February 29, 2020.

 

Liquidity and Capital Resources

 

As of February 28, 2021 we had cash of $4,886,199, and working capital of $9,645,564. We believe that our working capital levels are adequate to meet our operating requirements during the next twelve months. The Company is exploring and evaluating opportunities for growth and expansion using the Company’s cash resources.

 

During the three months ended February 28, 2021, we had net cash flow provided by operating activities of $678,804, as compared to net cash flow provided by operating activities of $609,712 for the three months ended February 28, 2020. The increase in cash flow from operating activities resulted from increases net income, depreciation expenses, accounts receivable and accrued expenses offset by decreases in prepaid expenses and inventory.

 

We had net cash flow used in investing activities of $(178,473) for the three months ended February 28, 2021, as compared to net cash flow used in investing activities of $(15,343) for the three months ended February 29, 2020. We attribute the change to the Company purchasing more new equipment during the three months ended February 28, 2021.

 

We had net cash flow used by financing activities of $(2,061) during the three months ended February 28, 2021 as compared to $(1,878) used in financing activities for three months ended February 29, 2020.

 

As a result of the foregoing, the Company had a net increase in cash of $498,270 for the three months ended February 28, 2021, as compared to a net increase in cash of $592,491 for the three months ended February 29, 2020.

 

The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of February 28, 2021:

 

Contractual Obligations         Payments due              
        0 – 12     13 – 36     37 – 60     More than  
  Total     Months     Months     Months     60 Months  
Capital Lease Obligations   $ 15,041     $ 8,742     $ 6,299     $ -     $ -  
Operating leases   $ 2,090,768       251,203       425,291       410,487       1,003,787  
Total obligations   $ 2,105,809     $ 259,945     $ 431,590     $ 410,487     $ 1,003,787  

 

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Inflation

 

In the past two fiscal years, inflation has not had a significant impact on our business. However, any significant increase in inflation and interest rates could have a significant effect on the economy in general and, thereby, could affect our future operating results.

 

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“Commission”). Ira Levy, the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of February 28, 2021 and has concluded that, as of such date, our disclosure controls and procedures were effective.

 

Changes in Internal Controls

 

During the three months ended February 28, 2021 there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

There are no legal proceedings to which the Company or any of its property is the subject.

 

ITEM 1A. RISK FACTORS.

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

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ITEM 6. EXHIBITS.

 

Exhibit Number   Description
4.1   Rights Agreement dated as of October 7, 2016 between Surge Components, Inc., as the Company, and Continental Stock Transfer & Trust Company, as Rights Agent, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on October 7, 2016.
     
4.2   Amendment to the Rights Agreement dated as of October 6, 2019 between Surge Components, Inc., as the Company, and Continental Stock Transfer & Trust Company, as Rights Agent filed with Form 10-Q on October 15, 2019.
     
31.1   Certification by principal executive officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification by principal executive officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
10.1   Rental Agreement between Great American Realty and Surge Components dated July 28, 2020 as filed with the Form 10Q on October 15, 2020.
     
10.2   Rental Agreement between Great American Realty and Challenge Electronics dated July 28, 2020 as filed with the Form 10Q on October 15, 2020.
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

24

 

 

SIGNATURES

 

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

 

  SURGE COMPONENTS, INC.
     
Date: April 14, 2021 By: /s/ Ira Levy
  Name: Ira Levy
  Title: Chief Executive Officer
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)

 

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