Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
PART
I
Item 1.
Business.
References
to “we,” “us,” “our”, “our company” and “the company” refer to Surge
Components, Inc. (“Surge” or the “Company”) and, unless the context indicates otherwise, includes Surge’s
wholly-owned subsidiaries, Challenge/Surge, Inc. (“Challenge”), and Surge Components, Limited (“Surge Limited”).
We
were incorporated under the laws of the State of New York on November 24, 1981, and re-incorporated in Nevada on August 26, 2010.
In February 2019, we converted into a Delaware corporation. We completed an initial public offering of our securities in 1984
and a second offering in August 1996. Our principal executive offices are located at 95 East Jefryn Boulevard, Deer Park, New
York 11729 and our telephone number is (631) 595-1818.
We
are a supplier of electronic products and components. These products include capacitors, which are electrical energy storage devices,
and discrete components, such as semiconductor 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 that we sell are
typically utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, telecomm, audio,
cellular telephones, computers, consumer electronics, garage door openers, household appliances, power supplies and security equipment.
The products that we sell 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.
Surge sells its products through three of the top four distributors for electronic components in the world and also supplies its
products to subcontractors who manufacture for their customers. These channels open doors to Surge at customers which Surge may
not have access to otherwise. The products that we sell are manufactured predominantly in Asia by approximately sixteen independent
manufacturers. We only have one binding long-term supply agreement with one of our manufacturers, Lelon Electronics. We have an
agreement to act as the exclusive sales agent utilizing independent sales representative organizations in North America to sell
and market the products for one of such manufacturers, Lelon Electronics. When we act as a sales agent, we receive a commission
from our supplier who sold the product to the customer that we introduced to our supplier. The amount of the commission is determined
on a sale by sale basis depending on the profit margin of the product. Commission revenue totaled $267,019 and $536,668 for the
fiscal years ended November 30, 2020 (“Fiscal 2020”) and November 30, 2019 (“Fiscal 2019”), 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.
In
order for us 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 clients, our ability to retain and attract sales
and other 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 managing growth, including monitoring an expanded level of operations.
Industry
Background
The
United States electronics distribution industry is composed of manufacturers, national and international distributors, as well
as regional and local distributors. Electronics distributors market numerous products, including active components (such as transistors,
microprocessors, integrated circuits and semiconductors), passive components (such as capacitors and audibles), and electro mechanical,
interconnect (such as connectors and wire) and computer products. Surge focuses its efforts on the sale of capacitors, discrete
components, and audible products.
The
electronics industry has been characterized by intense price cutting and rapid technological changes and development, which could
materially adversely affect our future operating results. In addition, the industry has been affected historically by periodic
economic downturns, which have had an adverse economic effect upon manufacturers and end-users of the products that we sell,
as well as distributors. Furthermore, the life-cycle of existing electronic products and the timing of new product development
and introduction can affect the demand for electronic components, including the products that we sell. Accordingly, any downturn
in the electronics industry in general could adversely affect our business and results of operations. Due to rising transportation
and employment costs in Asia, we have seen some U.S. manufacturers start moving their manufacturing facilities to Mexico to reduce
transportation costs and bring manufacturing much closer to home. At this time, however, none of our customers has moved its manufacturing
facilities to Mexico.
Products
Surge supplies a wide variety
of electronic components (some of which bear our private “Surge” label) which can be broadly divided into two categories—capacitors
and discrete components. For Fiscal 2020 and Fiscal 2019, capacitors accounted for approximately 30% and 31% of Surge’s sales,
respectively, of which approximately 75% for each year was Lelon capacitors (discussed below). Discrete components accounted for
Surge’s remaining sales in Fiscal 2020 and Fiscal 2019. Capacitors and discrete components can be categorized based on various
factors, including function, construction, fabrication and capacity.
We
sell, under the name of the manufacturer, Lelon Electronics, aluminum electrolytic capacitors, which are capacitors that store
and release energy into a circuit incrementally and are used in various applications, including but not limited to, computers,
appliances, automotive, lighting, telecommunications devices and various consumer products. Our sales of products under the Lelon
Electronics name accounted for approximately 26% of our total sales (and approximately 75% of our capacitor sales as noted above)
in Fiscal 2020.
The
principal products sold by Surge under the Surge name (except with respect to capacitors, which the Company also sells under the
Lelon Electronics name as noted above) or by Challenge are set forth below.
Capacitors
A
capacitor is an electrical energy storage device used in the electronics industry for varied applications, principally as elements
of resonant circuits, coupling and bypass applications, blockage of DC current, frequency determining and timing elements, filters
and delay-line components. All products are available in traditional leaded as well as surface mount (chip) packages. The product
line of capacitors we sell includes:
Aluminum
Electrolytic Capacitors- These capacitors, which are Surge’s principal product, are storage devices used in power applications
to store and release energy as the electronic circuitry demands. They are commonly used in power supplies and can be found in
a wide range of consumer electronics products. Our supplier has one of the largest facilities for these products in Taiwan and
China. These facilities are fully certified for the International Quality Standard ISO 9001 and QS9000, and TS16949, which means
that they meet the strictest requirements established by the automotive industry and adopted throughout the world to ensure that
the facility’s manufacturing processes, equipment and associated quality control systems will satisfy specific customer
requirements. This system is also intended and designed to facilitate clear and thorough record keeping of all quality control
and testing information and to ensure clear communication from one department to another about the information (i.e., quality
control, production or engineering). This certification permits us to monitor quality control/manufacturing process information
and to respond to any customer questions.
Ceramic
Capacitors- These capacitors are the least expensive, and are widely used in the electronics industry. They are commonly used
to bypass or filter semiconductors in resonant circuits and are found predominantly in a wide range of low cost products including
computer, telecom, appliances, games and toys.
Mylar
Film Capacitors- These capacitors are frequently used for noise suppression and filtering. They are commonly used in telecommunication
and computer products. Surge’s suppliers in China have facilities fully certified for all of the above mentioned quality
certifications.
Discrete
Components
Discrete
components, such as semiconductor rectifiers, transistors and diodes, are packaged individually to perform a single or limited
function, in contrast to integrated circuits, such as microprocessors and other “chips”, which contain from only a
few diodes to as many as several million diodes and other elements in a single package, and are usually designed to perform complex
tasks. Surge almost exclusively distributes discrete, low power semiconductor components rather than integrated circuits.
The
product line of discrete components we sell includes:
Rectifiers-
Low power semiconductor rectifiers are devices that convert alternating current, or AC power, into one directional current, or
DC power, by permitting current to flow in one direction only. They tend to be found in most electrical apparatuses, especially
those drawing power from an AC wall outlet. All products are available in traditional leaded as well as surface mount (chip) packages.
Surge’s rectifier suppliers all have the aforementioned certifications, giving us an opportunity to market the products
that we sell to the automotive industry.
Transistors-
These products send a signal to the circuit for transmission of waves. They are commonly used in applications involving the processing
or amplification of electric current and electric signals, including data, television, sound and power. All products are available
in traditional leaded as well as surface mount (chip) packages. Surge sells many types of ISO 9002 transistors, including power
transistors, designed for large currents to safely dissipate large amounts of power.
Diodes-
Diodes are two-lead or surface mount components that allow electric current to flow in only one direction. They are used in a
variety of electronic applications, including signal processing and direction of current. All products are available in traditional
leaded as well as surface mount (chip) packages. Diodes sold include:
Circuit
Protection Devices- Our circuit protection devices include transient voltage suppressors and metal oxide varistors, which protect
circuits against switching, lightening surges and other uncontrolled power surges and/or interruptions in circuits. Transient
voltage suppressors, which offer a higher level of protection for the circuit, are required in telecommunication products and
are typically higher priced products than the metal oxide varistors, which are more economically priced and are used in consumer
products. All products are available in traditional leaded as well as surface mount (chip) packages.
Audible
Components- These include audible transducers, Piezo buzzers, speakers, and microphones, which produce an audible sound for, and
are used in back-up power supplies for computers, alarms, appliances, smoke detectors, automobiles, telephones and other products
which produce sounds. Challenge has initiated marketing relationships with certain Asian manufacturers of audible components to
sell these products worldwide. All products are available in traditional leaded as well as surface mount (chip) packages.
New
Products- We periodically introduce new products, which are intended to complement our existing product lines. These products
are ones that are commonly used in the same circuit designs as other of the products that we sell and will further provide a one-
stop-shop for the customer. Some of these products are common items used in all applications and others are niche items with a
focus towards a particular application. These new products include fuses, printed circuit boards and switches. All products are
available in traditional leaded as well as surface mount (chip) versions. In 2019 we were issued a patent on a new pinpoint alarm
designed to improve an individual’s ability to determine the location of the alarm. The improved alarm can be used in a
wide variety of applications including reversing vehicles, medical emergency notification and hardware devices that use Bluetooth
or other wireless communication protocols in combination with mobile software applications to locate lost items.
Inventory
In
order to adequately service our customers’ needs, we believe that it is necessary to maintain large inventories, which makes
us more susceptible to price and technology changes. At any given time, we attempt to maintain a one-to-two month inventory on
certain products in high demand for customers and at least one month for other products. Our inventory currently contains more
than 100 million component units consisting of more than 3,000 different part numbers. The products that we sell range in sales
price from less than one cent for a commercial diode to more than $2.00 for high power capacitors and semiconductors. As of November
30, 2020, we maintained inventory valued at $3,410,534.
Because
of the experience of our management, including Ira Levy and Steven Lubman, we believe that we know the best prices to buy the
products we sell and as a result we generally waive rights to manufacturers’ inventory protection agreements (including
price protection and inventory return rights), and thereby bear the risk of increases in the prices charged by our manufacturers
and decreases in the prices of products held in our inventory or covered by purchase commitments. If prices of components, which
we hold in inventory decline, or if new technology is developed that displaces products that we sell, our business could be materially
adversely affected. The Company has experienced very little impact from customer design changes and slowdown but this can potentially
increase due to economic conditions and customer-specific business conditions. If our customers experience these changes, our
business could be adversely affected.
Product
Availability
Surge
and Challenge obtain a significant amount of their products from manufacturers in Asia. In Fiscal 2020 and Fiscal 2019, Challenge
purchased approximately 86% and 76%, respectively, of its products overseas as a result of Challenge’s introduction of new
product lines. Of the total goods purchased by Surge and Challenge in Fiscal 2020, those foreign manufactured products were supplied
from manufacturers in Taiwan (45%), Hong Kong (16%), elsewhere in Asia (34%) and overseas outside of Asia (less than 1%). The
Company purchases its products from approximately sixteen different manufacturers. The pandemic has had an effect on the Company
getting inventory from their suppliers. If this would continue, our business could be adversely affected
Most
of the facilities that manufacture products for Surge have obtained International Quality Standard ISO 9002 and other certifications.
We typically purchase the products that we sell in United States currency in order to minimize the risk of currency fluctuations.
In most cases, Surge utilizes two or more alternative sources of supply for each of its products with one primary and one complementary
supplier for each product. Surge’s relationships with many of its suppliers date back to the commencement of our import
operations in 1983. We have established payment terms with our manufacturers of between 30 and 60 day open account terms.
We
only have one agreement with a supplier, Lelon Electronics, which is terminable by either party upon six
months’ notice to the other party. We have an agreement to act as the sales agent in North America for one of our manufacturers,
Lelon Electronics. While we believe that we have established close working relationships with our principal manufacturers, our
success depends, in large part, on maintaining these relationships and developing new supplier relationships for our existing
and future product lines. Because of the lack of long- term contracts, we may not be able to maintain these relationships.
For
Fiscal 2020 and Fiscal 2019, one of Surge’s vendors, Lelon Electronics, accounted for approximately 39% and 38% of Surge’s
consolidated purchases. The loss of or a significant disruption in the relationship with Lelon Electronics, which is our major
supplier, could have a material adverse effect on our business and results of operations until a suitable replacement could be
obtained.
The
Company has a written agreement with Lelon Electronics regarding the supply of inventory for the Company’s customers. The
Company purchases products under both the Company’s name and Lelon’s brand name for the Company’s inventory
in order to supply the Company’s customers. For the majority of purchases from Lelon Electronics, the Company takes title
to the products, houses them in the Company’s warehouse and sells directly to the Company’s customers. There is no
right of return on the products purchased from Lelon and the Company accepts all credit risk with regards to sales of these products.
The
components business has, from time to time, experienced periods of shortages in product supply, usually as the result of demand
exceeding available supply. When these shortages occur, suppliers tend to either increase prices and or reduce the number of units
sold to given customers. Should there be shortages in the future, such shortages may benefit our business if we get preferential
supply from our manufacturers. It could also have an adverse effect upon our business, in the case that our manufacturers don’t
have enough capacity to provide enough components. Conversely, due to poor market demand, there could be an excess of components
in the market, causing stronger competition and an erosion of prices.
Marketing
and Sales
Surge’s
sales efforts are directed towards Original Equipment Manufacturer (OEM) customers in numerous industries where the products that
we sell have wide application. Surge currently employs thirteen sales and marketing personnel, not including two of its executive
officers, who are responsible for certain key customer relationships. In addition, Surge has expanded its sales team, hiring a Europe manager based in London.
We
use independent sales representatives or organizations, which often specialize in specific products and areas and have specific
knowledge of and contacts in particular markets. We currently have representation agreements with approximately 30 sales representative
organizations. Sales representative organizations, which are generally paid a 5% commission on net sales, are generally responsible
in their respective geographic markets for identifying customers and soliciting customer orders. Pursuant to arrangements with
our independent sales representatives, they are permitted to represent other electronics manufacturers, but are generally prohibited
from carrying a line of products competitive with the products that we sell. These arrangements can be terminated on written notice
by either party or if breached by either party. These organizations normally employ between one and twelve sales representatives.
The individual sales representatives employed by the sales organizations generally possess an expertise which enhances the scope
of our marketing and sales efforts. This permits us to avoid the significant costs associated with creating a direct marketing
network. We have had relationships with certain sales organizations since 1988 and continue to engage new sales organizations
as needed. We believe that additional sales organizations and representatives are available to us, if required.
We
have initiated a formal national distribution program to attract more distributors to promote the products that we sell. We expect
this market segment to contribute significantly to our sales growth over time.
Many
customers require their suppliers to have a local presence and Surge’s network of independent sales representatives are
responsive to these needs. Surge formed a Hong Kong corporation, Surge Components, Limited and hired a regional sales manager
to service the Hong Kong/Greater China region customers.
Other
marketing efforts include generation and distribution of catalogs and brochures of the products we sell and attendance at trade
shows. We have produced an exhibit for display at electronics trade shows throughout the year. The products that we sell have
been exhibited at the electronic distribution show in Las Vegas, and we intend to continue our commitment and focus on the distribution
segment of the industry by our visibility at the Electronic Distributor Trade Show. In addition, we have updated our website to
make it more informative and user friendly. Our search engines have been improved so that customers can find us more easily and
we have developed a new portal system to help with lead management and disbursement.
Customers
The
products that we sell are sold to distributors and OEMs in such diverse industries as the automotive, computer, communications,
cellular telephones, consumer electronics, garage door openers, security equipment, audio equipment, telecomm products, computer
related products, power supply products, utility meters and household appliances industries. We request our distributors to provide
point of sales reporting, which enables us to gain knowledge of the breakdown of industries into which the products that we sell
are sold. Two of our customers accounted for 17% and 15% of net sales for Fiscal 2020, and 14% and 12% of net sales for Fiscal
2019. Our discrete components are often sold to the same clients as our capacitors. These OEM customers typically accept samples
for evaluation and, if approved, we work towards procuring the next orders for these items.
Typically,
we do not maintain contracts with our customers and generally sell products pursuant to customer purchase orders. Although our
customer base has increased, the loss of our largest customers as well as, to a lesser extent, the loss of any other material
customer, could have a materially adverse effect on our operations during the short-term until we are able to generate replacement
business, although we may not be able to obtain such replacement business. Because of our contracts and good working relationships
with our distributors, we offer the OEMs, when purchasing through distributors, extended payment terms, just-in- time deliveries
and one-stop shopping for many types of electronic products.
Competition
We
conduct business in the highly competitive electronic components industry. We expect this industry to remain competitive. We face
intense competition in both our selling efforts and purchasing efforts from the many companies that manufacture or distribute
electronic components. Our principal competitors in the sale of capacitors include Nichicon, Panasonic, Illinois Capacitor, NIC,
AVX, Murata, Epcos, United Chemicon, Rubycon, Vishay and Kemet. Our principal competitors in the sale of discrete components include
Vishay, General Semiconductor Division, General Instrument Corp., OnSemi, Inc., Microsemi Corp., Diodes, Inc. and Littlefuse,
and Copper Bussman Division. Our principal competition in the audible business include AVX, Murata, Panasonic, Projects Unlimited,
International Components Corp. and Star Micronics. Many of these companies are well established with substantial expertise, and
have much greater assets and greater financial, marketing, personnel, and other resources than we do. Many larger competing suppliers
also carry product lines which we do not carry. Generally, large semiconductor manufacturers and distributors do not focus their
direct selling efforts on small to medium sized OEMs and distributors, which constitute many of our customers. As our customers
become larger, and as the market becomes more competitive, our competitors may find it beneficial to focus direct selling efforts
on those customers, which could result in our facing increased competition, the loss of customers or pressure on our profit margins.
We are finding increased competition from manufacturers located in Asia due to the increased globalization nature of the business.
There can be no assurance that we will be able to continue to compete effectively with existing or potential competitors. Other
factors that will affect our success in these markets include our continued ability to attract additional experienced marketing,
sales and management talent, and our ability to expand our support, training and field service capabilities. Additionally, since
the tsunami and earthquake in Japan in 2012, our competitors have established manufacturing facilities in China enabling them
to be more competitive by lowering their labor rates and manufacturing costs. Also, as the world continues to become global and
customers have easier access to suppliers in Asia, our business could be adversely affected since the internet enables customers
to meet and interact with suppliers through Google and other search engines which customers had not previously done.
Customer
Service
We
have customer service employees whose time is dedicated largely to responding to customer inquiries such as price quote requests,
delivery status of new or existing purchase orders, changes of existing order dates, quantities, dates, etc. We intend to increase
our customer service capabilities, as necessary.
Foreign
Trade Regulation
Most
products sold by Surge are manufactured in Asia, including such countries as Taiwan, South Korea, Hong Kong, India, Japan and
China. The purchase of goods manufactured in foreign countries is subject to a number of risks, including economic disruptions,
transportation delays and interruptions, foreign exchange rate fluctuations, impositions of tariffs and import and export controls,
and changes in governmental policies, any of which could have a material adverse effect on our business and results of operations.
Potential concerns may include drastic devaluation of currencies, loss of supplies and increased competition within the region.
From
time to time, protectionist pressures have influenced United States trade policy concerning the imposition of significant duties
or other trade restrictions upon foreign products. We cannot predict whether additional United States customs quotas, duties,
taxes or other charges or restrictions will be imposed upon the importation of foreign components in the future or what effect
such actions could have on our business, financial condition or results of operations.
Our
ability to remain competitive with respect to the pricing of imported components could be adversely affected by increases in tariffs
or duties, changes in trade treaties, strikes in air or sea transportation, and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. Our ability to remain competitive could also be affected
by other governmental actions related to, among other things, anti-dumping legislation and international currency fluctuations.
While we do not believe that any of these factors adversely impact our business at the present time, there can be no assurance
that these factors will not materially adversely affect us in the future. Since July 2018, when tariffs started to impact some
of the Company’s sales, the Company has been able to pass on the tariffs to its U.S. and Canadian customers. We have also
changed our shipping terms with our Mexico customers to Free Carrier, which means we deliver the goods to the customers’
Hong Kong freight forwarder, who then becomes responsible for the transportation and tariff costs. Any significant disruption
in the delivery of merchandise from our suppliers, substantially all of whom are foreign, could have a materially adverse impact
on our business and results of operations.
Government
Regulation
Various
laws and regulations relating to safe working conditions, including the Occupational Safety and Health Act, are applicable to
our company. We believe we are in substantial compliance with all material federal, state and local laws and regulations regarding
safe working conditions. We believe that the cost of compliance with such governmental regulations is not material.
We
are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging
in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions. If our employees or other agents are found to
have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect
on our business, financial condition and results of operations. To the Company’s knowledge, none of our employees or other
agents have engaged in such practices.
The
Company has been impacted by the tariffs in effect or being considered by the United States to impose on Chinese goods being imported
into the United States, which includes the Company’s products. The imposition of such tariffs will likely cause our costs,
as well as the prices we charge customers, to increase.
Environmental
and Regulatory Compliance
We
are subject to various environmental laws and regulations relating to the protection of the environment, including those governing
the handling and management of certain chemicals used in electronic components.
We
do not believe that compliance with these laws and regulations will have a material adverse effect on our capital expenditures,
earnings, or competitive position.
Patents,
Trademarks and Proprietary Information
In
September 2018, we were issued a U.S. patent application with the United States Patent and Trademark Office for an improved pinpoint
alarm designed to improve an individual’s ability to determine the location of an alarm versus standard single, multi-frequency,
or broadband alarms. The improved alarm can be used in a wide variety of applications, including reversing vehicles, medical emergency
notification, and hardware devices that use Bluetooth or other wireless communications protocols in combination with mobile software
applications to locate lost items, including phones, wallets, and keys. Our patent issued on December 31, 2019, as United States
Patent No. 10,522,008. With regard to our other products, although we have no knowledge that such products infringe patents
or trademarks, or violate proprietary rights of others, it is possible that alleged infringement of existing or future patents,
trademarks or proprietary rights of others may occur. In the event that the products that we sell are alleged to infringe proprietary
rights of others, these products may have to be modified or redesigned. However, there can be no assurance that any infringing
products will be able to be modified or redesigned in a way that does not infringe on the proprietary rights of others, which
could have a material adverse effect upon our operations. In addition, there can be no assurance that we will have the financial
or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. Moreover, if the
products we sell infringe patents, trademarks or proprietary rights of others, we could, under certain circumstances, become liable
for damages, which also could have a material adverse effect on our business.
With
respect to the other products that we sell, we have no patents, trademarks or copyrights registered in the United States Patent
and Trademark Office or in any state. Additionally, to the best of our knowledge the manufacturers of the products that we sell
do not have patents, trademarks or copyrights registered in the United States Patent and Trademark Officer or in any state. We
rely on the know-how, experience and capabilities of our management personnel.
Backlog
As
of November 30, 2020, our backlog was approximately $9,708,000, as compared with $8,055,000 at November 30, 2019. Substantially
all backlog is expected to be shipped by us within 180 days of year end. Year to year comparisons of backlog are not necessarily
indicative of future operating results.
Employees
As
of November 30, 2020, Surge and Challenge employed 38 persons, two of whom are employed in executive capacities, thirteen are
engaged in sales, three in engineering, two in purchasing, five in administrative capacities, seven in customer service,
two in accounting and four in warehousing. None of our employees are covered by a collective bargaining agreement, and we consider
our relationship with our employees to be good.
Competitive pay and benefits. The Company’s
compensation programs are designed to provide the proper incentives to attract, retain and motivate employees to achieve superior
results. We provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge
and geographic location. Annual increases and incentive compensation are based on merit, which is communicated to the employees
at the time of hiring. Employees are eligible for paid and unpaid leaves, a retirement plan, and disability/accident coverage.
Health and safety. The
health and safety of our employees is our highest priority. Our safety focus is also evident in our response to the COVID-19 pandemic.
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Adding work from home flexibility.
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Adjusting attendance policies to encourage
those who are sick to stay home.
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Increasing cleaning protocols across all
locations.
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Implementing temperature screenings of
employees.
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Establishing new physical distancing procedures
for employees who need to be onsite.
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Providing additional personal protective
equipment and cleaning supplies.
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Modifying work spaces with plexiglass
dividers.
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Requiring masks to be worn in all locations
where allowed by local law.
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Item 1A.
Risk Factors
An
investment in our common stock involves a high degree of risk. An investor should carefully consider the risks described below
as well as other information contained in this annual report on Form 10-K. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely affected, the value of our common stock could decline,
and an investor may lose all or part of his or her investment.
Risks
Related to our Business
We
have an agreement with only one of our suppliers and we depend on a limited number of suppliers
We
have an agreement with only one of our suppliers (Lelon Electronics), which agreement is terminable by either party upon notice
to the other party. Lelon Electronics accounted for approximately 39% and 38% of the Company’s consolidated purchases in
the years ending November 30, 2020 and November 30, 2019. We also act as the exclusive sales agent in North America for Lelon
Electronics. While we believe that we have established close working relationships with our principal suppliers, our success depends,
in large part, on maintaining these relationships and developing new supplier relationships for our existing and future product
lines. There is no assurance that we will be able to maintain these relationships. While we believe that there are alternative
semiconductor and capacitor suppliers whose replacement products may be acceptable to our customers, the loss of, or a significant
disruption in the relationship with, one or more of our major suppliers would likely have a material adverse effect on our business
and results of operations.
We
need to maintain large inventories in order to succeed and as a result, price fluctuations could harm us.
In
order to adequately service our customers, we believe that it is necessary to maintain a large inventory of products. Accordingly,
we attempt to maintain a one-to-two month inventory of those products which we supply to our customers. As a result of our strategic
inventory purchasing policies, under which we order products to obtain preferential pricing, we generally waive the right to manufacturers’
inventory protection agreements (including price protection and inventory return rights). As a result, we bear the risk of increases
in the prices charged by our manufacturers to the Company and decreases in the prices we are able to charge our customers. If
prices of components which we hold in inventory decline or if new technology is developed that displaces products which we sell,
our business could be materially adversely affected. Typically the Company has experienced very little impact from customer design
changes and slowdown but this can potentially increase due to economic conditions and specific customers business conditions.
If our customers experience these changes, our business could be adversely affected.
Our
operations would be adversely effected if we lose certain of our customers.
For
Fiscal 2020, approximately 17% and 15% of our net sales were derived from sales to two customers. Although our customer base
has increased, the loss of our largest customers as well as, to a lesser extent, the loss of any other material customer, would
be expected to have a materially adverse effect on our operations until we are able to generate replacement business, although
we may not be able to obtain such replacement business.
We
may not be able to compete against large competitors who have better resources.
We
face intense competition, in both our selling efforts and purchasing efforts, from the many companies that manufacture or distribute
electronic components and semiconductors. Our principal competitors in the sale of capacitors include Nichicon, Panasonic, Illinois
Capacitor, NIC, AVX, Murata, Epcos, United Chemicon, Rubycon, Vishay and Kemet, General Semiconductor Division, General Instrument
Corp., OnSemi, Inc., Microsemi Corp., Diodes, Inc. and Littlefuse, and Copper Bussman Division. Many of these companies are well
established with substantial expertise, and have much greater assets and greater financial, marketing, personnel, and other resources
than we do. Many larger competing suppliers also carry product lines which we do not carry. Generally, large semiconductor manufacturers
and distributors do not focus their direct selling efforts on small to medium sized OEMs and distributors, which constitute most
of our customers. As our customers become larger, however, our competitors may find it beneficial to focus direct selling efforts
on those customers, which could result in our facing increased competition, the loss of customers or pressure on our profit margins.
There can be no assurance that we will be able to continue to compete effectively with existing or potential competitors. The
Company periodically introduces new products including most recently, switches.
System
failure or cybersecurity breaches of our network security could subject us to increased operating costs, as well as litigation
and other potential losses.
The
computer systems and network infrastructure that we use could be vulnerable to unforeseen hardware and cybersecurity issues,
including “hacking” and “identity theft.” Our operations are dependent upon our ability to protect our
computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage
or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of
operations. In addition, our operations are dependent upon our ability to protect our computer systems and network infrastructure
against damage from physical break-ins, cybersecurity breaches and other disruptive problems caused by the Internet or other
users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through
our computer systems and network infrastructure, which may result in significant liability to us and damage our reputation.
Despite
efforts to ensure the integrity of our systems, we will not be able to anticipate all security breaches of these types, nor will
we be able to implement guaranteed preventive measures against such security breaches. Persistent attackers may succeed in penetrating
defenses given enough resources, time and motive. The techniques used by cyber criminals change frequently, may not be recognized
until launched and can originate from a wide variety of sources, including outside groups such as external service providers,
organized crime affiliates, terrorist organizations or hostile foreign governments.
A
successful attack to our system security could cause us serious negative consequences, including significant disruption of operations,
misappropriation of confidential information, or damage to our computers or systems or those of our customers. A successful security
breach could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidences
in our security measures, significant litigation exposure, and harm to our reputation, all of which could have a material adverse
effect on our business and results of operations.
Our
business will be adversely affected if there is a shortage of components.
The
components business has, from time to time, experienced periods of extreme shortages in product supply, generally as the result
of demand exceeding available supply. When these shortages occur, suppliers tend to either increase prices or reduce the number
of units sold to customers. We believe that because of our large inventory and our relationships with our manufacturers, we have
not been adversely affected by shortages in certain discrete semiconductor components. However, future shortages may have an adverse
effect upon our business especially if we were to reduce inventory to cut costs and reduce risks of obsolescence.
Our
success depends on key personnel whose continued service is not guaranteed.
Our
continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel,
particularly Ira Levy and Steven Lubman, our chief executive officer and vice president, respectively, who have extensive industry
knowledge and relationships and exercise substantial influence over our operations. The loss of services of one or both of these
individuals, or our inability to attract and retain highly qualified personnel, could adversely affect our business, and weaken
our relationships with suppliers, business partners, and industry personnel, which could adversely affect our financial condition,
results of operations, cash flow and trading price of our common stock.
Our
business is subject to risks from trade regulation and foreign economic conditions.
Approximately
96% of the total goods which we purchased in Fiscal 2020 were manufactured in foreign countries, with the majority purchased from
Taiwan (45%), Hong Kong (16%), elsewhere in Asia (34%) and outside of Asia (less than 1%). These purchases subject us to a number
of risks, including economic disruptions, transportation delays and interruptions, foreign exchange rate fluctuations, imposition
of tariffs and import and export controls and changes in governmental policies, any of which could have a materially adverse effect
on our business and results of operations. Potential concerns may include drastic devaluation of currencies, loss of supplies
and increased competition within the region.
The
ability to remain competitive with respect to the pricing of imported components could be adversely affected by increases in tariffs
or duties, changes in trade treaties, strikes in air or sea transportation, and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. For example, it is possible that political or economic
developments in China, or with respect to the United States’ relationship with China, could have an adverse effect on our
business. Our ability to remain competitive could also be affected by other governmental actions related to, among other things,
anti-dumping legislation and international currency fluctuations. While we do not believe that any of these factors have adversely
impacted our business in the past, there can be no assurance that these factors will not materially adversely affect us in the
future. Because the China internal consumption market is depressed, this will increase competition, as there is now a smaller
market potential target. Therefore, we believe certain of our competitors will reduce their pricing to capture more market share.
Electronics
industry cyclicality may adversely affect our operations.
The
electronics industry has been affected historically by general economic downturns, which have had an adverse economic effect upon
manufacturers and end-users of capacitors and semiconductors. In addition, the life-cycle of existing electronic products and
the timing of new product developments and introductions can affect demand for semiconductor components. Any downturns in the
electronics distribution industry could adversely affect our business and results of operations.
Epidemic
diseases, or the perception of their effects, could have a material adverse effect on our business, financial condition, results
of operations, or cash flows.
Outbreaks
of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus or, historically, the Ebola virus, Middle
East Respiratory Syndrome, Severe Acute Respiratory Syndrome, or the H1N1 virus, could cause disruptions in our business. These
disruptions could include disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary
closures of our facilities or the facilities of our suppliers and their contract manufacturers. Any disruption of our suppliers
and their contract manufacturers or our customers would likely impact our sales and operating results. In addition, order cancellations,
or order hold notices from customers could be experienced. A significant outbreak of epidemic, pandemic, or contagious diseases
in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets
of many countries, resulting in an economic downturn that could affect demand for our products. Any of these events could have
a material adverse effect on our business, financial condition, results of operations, or cash flows.
Most
of our products are not protected by patents, trademarks and proprietary information.
On
December 31, 2019, a U.S. patent which was issued by the United States Patent and Trademark Office for an improved pinpoint alarm
designed to improve an individual’s ability to determine the location of an alarm versus standard single, multi-frequency,
or broadband alarms, which can be used in a wide variety of applications, including reversing vehicles, medical emergency notification,
and hardware devices that use Bluetooth or other wireless communications protocols in combination with mobile software applications
to locate lost items, including phones, wallets, and keys. We have no other patents, trademarks or copyrights registered with
the United States Patent and Trademark Office.
Although
we have no knowledge that our products infringe patents or trademarks, or violate proprietary rights of others, it is possible
that alleged infringement of existing or future patents, trademarks or proprietary rights of others may occur. In the event
that the products that we sell are alleged to infringe proprietary rights of others, these products may have to be modified or
redesigned. However, there can be no assurance that any infringing products will be able to be modified or redesigned in a way
that does not infringe on the proprietary rights of others, which could have a material adverse effect upon our operations. In
addition, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent
infringement or proprietary rights violation action. Moreover, if the products we sell infringe patents, trademarks or proprietary
rights of others, we could, under certain circumstances, become liable for damages, which also could have a material adverse effect
on our business.
Additionally
to the best of our knowledge the manufacturers of the products that we sell do not have patents, trademarks or copyrights registered
in the United States Patent and Trademark Officer or in any state.
Risks
Related to our Common Stock
Our
common stock is quoted on the OTC Pink Market, which may limit the liquidity and price of our common stock more than if our common
stock were listed on the Nasdaq Stock Market or another national exchange.
Our
securities are currently quoted on the OTC Pink Market, an inter-dealer electronic quotation and trading system or equity
securities. Quotation of our securities on the OTC Pink Market may limit the liquidity and price of our securities more than if
our securities were listed on The Nasdaq Stock Market or another national exchange. Some investors may perceive our securities
to be less attractive because they are traded in the over-the-counter market. In addition, as an OTC quoted company, we do not
attract the extensive analyst coverage that accompanies companies listed on national exchanges. Further, institutional and other
investors may have investment guidelines that restrict or prohibit investing in securities traded on the OTC Pink Market. These
factors may have an adverse impact on the trading and price of our common stock.
The
market price of our common stock may fluctuate significantly in response to the following factors, most of which are beyond our
control:
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variations in our quarterly operating results;
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changes in general economic conditions;
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changes in market valuations of similar companies;
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announcements by
us or our competitors of significant new contracts, acquisitions, strategic partnerships or joint ventures, or capital commitments;
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loss of a major supplier or customer; and
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the addition or loss of key managerial and collaborative
personnel.
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Any
such fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As
a result, stockholders may be unable to sell their shares, or may be forced to sell them at a loss.
The
application of the “penny stock” rules could adversely affect the market price of our common stock and increase an
investor’s transaction costs to sell those shares.
Rule
3a51-1 of the Exchange Act defines “penny stock,” in part, as any equity security that has a market price of less
than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving
a penny stock, unless exempt, Rule 15g-9 of the Exchange Act requires that a broker or dealer:
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approve a person’s account for transactions
in penny stocks; and
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receive from the
investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment
experience and objectives of the person; and
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make a reasonable
determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which:
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sets forth the basis on which the broker or
dealer made the suitability determination; and
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that the broker or dealer received a signed,
written agreement from the investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Anti-takeover
provisions in our organizational documents and the shareholder rights plan that we have adopted may discourage or prevent a change
of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent
attempts by our stockholders to replace or remove our current management.
Our
certificate of incorporation and bylaws currently contain provisions that could delay or prevent a change of control of our company
or changes in our Board of Directors that our stockholders might consider favorable. Some of these provisions:
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authorize the issuance
of preferred stock which can be created and issued by the Board of Directors without prior stockholder approval, with rights
senior to those of our common stock;
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prohibit our stockholders
from calling special stockholder meetings or taking action by written consent; and
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require advance
written notice of stockholder proposals and director nominations.
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We
have also adopted a shareholder rights plan that could make it more difficult for a third party to acquire, or could discourage
a third party from acquiring, us or a large block of our common stock. A third party that acquires 5% or more of our common stock
could suffer substantial dilution of its ownership interest under the terms of the shareholder rights plan through the issuance
of our shares to all stockholders other than the acquiring person. These and other provisions in our certificate of incorporation
and bylaws could make it more difficult for stockholders or potential acquirers to obtain control of our Board of Directors or
initiate actions that are opposed by our then-current Board of Directors, including a merger, tender offer, or proxy contest involving
our company. Any delay or prevention of a change of control transaction or changes in our Board of Directors could cause the market
price of our common stock to decline.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties.
Our
executive offices and warehouse facilities are located at 95 East Jefryn Boulevard, Deer Park, New York, 11729. We lease our facilities
from Great American Realty of Jefryn Blvd., LLC (“Great American”), an entity that is 50% owned by Ira Levy, Surge’s
president and Steven Lubman, Surge’s vice president. Our lease is through September 30, 2030 and our monthly rent for
the year ended November 30, 2020 is $15,826. We occupy approximately 23,250 square feet of office space and warehouse space.
The rental rate is typical for the type and location of Surge’s and Challenge’s facilities.
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 additional warehouse space in Hong Kong through December 31, 2022. Annual minimum rental payments
for this space are approximately $36,840.
Item
3. Legal Proceedings.
None.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART
III
Item
10. Directors, Executive Officers, and Corporate Governance.
Our
board of directors was classified into three classes, with the term of office of one class expiring each year. In 2021, each director
will be elected for a term of one year to end at the next annual meeting of shareholders.
Our
executive officers and directors, and their ages, positions and offices with us are as follows:
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Name
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Age
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Position
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Ira Levy
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64
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Chief Executive
Officer, Chief Financial Officer, President and Director
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Steven J. Lubman
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65
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Vice President,
Secretary, Treasurer and Director
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Alan Plafker* (2)(3)
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62
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Director
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Martin Novick* (2)(3)
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84
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Director
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Lawrence
Chariton* (2)(3)
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63
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Director
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Gary Jacobs* (1)(2)(3)
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63
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Director
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Peter Levy* (1)(2)(3)
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60
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Director
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(1)
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Member
of Compensation Committee.
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(2)
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Member
of Audit Committee
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(3)
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Member
of Nominating and Corporate Governance Committee
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Directors
Ira
Levy has served as our President, Chief Executive Officer and director since our inception in November 1981, and
as our Chief Financial Officer since March 2010. From 1976 to 1981, Mr. Levy was employed by Capar Components Corp., an importer
and supplier of capacitor and resistor products. Mr. Levy has served on the board of trustees of the Bellmore Jewish Center since
2002 and served as its president from 2006 to 2008. From 2000 to 2004, he served as a member of the board of trustees of METNY,
the governing body of the Conservative movement of Judaism for New York, New Jersey, and Connecticut. Mr. Levy studied Business
Management at Hofstra University. Mr. Levy’s experience in, and knowledge of, the electronics components business led to
the conclusion that he should serve on our board.
Steven
J. Lubman has served as our Vice President, Secretary and a director since our inception in November 1981. In June
1988, Mr. Lubman founded Challenge Electronics, a division of the Company. From 1980 through 1981, he served as the sales manager
for NIC Components Corp., a division of Nu Horizons Electronics Corp., a distributor of electronic components which was acquired
by Arrow Electronics, Inc. (NYSE: ARW) in January 2011. From 1976 through 1980, Mr. Lubman served as both an inside and then outside
salesperson for Capar Components Corp., a division of Diplomat Electronics Inc., a broad line distributor of electronic components
including integrated circuits, diodes, transistors, and capacitor products. Mr. Lubman’s more than 35 years of experience
in, and knowledge of the electronics components business, led to the conclusion that he should serve on our board.
Alan
Plafker has served as a director since June 2001. Since November 2016, he has served as Vice President of Garber
Atlas Fries & Associates, Inc., an insurance agency providing commercial and personal insurance coverage. From July 2000 to
November 2016, Mr. Plafker served as President and Chief Executive Officer of Member Brokerage Service LLC, a credit union service
organization owned by Melrose Credit Union, and also served as director of business services for the credit union. From January
1993 to July 2000, he served as a member of the credit union’s board of directors and supervisory committee. Mr. Plafker
has more than 35 years of executive and management experience in the insurance and credit union industries. He is a New York State
licensed insurance agent and broker. Mr. Plafker has earned certification as a Certified Professional Insurance Agent from the
AIMS Society and earned the CIC designation from the Society of Certified Insurance Counselors. He has also earned the CUBLP (Credit
Union Business Lending Professional) designation from the CUNA Business Lending Certification Institute. In addition, he is a
past President and currently serves on the Board of Directors of the Professional Insurance Agents Association of New York State,
and currently serves as Treasurer and as a member of the Board of Directors for the New York Independent Livery Drivers Benefit
Fund, a New York State benefit fund providing injury benefits for livery drivers, to comply with the Workers’ Compensation
Board regulations. Mr. Plafker received a Bachelor’s degree in business administration from Adelphi University. Mr. Plafker’s
experience in the insurance industry and knowledge of financial matters led to the conclusion that he should serve on our board.
Martin
Novick is a real estate investor and was appointed to the Board in September 2016. He served as a vice president
of Audiovox Electronic Corp., an international distributor and value-added service provider in the accessory, mobile and consumer
electronics industries, from 1969 to 2008. He previously served on the board of directors of Audiovox Electronic Corp., Nu Horizons
Electronics Corp., a distributor of electronic components which was acquired by Arrow Electronics, Inc. (NYSE: ARW) in January
2011 and Arielle Electronics, a company that sold bluetooth and wireless products. Mr. Novick holds a Bachelor’s Degree
in Marketing from New York University. Mr. Novick’s significant experience in the electronics industry and as a director
of a public company led to the conclusion that he should serve on our board.
Lawrence
Chariton has served as a director since 2001. Since May 2008, he has served as a consultant to Great American Jewelry,
a retail jewelry firm. He served for 32 years as Chief Operating Officer of Linda Shop Jewelry, a retail jewelry firm. Since February
2018, Mr. Chariton has served as a member of the Board of Trustees of the State University of Old Westbury in New York. Mr. Chariton
previously served as a member of the Board of Directors of New Island Hospital in Bethpage New York and subsequently served as
a member of the Board of Directors of St. Joseph’s Hospital from February 2007 to December 2010. Mr. Chariton served on
the Board of Directors of Jewish National Fund of Long Island. Mr. Chariton has a Bachelor’s degree in Accounting from Hofstra
University and is a graduate of the Gemological Institute of America in Diamond Grading and Color Essentials. Mr. Chariton’s
experience running a small business led to the conclusion that he should serve on our board.
Gary
M. Jacobs has served as a director since July 2003. Since October 2014, Mr. Jacobs has served as President of Bar
Bakers, LLC, a commercial food manufacturer of nutritional bars, cookies and other baked goods. From March 2011 to October 2014,
he served as a consultant to several companies, providing advisory services in the areas of turn-around and financial and operational
efficiencies. Mr. Jacobs served as the Chief Financial Officer of Chem Rx from June 2008 until March 2011. From May 2005 to June
2008, Mr. Jacobs was the Chief Financial Officer and Chief Operating Officer of Gold Force International, Ltd., a supplier of
gold, silver and pearl jewelry to U.S. retail chains, and Karat Platinum LLC, a developer of an alternative to platinum. From
July 2003 to April 2005, Mr. Jacobs served as President of The Innovative Companies, LLC, a supplier of natural stone. From October
2001 to February 2003, Mr. Jacobs served as Executive Vice President of Operations and Corporate Secretary of The Hain Celestial
Group, Inc., a food and personal care products company. Mr. Jacobs also served as Executive Vice President of Finance, Chief Financial
Officer and Treasurer of The Hain Celestial Group, Inc. from September 1998 to October 2001. Prior to that, Mr. Jacobs was the
Chief Financial Officer of Graham Field Health Products, Inc., a manufacturing and distribution company. Mr. Jacobs served for
13 years as a member of the audit staff of Ernst & Young LLP, where he attained the position of senior manager. He is a certified
public accountant and holds a Bachelor’s of Business Administration in Accounting from Adelphi University. Mr. Jacobs’s
experience as a certified public accountant and as a chief financial officer led to the conclusion that he should serve on our
board.
Peter
A. Levy has been a director of the Company since April 2017. He is an equity shareholder at the law firm of Mandelbaum
Salsburg, one of the region’s oldest and most renowned law firms. He joined Mandelbaum as a member in September of 2015.
In addition to practicing law for 15 years, Mr. Levy spent 12 years as a partner at a regional accounting firm, Sobel & Company,
and has served as the chief operating officer of two different public companies, The Empire Sports & Entertainment and MYOS
Corporation. As the president of MYOS Corporation, he successfully positioned the company on the NASDAQ stock exchange. Mr.
Levy has significant experience in mergers and acquisitions, joint venture partnering, corporate governance, business processes,
and strategic planning. Community service is an important aspect of Mr. Levy’s life. For over 20 years he has been
on the Board and also served as the Corporate Liaison to Easter Seals – Camp ASCCA, America’s flagship camp for
People with Disabilities, and he is the co-builder of the Roswal-Levy Tower, the world’s largest wheelchair-accessible interactive
climbing tower for the disabled. For over a decade, Mr. Levy has been on the Board of Hamp’s Camp, a charity
founded by former N.Y. Giants running back Rodney Hampton, which is dedicated to providing leadership tools to underprivileged
children in Atlanta, Newark, and Houston. Mr. Levy’s financial experience led to the conclusion that he should serve on
our board. Mr.Levy is not related to the Company’s CEO Mr. Ira Levy.
The
Board has determined that each of Messrs. Chariton, Jacobs, Plafker, Novick and Peter Levy qualify as “independent”
under the Nasdaq Stock Market Rules as well as Rule 10A-3 promulgated under the Exchange Act.
Board
and Committee Meetings
During
the fiscal year ended November 30, 2020, the Board held 5 meetings. Each of the directors attended at least 75% of the aggregate
of (i) the total number of meetings of the Board (held during the period for which he served as a director), and (ii) the total
number of meetings held by all committees of the Board on which he served (during the periods that he served on such committees).
We have no written policy regarding director attendance at annual meetings of stockholders. Our last annual meeting of stockholders
was held on November 23, 2020 and all of our directors attended such meeting.
Board
Committees
The
composition and responsibilities of each of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance
Committee are described below. Members will serve on these committees until their resignation or until otherwise determined by
the Board. Each committee operates under a charter that has been approved by the Board, and which is available on our website
at http://www.surgecomponents.com/relations.asp.
Audit
Committee
Our
Audit Committee is comprised of Messrs. Chariton, Plafker, Novick, Jacobs and Peter Levy, each of whom is an independent director
of the Board. Mr. Jacobs serves as chairman of the Audit Committee. Our Board has determined that Mr. Jacobs is an “audit
committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. The audit committee members are “independent”
as that term is defined under the Nasdaq Stock Market Rules. During the fiscal year ended November 30, 2020, the Audit Committee
held four meetings.
The
Audit Committee is authorized to:
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approve and retain the independent auditors
to conduct the annual audit of our books and records;
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review the proposed scope and results of the
audit;
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review and pre-approve the independent auditor’s
audit and non-audit services rendered;
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approve the audit fees to be paid;
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review accounting and financial controls with
the independent auditors and our financial and accounting staff;
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review and approve transactions between us and
our directors, officers and affiliates;
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recognize and prevent prohibited non-audit services;
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establish procedures for complaints received
by us regarding accounting matters;
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oversee internal
audit functions; and
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prepare the report
of the Audit Committee that SEC rules require to be included in our annual meeting proxy statement.
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Compensation
Committee
Our
Compensation Committee is comprised of Peter Levy and Gary Jacobs, each of whom is an independent director. Mr. Levy serves as
chairman of the Compensation Committee. During the fiscal year ended November 30, 2020, the Compensation Committee held two meetings.
The
Compensation Committee is authorized to:
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review and
recommend the compensation arrangements for management, including the compensation for our chief executive officer;
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establish and review
general compensation policies with the objective of attracting and retaining superior talent, rewarding individual performance
and achieving our financial goals;
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administer our stock
incentive plans; and
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prepare
the report of the Compensation Committee that SEC rules require to be included in our annual meeting proxy statement.
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Nominating
and Corporate Governance Committee
Our
Nominating and Corporate Governance Committee is comprised of Messrs. Chariton, Plafker Novick, Peter Levy and Jacobs, each of
whom is an independent director. Mr. Jacobs serves as chairman of the Nominating and Corporate Governance Committee. The Nominating
and Corporate Governance Committee held one meeting during the fiscal year ended November 30, 2020.
The
Nominating and Corporate Governance Committee is authorized to:
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identify
and nominate members of the board of directors;
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oversee the evaluation
of the board of directors and management;
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develop and recommend
corporate governance guidelines to the board of directors;
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evaluate the performance
of the members of the board of directors; and
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make recommendations
to the board of directors as to the structure, composition and functioning of the board of directors and its committees.
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Director
Nominations
In
evaluating and determining whether to nominate a candidate for a position on the Board, the Nominating and Corporate Governance
Committee utilizes a variety of methods and considers criteria such as high professional ethics and values, experience on the
policy-making level in business or experience relevant to our product candidates and a commitment to enhancing stockholder value.
Candidates may be brought to the attention of the Nominating and Corporate Governance Committee by current Board members, stockholders,
officers or other persons. The Nominating and Corporate Governance Committee will review all candidates in the same manner regardless
of the source of the recommendation.
We
have no formal policy regarding board diversity. Our Nominating and Corporate Governance Committee and Board may therefore consider
a broad range of factors relating to the qualifications and background of nominees, which may include diversity, which is not
only limited to race, gender or national origin. Our Nominating and Corporate Governance Committee’s and Board’s priority
in selecting board members is identification of persons who will further the interests of our stockholders through his or her
established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board
members and professional and personal experiences and expertise relevant to our growth strategy.
The
Nominating and Corporate Governance Committee also considers stockholder recommendations for director nominees that are properly
received in accordance with our Bylaws and applicable rules and regulations of the SEC. In order to validly nominate a candidate
for election or reelection as a director, stockholders must give timely notice of such nomination in writing to our Corporate
Secretary and include, as to each person whom the stockholder proposes to nominate, all information relating to such person that
is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required,
in each case pursuant to Regulation 14A under the Exchange Act, and the rules and regulations thereunder (including such person’s
written consent to being named in the proxy statement as a nominee and to serving as a director if elected). For more information
on director candidate nominations by stockholders, see “Procedures for Nominating Directors”.
Procedures
for Nominating Directors
Effective
February 5, 2019, the Company began to be governed by newly adopted bylaws (the “Bylaws”).The Bylaws provide, among
other things, for advance notice of director nominations.
The
exclusive means by which a stockholder may nominate a director is as follows: (i) in the case of the nomination of a director
for election at an annual meeting, by delivery of a notice to the secretary of the Company not less than sixty days nor more than
ninety days prior to the anniversary of the date on which the Corporation first mailed its proxy materials for the previous year’s
annual meeting of stockholders (or within a reasonable time before the date on which the Company mails its proxy materials for
the current year if during the prior year the Company did not hold an annual meeting); or (ii) in the case of the nomination of
a director for election at a special meeting, by delivery of a notice to the secretary not less than sixty days nor more than
ninety days prior to such special meeting, in either case setting forth: (a) the name, age, business address and the primary legal
residence address of each nominee proposed in such notice, (b) the principal occupation or employment of such nominee, (c) the
number of shares of capital stock of the Company which are owned directly or indirectly of record and directly or indirectly beneficially
owned by the nominee and each of its affiliates, (d) any material agreements, understandings or relationships, including financial
transactions and compensation, between the nominating stockholder and the proposed nominees and (d) such other information concerning
each such nominee as would be required, under the rules of the SEC, in a proxy statement soliciting proxies in a contested election
of such nominees. Such notice shall include a signed consent of each such nominee to serve as a director of the Company, if elected.
In addition, any stockholder nominee, to be validly nominated, is required to submit to the secretary the questionnaire required
pursuant to the Bylaws. A stockholder intending to nominate one or more candidates for election as directors must comply with
the advance notice bylaw provisions specifically applicable to the nomination of candidates for election as directors for such
nomination to be properly brought before the meeting.
To
be eligible to be a director nominee nominated by a stockholder or stockholders for election or reelection as a director of the
Company, a nominee must deliver (in accordance with the time periods prescribed for delivery of notice under Section 2.6.2 of
the Bylaws) to the secretary a written questionnaire (the “Questionnaire”) with respect to the background, qualification
and experience of such person and the background of any other person or entity on whose behalf the nomination is being made and
a written representation and agreement that such person: (a) will abide by the requirements of the Bylaws and the Company’s
certificate of incorporation as in effect at the time of their nomination and as validly amended, (b) is not and will not become
a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person
or entity as to how such person, if elected as a director of the Company, will act or vote on any issue or question (a “Voting
Commitment”) that has not been disclosed to the Company or (2) any Voting Commitment that could limit or interfere with
such person’s ability to comply, if elected as a director of the Company, with such person’s fiduciary duties under
applicable law, (c) is not and will not become a party to any agreement, arrangement or understanding with any person or entity
other than the Company with respect to any direct or indirect compensation, reimbursement or indemnification in connection with
service or action as a director that has not been disclosed therein, and (d) in such person’s individual capacity and on
behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director
of the Company, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality
and stock ownership and trading policies and guidelines of the Company. If, prior to the meeting, there is a change or inaccuracy
in any information set forth on the Questionnaire, then the director candidate must promptly notify the secretary by submitting
in writing a revised Questionnaire. If a nominee fails to provide such Questionnaire, revised Questionnaire or representation
and agreement in accordance with the above, the information may be deemed by the Board of Directors in its discretion not to have
been provided in accordance with the Bylaws and such nominee may be disqualified as a director nominee by the Board of Directors
in its discretion.
In
addition to all other requirements set forth in the Bylaws, a nominating stockholder (including its affiliates) and each director
nominee must also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder
with respect to the matters set forth in the Bylaws.
Board
Leadership Structure and Role in Risk Oversight
Although
we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined,
we have traditionally determined that it is in our best interests and in the best interests of our stockholders to combine these
roles. Mr. Levy has served as our Chairman since November 1981. Due to our small size, we believe it is currently most effective
to have the Chairman and Chief Executive Officer positions combined.
Our
board of directors is primarily responsible for overseeing our risk management processes. The Board receives and reviews periodic
reports from management, auditors, legal counsel, and others, as considered appropriate regarding our assessment of risks. The
Board focuses on the most significant risks facing us and our general risk management strategy, and also ensures that risks undertaken
by management are consistent with the board’s appetite for risk. While the Board oversees our risk management, management
is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach
for addressing the risks facing us and that our board leadership structure supports this approach.
Code
of Ethics
We
have adopted a code of ethics that applies to our officers, directors and employees. A copy of the code of ethics is accessible
on our website at http://www.surgecomponents.com/relations.asp. Additional copies of the code of ethics may be obtained
without charge, from us by writing or calling: 95 East Jefryn Blvd., Deer Park, New York 11729, Attention: Corporate Secretary,
Telephone: (631) 595-1818.
Stockholder
Communications with the Board
Stockholders
who wish to do so may communicate directly with the Board or specified individual directors by writing to:
Board
of Directors (or name of individual director)
c/o
Corporate Secretary
Surge
Components, Inc.
95
East Jefryn Blvd.
Deer
Park, New York 11729
The
Board of Directors maintains a process for stockholders or other interested parties to communicate with the Board or any Board
member. Stockholders or interested parties who desire to communicate with the Board should send any communication to the Company’s
Corporate Secretary, Surge Components, Inc., 95 East Jefryn Blvd., Deer Park, New York 11729. We will forward all communications
from security holders and interested parties to the full Board, to non-management directors, to an individual director or to the
chairperson of the Board committee that is most closely related to the subject matter of the communication, except for the following
types of communications: (i) communications that advocate that we engage in illegal activity; (ii) communications that, under
community standards, contain offensive or abusive content; (iii) communications that have no relevance to our business or operations;
and (iv) mass mailings, solicitations and advertisements. The Corporate Secretary will determine when a communication is not to
be forwarded. Our acceptance and forwarding of communications to directors does not imply that directors owe or assume any fiduciary
duties to persons submitting the communications.
Additionally,
the Audit Committee has established procedures for the receipt, retention and confidential treatment of complaints received by
Surge regarding accounting, internal accounting controls or auditing matters, including procedures for confidential, anonymous
submissions by employees with respect to such matters. Employees and stockholders may raise a question or concern to the Audit
Committee regarding accounting, internal accounting controls or auditing matters by writing to:
Chairman,
Audit Committee
c/o
Corporate Secretary
Surge
Components, Inc.
95
East Jefryn Blvd.
Deer
Park, New York 11729
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires that our officers and directors, and persons who own more than ten percent
of a registered class of our equity securities, file reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and persons owning more than ten percent of such securities are required by Commission regulation
to file with the Commission and furnish the Company with copies of all reports required under Section 16(a) of the Exchange Act.
To our knowledge, based solely upon our review of the copies of such reports furnished to us, during the fiscal year ended November
30, 2020, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were
complied with.
Item
11. Executive Compensation.
Summary
Compensation Table
The
following table sets forth information regarding compensation paid to our executive officers for the years ended November 30,
2020 and November 30, 2019:
|
Name and Position
|
|
Fiscal
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock Awards
($)
|
|
|
Option Awards
($)
|
|
|
All Other Compensation
($)(1)
|
|
|
Total
($)
|
|
|
Ira Levy
|
|
2020
|
|
|
|
275,000
|
|
|
|
137,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,803
|
|
|
|
465,303
|
|
|
President CEO and CFO
|
|
2019
|
|
|
|
275,000
|
|
|
|
136,224
|
|
|
|
41,250
|
|
|
|
-
|
|
|
|
55,950
|
|
|
|
508,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven J. Lubman
|
|
2020
|
|
|
|
225,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,685
|
|
|
|
373,685
|
|
|
Vice President and Secretary
|
|
2019
|
|
|
|
225,000
|
|
|
|
100,312
|
|
|
|
25,312
|
|
|
|
-
|
|
|
|
48,622
|
|
|
|
399,246
|
|
|
|
(1)
|
Amounts
in this column include payments for medical insurance, automobile allowance and life and personal insurance. With respect
to Fiscal 2020, the amounts were comprised of the following items:
|
|
|
|
Medical Insurance
|
|
|
Automobile Allowances
|
|
|
Life and Personal Insurance
|
|
|
Ira Levy
|
|
$
|
29,550
|
|
|
$
|
16,909
|
|
|
$
|
6,344
|
|
|
Steven J. Lubman
|
|
$
|
29,550
|
|
|
$
|
11,400
|
|
|
$
|
7,735
|
|
2020
Base Salary and Bonus
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. 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.
The
bonus granted to the named executive officers for 2019 was based on certain performance goals that were set prior to the year
by the Compensation Committee and the executive, but ultimately the bonus is discretionary, as the Compensation Committee has
the authority to make all final decisions regarding the amount and form of bonuses provided to the executive officers. For Mr.
Levy, his target bonus amount is equal to fifty percent (50%) of his base salary, and Mr. Lubman’s target is equal to forty-five
percent (45%) of his base salary.
In
2019 the Compensation Committee used four performance markers to guide their decisions regarding bonus amounts. The performance
guidelines that were applicable to Messrs. Levy and Lubman’s bonuses for the 2019 year included individual performance goals,
revenue growth, achieving the operating plan goals for specific divisions of the company, and achieving the operating plan for
the company as a whole. Each performance guideline was generally intended to make up twenty-five percent of the potential bonus
amount for each executive. Based upon the Company’s and the executives’ performance during the 2019 year, the Compensation
Committee granted awards that were approximately one hundred percent (100%) of the executives’ target award amount.
2020
Equity Compensation Awards
We
have historically granted fully vested stock awards and stock option awards. The amount of awards granted in any given year is
determined based on the performance of the company and the executive in the previous year. Performance is generally based upon
the same performance guidelines that are used for the annual cash bonus award for that year. The Compensation Committee sets a
target award amount based upon a percentage of the executive’s base salary. At the end of the year, the Compensation Committee
determines the cash amount that resulted from the previous year’s performance, with any discretionary adjustments that the
Compensation Committee deems to be appropriate, and converts that cash amount into a number of shares of stock awards or stock
option awards, as applicable.
During
the 2019 year, the Compensation Committee set a target amount of twenty percent (20%) of base salary for Mr. Levy and a target
of fifteen percent (15%) of base salary for Mr. Lubman. Following the end of the 2019 year, the Compensation Committee determined
that Messrs. Levy and Lubman should receive equity awards equal in value to one hundred percent (100%) of their target award amount.
The Compensation Committee used the Company’s stock price of $1.50 on April 23, 2020 to convert the resulting cash award
into 27,500 stock awards for Mr. Levy, The equity awards, if any, that will be granted to the named executive officers with respect
to 2020 year performance will not be granted until the 2021 year, therefore they will be included in the compensation disclosures
that we file for the 2021 year.
Employment
Agreements
In
February 2016, the Company entered into revised employment agreements (the “Levy Agreement” and the “Lubman
Agreement”, individually, and collectively, the “Employment Agreements”) with Ira Levy and Steven Lubman, respectively,
which provides the executives with a base salary of $275,000 and $225,000, respectively (“Base Salary”). The executives
shall receive an annual bonus as shall be determined by the Board or the Compensation Committee, as applicable, in its sole discretion,
based upon criteria to be established in its sole discretion. The executives shall also be entitled to receive additional cash,
equity or other compensation or benefits in consideration for their services to the Company, at such times and in such amounts
as shall be determined in the sole discretion of the Board or the Compensation Committee. In addition, the executives shall be
entitled to receive grants of stock options, stock and/or any other equity incentive awards available to senior executives, under
the Company’s equity incentive plans, at such times and in such amounts as shall be determined in the sole discretion of
the Board or the Compensation Committee.
The
Employment Agreements will remain in effect until terminated by either the Company or the executive. In the event an executive’s
employment is terminated by the Company for Cause (as defined in the Employment Agreements), or if an executive resigns other
than for Good Reason (as defined in the Employment Agreements), he shall be entitled to receive (i) any earned but unpaid salary,
all vested equity, and any earned but unpaid bonus awards through the date of termination, and (ii) reimbursement for any unreimbursed
business expenses incurred by him in accordance with the Company’s policy prior to the date of termination.
In
the event an executive’s employment is terminated by the Company other than for Cause or if an executive resigns for Good
Reason, including a Change of Control (as defined in the Employment Agreements) that is accompanied by the executive’s resignation
within a twelve month period following that Change of Control, such executive shall be entitled to any earned but unpaid salary,
all vested equity, and any earned but unpaid bonus awards through the date of termination. Such executive will also be paid 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.
The Company shall also (i) accelerate the vesting on any of the executive’s unvested stock options, restricted stock grants
or other equity incentive awards; and (ii) reimburse the executive for any unreimbursed business expenses incurred by him in accordance
with the Company’s policy prior to the date of termination. In the event that the executive is terminated without Cause
due to our inability to pay our debts when they generally become due, we will not be liable for the cash severance payments or
the payment of annual bonuses due to the executive. The severance benefits potentially payable upon a termination other than for
Cause or for Good Reason will be provided subject to the executive signing a general release of claims in our favor prior to payment.
In
the event an executive’s employment is terminated by the Company upon death or disability, the executive or his estate shall
be entitled to receive his salary then in effect along with all other fringe benefits (including, without limitation, family medical
benefits) for a period of one year following the date of such termination. In addition, the executive or his estate shall have
the right to exercise any unexercised and vested options for a period of ninety days following the date of termination and to
receive payment for any accrued but unpaid vacation time.
The
Employment Agreements contain customary non-competition and non-solicitation provisions that extend to one year after the date
of termination of the executives’ employment with the Company. The executives also agreed to customary terms regarding confidentiality
and ownership of product ideas.
Outstanding
Equity Awards at November 30, 2020
|
Name
|
|
Number of securities underlying options, Unexercisable
(#)
|
|
|
Number of Securities Underlying Unexercised
Options, Exercisable
(#)
|
|
|
Option
Exercise Price
($)
|
|
|
Option
Expiration
Date
|
|
|
Ira Levy
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
1.41
|
|
|
04/23/2025
|
|
|
Steven Lubman
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
1.41
|
|
|
04/23/2025
|
|
Director
Compensation for Year Ending November 30, 2020
The
following table summarizes the compensation for our non-employee board of directors for the fiscal year ended November 30, 2020.
All compensation paid to our employee directors is included under the summary compensation table above. With respect to the 2020
fiscal year, the director compensation program consisted of a monthly cash fee of $2,500 per month, with the amount increased
to $3,500 per month for a non-employee director that serves as the chairman of more than two committees on the Board of Directors.
The non-employee directors are also eligible to receive equity awards, although there is no annual target amount set for the non-employee
directors.
|
Name
|
|
Fees Earned or Paid in Cash
($)
|
|
|
Option
Awards
($)(1)
|
|
|
Total
($)
|
|
|
Alan Plafker
|
|
|
30,000
|
|
|
|
21,150
|
|
|
|
51,150
|
|
|
Martin Novick
|
|
|
30,000
|
|
|
|
21,150
|
|
|
|
51,150
|
|
|
Lawrence Chariton
|
|
|
30,000
|
|
|
|
21,150
|
|
|
|
51,150
|
|
|
Gary Jacobs
|
|
|
63,150
|
(2)
|
|
|
35,250
|
|
|
|
77,250
|
|
|
Peter Levy
|
|
|
30,000
|
|
|
|
21,150
|
|
|
|
51,150
|
|
|
|
(1)
|
Amounts
in this column reflect the grant date value of the option awards granted to each of the directors in accordance with Topic 718,
disregarding any estimates of forfeitures. Further details of the methods and assumptions used for purposes of valuing these awards
are included in Note H of the Notes to Consolidated Financial Statements in this Annual Report. As of November 30, 2020, Mr.Chariton,
Mr. Plafker, Mr. Novick and Mr. Levy held 15,000 shares of unexercised but vested stock option awards, and Mr. Jacobs held 25,000
shares of unexercised but vested stock option awards.
|
|
|
(2)
|
Amount reflects 15,000 shares at $1.41 awarded in April
2020.
|
Item
12. Security Ownership of Certain Beneficial Owners and Management.
Under
Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the
voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain
shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right
to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided.
In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of these acquisition rights.
The
following table sets forth as of February 21, 2021, information regarding the beneficial ownership of our common stock by: (i)
each person known by the Company to be the beneficial owner of than five percent of the outstanding shares of common stock, (ii)
each of our directors and officers and (iii) all officers and directors, as a group:
|
Name
and address of Beneficial Owner(1)
|
|
Amount and Nature of Common Stock Beneficially
Owned
|
|
|
Percentage of Common Stock Beneficially Owned(2)
|
|
|
Ira Levy
|
|
|
1,277,054
|
(3)
|
|
|
23.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Steven J. Lubman
|
|
|
1,038,060
|
(3)
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence Chariton
|
|
|
172,573
|
(5)
|
|
|
3.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Alan Plafker
|
|
|
42,085
|
(5)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin Novick
|
|
|
15,000
|
(5)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Jacobs
|
|
|
152,000
|
(4)
|
|
|
2.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Peter Levy
|
|
|
15,000
|
(5)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (7 persons)
|
|
|
2,692,884
|
|
|
|
49.5
|
%
|
|
|
(1)
|
Except
as otherwise indicated, the address of each beneficial owner is c/o Surge Components, Inc., 95 East Jefryn Boulevard, Deer Park,
NY 11729.
|
|
|
(2)
|
Applicable
percentage ownership is based on 5,437,526 shares of common stock outstanding as of October 15, 2020.
|
|
|
(3)
|
Includes
50,000 shares issuable upon exercise of options with an exercise price of $1.41, which are exercisable within 60 days.
|
|
|
(4)
|
Includes
25,000 shares issuable upon exercise of options with an exercise price of $1.41, which are exercisable within 60 days
|
|
|
(5)
|
Includes
15,000 shares issuable upon exercise of options with an exercise price of $1.41, which are exercisable within 60 days.
|
Item
13. Certain Relationships And Related Transactions, and Director Independence.
Certain
Relationships and Related Transactions
Surge
and Challenge each lease their current executive offices from Great American Realty of Jefryn Blvd., LLC, an entity owned 50%
by Ira Levy, our Chief Executive Officer, and President and Steven Lubman, our Vice President, Secretary and Treasurer. Our
lease is through September 2030 and our annual rent payments were approximately $267,495 and $264,137 for Fiscal 2020 and Fiscal
2019, respectively.
Item
14. Principal Accounting Fees And Services
Fees
Billed by Our Independent Registered Public Accounting Firm During Fiscal 2019and 2020
The
following table sets forth the aggregate fees billed to us for the fiscal years ended November 30, 2019 and 2020 by Seligson &
Giannattasio, LLP:
|
|
|
2019
|
|
|
2020
|
|
|
Audit Fees(1)
|
|
$
|
163,500
|
|
|
$
|
163,500
|
|
|
Tax Fees(2)
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
|
|
(1)
|
Audit
Fees represent the aggregate fees for professional services for the audit of our annual financial statements and review of financial
statements included in our quarterly reports on Form 10-Q or services that are normally provided in connection with statutory
and regulatory filings or engagements for those fiscal years.
|
|
|
(2)
|
Tax
fees represent the aggregate fees billed for tax compliance, tax advice, and tax planning.
|
Audit
Committee Pre-Approval Policies and Procedures
Pursuant
to its charter, the Audit Committee is responsible for the pre-approval of all audit and permissible non-audit services provided
by our principal independent accountants on a case-by-case basis. Our Audit Committee has established a policy regarding approval
of all audit and permissible non-audit services provided by our principal independent accountants. Our Audit Committee pre-approves
these services by category and service. Our Audit Committee has preapproved all of the services provided by our principal independent
accountants in the fiscal year ending November 30, 2020.
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.
(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.
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 $3,223,000
and $2,974,000 for the years ended November 30, 2020 and November 30, 2019 respectively.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
(3) Revenue Recognition (continued):
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 $267,019 and $536,668 for the years ended November 30, 2020 and November 30, 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 $6,627,000 and $5,451,000 for the years ended November 30, 2020
and November 30, 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 November 30, 2020 was $1,026,608. The Company, at November 30, 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.
(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 November 30, 2020 and November 30, 2019, the Company’s
uninsured cash balances totaled $3,823,433 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 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.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(7) Income Taxes: (continued):
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 years ended November 30, 2020 and November 30, 2019.
(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 $3,462 and $5,371 for the years ended November 30, 2020 and November
30, 2019 respectively.
(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 November 30, 2020 and November 30, 2019 totaled 197,529 and 69,886, 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:
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Furniture and Fixtures
|
|
$
|
327,971
|
|
|
$
|
327,971
|
|
|
Leasehold Improvements
|
|
|
1,022,556
|
|
|
|
1,022,556
|
|
|
Computer Equipment
|
|
|
1,095,335
|
|
|
|
1,075,949
|
|
|
Less-Accumulated Depreciation
|
|
|
(2,343,627
|
)
|
|
|
(2,305,724
|
)
|
|
Net Fixed Assets
|
|
$
|
102,235
|
|
|
$
|
120,752
|
|
Depreciation and amortization expense for
the years ended November 30, 2020 and November 30, 2019 was $37,903 and $39,097, 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 November 30, 2020 are as follows:
|
2021
|
|
$
|
9,779
|
|
|
2022
|
|
$
|
9,779
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,558
|
|
|
Less: interest portion
|
|
|
2,456
|
|
|
Present value of net minimum lease payments
|
|
$
|
17,102
|
|
|
Less: current portion
|
|
|
8,475
|
|
|
Non-current portion
|
|
$
|
8,627
|
|
|
Financing lease obligations mature as follows:
|
|
|
|
|
|
|
|
|
|
Twelve months ended November 30, 2020:
|
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
8,475
|
|
|
2022
|
|
$
|
8,627
|
|
|
|
|
|
|
|
|
Principal payments remaining
|
|
$
|
17,102
|
|
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 November
30, 2020, the balance on the Credit Line was $0. As of November 30, 2020, 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. The Company is currently
in the process of applying for forgiveness but can not be assured of forgiveness for all or part of the PPP borrowings.
NOTE F – ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Commissions
|
|
$
|
215,052
|
|
|
$
|
233,784
|
|
|
Preferred stock dividends
|
|
|
151,569
|
|
|
|
146,569
|
|
|
Other accrued expenses
|
|
|
199,301
|
|
|
|
200,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
565,922
|
|
|
$
|
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 $1,776,000 at November 30, 2020. Pension expense for the years
ended November 30, 2020 and November 30, 2019 was $2,995 and $2,527, 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. In April 2001, 8,000 shares of the Series C Preferred were repurchased and cancelled.
In April 2002, in connection with a Mutual
Release, Settlement, Standstill and Non-Disparagement Agreement among other provisions, certain investors transferred back to the
Company 252,000 shares of common stock, 19,300 shares of Series C preferred stock, and certain warrants, in exchange for $225,000.
These repurchased shares were cancelled.
In February 2006, the Company settled with
a shareholder to repurchase 10,000 shares of Series C Preferred plus accrued dividends for $50,000.
Pursuant to exchange agreements dated as
of March 14, 2011, 9,000 shares of Series C Preferred were returned to the Company for cancellation in exchange for 112,500 shares
of common stock.
In October 2014, 2,000 shares of Series
C Preferred were converted into 20,000 shares of common stock.
In April 2015, the Company entered into
a settlement agreement with a shareholder pursuant to which 7,500 shares of Series C Preferred were returned to the Company for
cancellation in exchange for 110,000 shares of common stock plus $65,000 for accrued dividends and legal fees and expenses.
In July 2015, 4,200 shares of Series C
Preferred were exchanged for 42,000 shares of common stock and $29,838 in accrued dividends.
Dividends aggregating $151,569 have not
been paid for the semi-annual periods ended December 31, 2001 through the semi-annual payment due June 30, 2019. The Company has
accrued these dividends. At November 30, 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 November 30, 2020.
[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.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE H – SHAREHOLDERS’
EQUITY (Continued)
[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.
Activity in the Company’s stock plans for the year ended
November 30, 2020 is summarized as follows:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options outstanding November 30, 2019
|
|
|
147,000
|
|
|
$
|
1.01
|
|
|
Options issued in the year ended November 30, 2020
|
|
|
185,000
|
|
|
$
|
1.41
|
|
|
Options exercised in the year ended November 30, 2020
|
|
|
(75,000
|
)
|
|
$
|
(0.87
|
)
|
|
Options cancelled in the year ended November 30, 2020
|
|
|
(2,000
|
)
|
|
$
|
(1.15
|
)
|
|
Options outstanding at November 30, 2020
|
|
|
255,000
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at November 30, 2020
|
|
|
255,000
|
|
|
$
|
1.34
|
|
The intrinsic value of the exercisable
options at November 30, 2020 totaled $227,300. At November 30, 2020 the weighted average remaining life of the stock options is
3.26 years. At November 30, 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:
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
1,066,794
|
|
|
$
|
1,524,286
|
|
|
Allowance for bad debts
|
|
|
30,413
|
|
|
|
27,121
|
|
|
Inventory
|
|
|
60,746
|
|
|
|
60,746
|
|
|
Deferred rent
|
|
|
2,460
|
|
|
|
3,282
|
|
|
Other
|
|
|
97,673
|
|
|
|
62,071
|
|
|
Depreciation
|
|
|
63,632
|
|
|
|
65,402
|
|
|
Total deferred tax assets
|
|
|
1,321,718
|
|
|
|
1,742,908
|
|
|
Valuation allowance
|
|
|
(14,160
|
)
|
|
|
(557,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
$
|
1,307,558
|
|
|
$
|
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 decreased by approximately
$543,000 during the year ended November 30, 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.
The Company’s income tax expense
consists of the following:
|
|
|
Years Ended
|
|
|
|
|
November 30,
2020
|
|
|
November 30,
2019
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
States
|
|
|
110,100
|
|
|
|
107,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,100
|
|
|
|
107,083
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(87,149
|
)
|
|
|
(125,932
|
)
|
|
States
|
|
|
(34,669
|
)
|
|
|
(77,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121,818
|
)
|
|
|
(203,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(11,718
|
)
|
|
$
|
(96,033
|
)
|
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE I – INCOME TAXES (Continued)
The Company files a consolidated income
tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of approximately $4,161,000 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:
|
|
|
Years ended
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
U.S Federal Income tax statutory rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
Valuation allowance
|
|
|
(27
|
)%
|
|
|
(31
|
)%
|
|
State income taxes
|
|
|
5
|
%
|
|
|
5
|
%
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
Effective tax rate
|
|
|
(1
|
)%
|
|
|
(5
|
)%
|
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.
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.
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 November 30, 2020 are as follows:
Twelve Months Ended November 30,
|
2021
|
|
$
|
233,546
|
|
|
2022
|
|
|
194,352
|
|
|
2023
|
|
|
196,239
|
|
|
2024
|
|
|
202,204
|
|
|
2025
|
|
|
205,227
|
|
|
2021
|
|
|
1,108,281
|
|
|
|
|
|
|
|
|
|
|
$
|
2,139,849
|
|
Net rental expense for the years ended
November 30, 2020 and November 30, 2019 were $390,285 and $354,424 respectively, of which $267,495 and $264,137 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 17% and 15% of net sales for year ended November 30, 2020 and two customers who accounted for 14% and 12% of net
sales for the year ended November 30, 2019. The Company had one customer who accounted for 28% of accounts receivable at November
30, 2020 and one customer who accounted for 18% of accounts receivable at November 30, 2019.
NOTE M – MAJOR SUPPLIERS
During the years ended November 30, 2020
and November 30, 2019 there was one foreign supplier accounting for 39% and 38% of total inventory purchased.
The Company purchases substantially all
of its products overseas. For the year ended November 30, 2020, the Company purchased 45% of its products from Taiwan, 16%
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:
|
|
|
Year Ended
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Canada
|
|
|
4,214,031
|
|
|
|
4,233,319
|
|
|
China
|
|
|
5,778,321
|
|
|
|
5,828,541
|
|
|
Other Asian Countries
|
|
|
1,989,028
|
|
|
|
2,109,843
|
|
|
South America
|
|
|
180,474
|
|
|
|
527,183
|
|
|
Europe
|
|
|
1,207,560
|
|
|
|
1,390,715
|
|
Revenues are attributed to countries based
on location of customer.
SURGE
COMPONENTS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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, especially in
the second and third fiscal quarters of 2020. Although business has improved in the fourth quarter of 2020, 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 reasonable estimated at this time.