UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from _______ to _______
Commission File No.
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
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| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Securities registered pursuant to Section 12(b) of the Act: None
The registrant’s common stock outstanding
as of April 11, 2024, was
SURGE COMPONENTS, INC
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
| February 29, 2024 | November 30, 2023 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Marketable securities | ||||||||
| Accounts receivable - net of allowance for doubtful accounts of $ | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and income taxes | ||||||||
| Total current assets | ||||||||
| Fixed assets – net of accumulated depreciation and amortization of $ | ||||||||
| Operating lease right of use asset | ||||||||
| Deferred income taxes | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
1
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
| February 29, 2024 | November 30, 2023 | |||||||
| (unaudited) | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Operating lease liabilities, current maturities | ||||||||
| Accrued expenses and taxes | ||||||||
| Accrued salaries | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities net of current maturities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock - $ | ||||||||
| Series C– | ||||||||
| Series D – | ||||||||
| Common stock - $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income – unrealized gain on marketable debt securities | ||||||||
| Accumulated equity | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
2
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | ||||||||
| February 29, 2024 | February 28, 2023 | |||||||
| Net sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling and shipping expenses | ||||||||
| General and administrative expenses | ||||||||
| Depreciation and amortization | ||||||||
| Total operating expenses | ||||||||
| (Loss) income before other income and income taxes | ( | ) | ||||||
| Other income (expense): | ||||||||
| Interest expense | ||||||||
| Interest and dividend income | ||||||||
| Other income (expense): | ||||||||
| (Loss) income before income taxes | ( | ) | ||||||
| Income taxes | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Dividends on preferred stock | ||||||||
| Net (loss) income available to common shareholders | $ | ( | ) | $ | ||||
| Net (loss) income per share available to common shareholders: | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | ( | ) | $ | ||||
| Weighted Shares Outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See notes to consolidated financial statements.
3
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
| Three Months Ended | ||||||||
| February 29, 2024 | February 28, 2023 | |||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Other comprehensive income: | ||||||||
| Unrealized gain on marketable debt securities,net of tax | ||||||||
| Net comprehensive (loss) income | $ | ( | ) | $ | ||||
See notes to Consolidated financial statements
4
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity-unaudited
Three months ended February 28, 2023 and February 29, 2024
| Series C Preferred | Common | Additional Paid-In | Other Comprehensive | Accumulated Equity | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income | (Deficit) | Total | |||||||||||||||||||||||||
| Balance – December 1, 2022 | $ | | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||
| Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Issuance of shares as compensation | - | - | ||||||||||||||||||||||||||||||
| Stock option exercise | - | - | ||||||||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||||||
| Balance – February 28, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Series C Preferred | Common | Additional Paid -In | Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income | Equity | Total | |||||||||||||||||||||||||
| Balance – December 1, 2023 | $ | | $ | $ | $ | | $ | $ | ||||||||||||||||||||||||
| Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Issuance of shares as compensation | - | - | ||||||||||||||||||||||||||||||
| Change in unrealized gain on marketable securities | ||||||||||||||||||||||||||||||||
| Stock option exercise | - | - | ||||||||||||||||||||||||||||||
| Net Loss (income) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance – February 29, 2024 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
See notes to consolidated financial statements.
5
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended | ||||||||
| February 29, 2024 | February 28, 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) Income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Allowance for doubtful accounts | ||||||||
| Stock Compensation Expense | ||||||||
| CHANGES IN OPERATING ASSETS AND LIABILITIES: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and income taxes | ||||||||
| Other assets | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ( | ) | ||||
| NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Acquisition of fixed assets | $ | $ | ( | ) | ||||
| Proceeds from marketable securities | ||||||||
| NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | $ | $ | ( | ) | ||||
6
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
| Three Months Ended | ||||||||
| February 29, 2024 | February 28, 2023 | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| $ | - | $ | - | |||||
| NET CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| NET CHANGE IN CASH | ||||||||
| CASH AT BEGINNING OF PERIOD | ||||||||
| CASH AT END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Income taxes paid | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
| NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Accrued dividends on preferred stock | $ | $ | ||||||
See notes to consolidated financial statements.
7
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A – ORGANIZATION, DESCRIPTION OF COMPANY’S BUSINESS AND BASIS OF PRESENTATION
Surge Components, Inc. (“Surge”) was incorporated in the State of New York and commenced operations on November 24, 1981 as an importer of electronic products, primarily capacitors and discrete semi-conductors selling to customers located principally throughout North America. On June 24, 1988, Surge formed Challenge/Surge Inc. (“Challenge”), a wholly-owned subsidiary to engage in the sale of electronic component products and sounding devices from established brand manufacturers to customers located principally throughout North America.
In May 2002, Surge and an officer of Surge founded
and became sole owners of Surge Components, Limited (“Surge Limited”), a Hong Kong corporation. Under current Hong Kong law,
Surge Limited is required to have at least
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
In December 2021, the Company changed its corporate domicile to Nevada.
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Principles of Consolidation:
The consolidated financial statements include the accounts of Surge, Challenge, and Surge Limited (collectively the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.
The accompanying interim consolidated financial statements have been prepared without audit in accordance with the instructions to Form 10Q for interim financial reporting and the rules and regulations of the Securities and Exchange Commissions. In the opinion of management, all adjustments are of a normal recurring nature and all disclosures necessary for a fair presentation of these financial statements have been included. The results and trends in these interim consolidated financial statements for the three months ended February 29, 2024 and February 28, 2023 may not be representative of those for the full fiscal year or any future periods.
(2) Accounts Receivable:
Trade accounts receivable are recorded at the
net invoice value net of the allowance for credit losses in the consolidated balance sheet and are not interest bearing. The Company considers
receivables past due based on the payment terms. The Company reviews its exposure to accounts 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. Repayment terms vary from customer to customer and range from
(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.
8
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(3) Revenue Recognition (continued):
Revenue is recognized for products sold by the Company when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company’s warehouse.
For direct shipments, revenue is recognized when
product is shipped from the Company’s supplier. The Company has a long term supply agreement with one of our suppliers. The Company
purchases the merchandise from the supplier and has the supplier directly ship to the customer through a freight forwarder. Title passes
to customer upon the merchandise being received by a freight forwarder. Direct shipments were approximately $
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 $
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 $
(4) Inventories:
Inventories, which consist solely of products
held for resale, are stated at the lower of cost (first-in, first-out method) or net realizable value. Products are included in inventory
when the Company obtains title and risk of loss on the products, primarily when shipped from the supplier. Inventory in transit principally
from foreign suppliers at February 29, 2024 was $
(5) Depreciation and Amortization:
| Furniture, fixtures and equipment | ||
| Computer equipment | ||
| Leasehold Improvements |
Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized.
(6) Concentration of Credit Risk:
Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of accounts receivable. The Company maintains substantially all of its
cash balances in a limited number of financial institutions. At February 29, 2024 and November 30, 2023, the Company’s uninsured
cash balances totaled $
9
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(7) Income Taxes:
The Company’s deferred income taxes arise primarily from the differences in the recording of allowances for bad debts, inventory reserves, depreciation and other expenses 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 H.
The Company follows the provisions of the Accounting Standards Codification topic, ASC 740, “Income Taxes” (ASC 740). There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company’s financial condition or results of operations as a result of ASC 740.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2019, and state tax examinations for years before fiscal years ending November 30, 2018. Management does not believe there will be any material changes in our unrecognized tax positions over the next twelve months.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of ASC 740, there was no accrued interest or penalties associated with any unrecognized benefits, nor was any interest expense recognized during the three months ended February 29, 2024 and February 28, 2023.
(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) Marketable securities and other investments
Our marketable securities are stated at fair value in accordance with ASC Topic 321, Investments- Equity Securities. Any changes in the fair value of the Company’s marketable debt securities are included in the statement of other comprehensive income. The market value of the securities is determined using prices as reflected on an established market. Realized and unrealized gains and losses are determined on an average cost basis. The marketable securities are investments predominately in Treasury bills treasury notes which are being invested until such time the funds are needed for operations and reflected as available for sale debt securities.
| February 29, | November 30, | |||||||
| 2024 | 2023 | |||||||
| Cost | $ | $ | ||||||
| Gross unrealized gain | ||||||||
| Gross unrealized loss | ||||||||
| Fair value | $ | $ | ||||||
10
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(13) Shipping Costs
The Company classifies shipping costs as a component
of selling expenses. Shipping costs totaled $
(14) Earnings Per Share
Basic earnings per share includes no dilution
and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for
the period. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive
stock options and convertible preferred stock exercised into common stock. Total potentially dilutive shares excluded from diluted
weighted shares outstanding at February 29, 2024 and February 28, 2023 totaled
(15) 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.
(16) 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 $
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.
11
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(16) Leases (continued):
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.
NOTE C – FIXED ASSETS
| February 29, | November 30, | |||||||
| 2024 | 2023 | |||||||
| Furniture and Fixtures | $ | $ | ||||||
| Leasehold Improvements | ||||||||
| Computer Equipment | ||||||||
| Less-Accumulated Depreciation | ( | ) | ( | ) | ||||
| Net Fixed Assets | $ | $ | ||||||
Depreciation and amortization expense for the
three months ended February 29, 2024 and February 28, 2023 was $
12
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D – LOANS PAYABLE
In February 2017, the Company obtained a line
of credit with a bank for up to $
NOTE E – ACCRUED EXPENSES
| February 29, | November 30, | |||||||
| 2024 | 2023 | |||||||
| Commissions | $ | $ | ||||||
| Preferred stock dividends | ||||||||
| Other accrued expenses | ||||||||
| $ | $ | |||||||
NOTE F – RETIREMENT PLAN
13
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G – SHAREHOLDERS’ EQUITY
[1] Preferred Stock:
In February 1996, the Company amended its Certificate
of Incorporation to authorize the issuance of
In November 2000, the Company authorized
Dividends aggregating $
In October 2016, the Company authorized
[2] 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
In April 2021, a total of
In March 2022, a total of
In March 2022, the Company granted stock options
to (a) four non-employee directors to each purchase
In April 2023, a total of
14
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G – SHAREHOLDERS’ EQUITY (Continued)
[2] 2015 Incentive Stock Plan (continued)
| Shares | Weighted Average Exercise Price | |||||||
| Options outstanding December 1, 2023 | $ | |||||||
| Options issued in the three months ended February 29, 2024 | $ | |||||||
| Options exercised in the three months ended February 29, 2024 | $ | |||||||
| Options cancelled in the three months ended February 29, 2024 | $ | |||||||
| Options outstanding at February 29, 2024 | $ | |||||||
| Options exercisable at February 29, 2024 | $ | |||||||
The intrinsic value of the exercisable options
at February 29, 2024 totaled $
[3] Compensation of Directors
Compensation for each non-employee director is
$
NOTE H – 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.
| February 29, | November 30, | |||||||
| 2024 | 2023 | |||||||
| Deferred Tax Assets | ||||||||
| Depreciation | $ | $ | ||||||
| Allowance for bad debts | ||||||||
| Inventory | ||||||||
| Facilities rental | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ||||||||
| Deferred Tax Assets | $ | $ | ||||||
15
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H – INCOME TAXES (Continued)
A 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.
| Three Months Ended | ||||||||
| February 29, 2024 | February 28, 2023 | |||||||
| Current: | ||||||||
| Federal | $ | $ | ||||||
| States | ||||||||
| Deferred: | ||||||||
| Federal | ( | ) | ||||||
| States | ( | ) | ||||||
| ( | ) | |||||||
| Provision for income taxes | $ | $ | ||||||
| Three Months Ended | ||||||||
| February 29, | February 28, | |||||||
| 2024 | 2023 | |||||||
| U.S Federal Income tax statutory rate | ( | )% | | % | ||||
| State income taxes | ( | )% | % | |||||
| Other-primarily state franchise taxes | % | % | ||||||
| Effective tax rate | % | % | ||||||
16
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I – OPERATING LEASE COMMITMENTS
The Company leases its office and warehouse space
through 2030 from a corporation that is partly owned by officers/shareholders of the Company (“Related Company”). Annual minimum
rental payments to the Related Company approximated $
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 2025. Annual minimum rental payments for this space are approximately $
The Company has a lease to rent additional warehouse
space in Hong Kong through November 30, 2025. Annual minimum rental payments for this space are approximately $
Twelve Months Ended February 29,
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 and after | ||||
| $ |
Net rental expense for the three months ended
February 29, 2024 and February 28, 2023 were $
The remaining weighted average lease term is
NOTE J – EMPLOYMENT AND OTHER AGREEMENTS
In February 2016, the Company entered into revised
employment agreements with
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.
17
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE K – MAJOR CUSTOMERS
The Company had
NOTE L – MAJOR SUPPLIERS
During the three months ended February 29, 2024
and February 28, 2023 there was one foreign supplier accounting for
The Company purchases substantially all of its
products overseas. For the three months ended February 29, 2024, the Company purchased
NOTE M – EXPORT SALES
| Three Months Ended | ||||||||
| February 29, | February 28, | |||||||
| 2024 | 2023 | |||||||
| Canada | ||||||||
| China | ||||||||
| Other Asian Countries | ||||||||
| South America | ||||||||
| Europe | ||||||||
Revenues are attributed to countries based on location of customer.
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This report contains forward-looking statements. All statements other than statements of historical facts contained herein, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Furthermore, we cannot at this time assess the affect that the global outbreak of the novel Coronavirus may have on the Company.
In some cases, forward-looking statements can be identified by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading “Risk Factors” in our most recent Annual Report on Form 10-K. Also, these forward-looking statements represent our estimates and assumptions only as of the date of the filing of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of the filing of this report.
Overview
The Company operates with two sales groups, Surge Components (“Surge”) and Challenge Electronics (“Challenge”). Surge is a supplier of electronic products and components. These products include capacitors, which are electrical energy storage devices, and discrete semiconductor components, such as rectifiers, transistors and diodes, which are single function low power semiconductor products that are packaged alone as compared to integrated circuits such as microprocessors. The products sold by Surge are typically utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, audio products, temperature control products, lighting products, energy related products, computer related products, various types of consumer products, garage door openers, household appliances, power supplies and security equipment. These products are sold to both original equipment manufacturers, commonly referred to as OEMs, who incorporate them into their products, and to distributors of the lines of products we sell, who resell these products within their customer base. These products are manufactured predominantly in Asia by approximately sixteen independent manufacturers. We act as the master distribution agent utilizing independent sales representative organizations in North America to sell and market the products for one such manufacturer pursuant to a written agreement. When we act as a sales agent, our supplier who sold the product to the customer that we introduced to our supplier pays us a commission. The amount of the commission is determined on a sale by sale basis depending on the profit margin of the product. Commission revenue totaled $19,190 and $83,982 for the three months ended February 29, 2024 and February 28, 2023 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 engineers on our staff who work 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. Challenge also at times handles the brokering of certain products, helping its customers find parts that regular suppliers can’t deliver.
The Company has a Hong Kong office to effectively handle the transfer business from United States customers purchasing and manufacturing in Asia after designing the products in the United States. This office has strengthened the Company’s global position, improving our capabilities and service to our customer base.
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The world of business continues to change. Customers continue to centralize purchasing from regional purchasing and are stretching their payment terms. These changes also include customers moving their manufacturing operations from North America to Asia, and the trend of globalization. Some of our customers have been involved in mergers and acquisitions, causing consolidation. This trend makes business more complicated and costly for the Company. The Company must have a presence in Asia to service and further develop the business. For these reasons, we established Surge Ltd., our Hong Kong subsidiary. Currency fluctuations may also have an effect on doing business outside of North America. Customers have moved to reduce their supply chain, which could adversely affect the Company. In some market segments, demand for electronic components has decreased, and in other segments, the demand is still strong. Some technologies have become obsolete, while customers develop new products using different kinds of components. One division in the Company has had success in designing new products for customers to better their products performance capabilities. This proactive approach separates the Company from selling commodity products to also selling more customized products. Management expects 2024 to continue to be a period of continued challenge, in regard to inflation and general economic conditions, in maintaining consistent flow of products during shortages of certain products, and growth, as we see our customers change their manufacturing and buying practices. These challenges could affect the Company in negative ways, possibly reducing sales and or profitability. Because of a labor shortage, our customers, engineering staff has been challenged, so getting our products approved has been and will continue to take longer to achieve. Additionally, if costs of raw materials continues to increase, our costs have increased. In order for the Company to continue to grow, we will depend on, among other things, the continued growth of the electronics and semiconductor industries, our ability to withstand intense price competition, our ability to obtain new customers, our ability to retain and attract good sales and other key personnel in order to expand our marketing capabilities, our ability to secure adequate sources of products, which are in demand on commercially reasonable terms, our success in executing and managing growth, including monitoring an expanded level of operations and systems, controlling costs, the availability of adequate cash flow, the continued supply of products from our factories, the ability to withstand higher transportation costs and longer travel times. The tariffs continue to impact the Company, although less now then previously. Supply chain challenges can present both a challenge and opportunity to the Company. The Company is cautiously optimistic about its ability to meet these challenges with continued growth unless the general global or electronics industry economic conditions deteriorate. Financial news has been talking about the decreases in consumer demand which could impact negatively the demand for the Company’s products, as the customers are producing less of their products. These economic conditions could have a negative impact on sales into 2025. The combination of possible increased costs and longer lead times from factories to the Company could also have negative impacts on the business in the future. The tense relations between America and China could also impact the Company’s business. China could impose rules and laws that make it more difficult to do business in Hong Kong and China. The Company is taking steps to be well prepared in case of any actions from China that would cause us business disruption. For example, many of the Company’s factory partners have opened production facilities outside of China. As economic conditions have deteriorated, it has impacted the Company’s business. Customers at the end of 2022 had pushed back delivery dates, and in some cases required cancellations because they over ordered, creating a significant excess inventory. We are watching closely as customers slowly consume their excess inventory levels that reflect this new business demand, and the Company will respond accordingly. This consumption of inventory by the customers is taking longer than expected. As of the end of the first quarter we have seen some customers begin to start ordering products again. We expect to see customers getting back to normal ordering levels by the second half of 2025.
Critical Accounting Policies
Accounts Receivable
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s estimates of recoverability of amounts due could be affected and the Company would adjust the allowance accordingly.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company’s warehouse. For direct shipments from our suppliers to our customer, revenue is recognized when product is shipped from the Company’s supplier. The Company acts as a sales agent for certain customers buying direct from one of its suppliers. The Company reports these commissions as revenues in the period earned.
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The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.
Inventory Valuation
Inventories are recorded at the lower of cost or net realizable value. Write-downs of inventories to net realizable value are based on stock rotation, historical sales requirements and obsolescence as well as in the changes in the backlog. Reserves required for obsolescence were not material in any of the periods in the financial statements presented. Reserves related to stock rotation and future sales requirements for specific inventory parts involve subjective estimates to be made by management based on current and expected market conditions. If market conditions are less favorable than those projected by management, additional write-downs of inventories could be required. For example, each additional 1% of obsolete inventory would reduce operating income by approximately $42,000.
The Company does not have price protection agreements with any of its vendors and assumes the risk of changes in the prices of its products. The Company does not believe there to be a significant risk with regards to the lack of price protection agreements as many of its inventory items are purchased to fulfill purchase orders received.
Income Taxes
We have made a number of estimates and assumptions relating to the reporting of a deferred income tax asset to prepare our financial statements in accordance with generally accepted accounting principles. These estimates may have a significant impact on our valuation allowance relating to deferred income taxes. Our estimates could materially impact the financial statements.
Results of Operations
Consolidated net sales for the three months ended February 29, 2024 decreased by $2,138,067 or 23.3%, to $7,053,706 as compared to net sales of $9,191,773 for the three months ended February 28, 2023. We attribute the decrease to a decrease in business with new customers as well as a decrease in business with existing customers. We can also attribute the decrease to customers pushing out orders due to them over ordering in 2022. The customers have excess inventory that they need to consume before re-ordering those products. Additionally, many customers, because of having this excess inventory have not launched new product development as their cash is tied up in the inventory. Net sales for the three months ended February 29, 2024 and February 28, 2023 reflect $154,486 and $394,793, respectively of tariff costs that the Company was able to pass on to its customers.
Our gross profit for the three months ended February 29, 2024 decreased by $606,940 to $2,042,128, or 22.9%, as compared to $2,649,068 for the three months ended February 28, 2023. Gross margin as a percentage of net sales increased to 29.0% for the three months ended February 29, 2024 compared to 28.8% for the three months ended February 28, 2023. The increase can be attributed to certain products being sold at a higher profit margin. Our industry will continue to receive pressure from customers for price reductions. Some of them further demand periodic price reductions on a quarterly or semi-annual basis, as opposed to annual fixed pricing. We work with electronic manufacturing service subcontractor customers who manufacture products for other customers who do not have their own manufacturing operations. At times we are not able to recover these price reductions from our suppliers. The Company has agreements with these subcontractor customers to provide periodic cost reductions through rebates in the amount of 5%. These reductions only affect future shipments of our products, and do not affect existing orders. These reductions can have a negative impact on our profit margins since they reduce the amount of commissions we can earn. Even though this rebate can impact the Company’s gross profit margin, these subcontractor customers represent very significant potential growth for the Company, because they can help the Company become an approved supplier at the customers they manufacture for, and they purchase our components for these customers. We believe it would be very difficult for the Company to achieve business at these customers without the help of these subcontractor customers. During the first quarters of Fiscal 2024, the Company was impacted by tariff costs on certain products imported from China, which went into effect as of July 6, 2018. The Company has been able to pass along a portion of these costs to its customers. The Company is also moving some customer deliveries directly to Hong Kong in order to mitigate some of these costs.
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Selling and shipping expenses for the three months ended February 29, 2024 was $672,403, a decrease of $99,136, or 12.8%, as compared to $771,539 for three months ended February 28, 2023. We attribute the decrease to decreases in sales and the resulting selling expenses such as commission expenses, travel expenses, and auto and freight out expenses, offset by entertainment and printing expenses.
General and administrative expenses for the three months ended February 29, 2024 was $1,436,904, an increase of $136,441, or 10.5%, as compared to $1,300,463 for the three months ended February 28, 2023. The increase is due primarily to increases in salaries and related payroll tax expenses as well as rent expenses, general insurance expenses, as well as computer and maintenance expenses and consulting, professional fees and public company expenses, partially offset by decreases in officer salaries and health insurance as well as temporary help expenses.
Depreciation expense for the three months ended February 29, 2024 was $17,384, an increase of $177, or 1.0%, as compared to $17,207 for the three months ended February 28, 2023.
Tax expense for the three months ended February 29, 2024 was $11,911, a decrease of $165,244 as compared to a tax expense of $177,155 for the three months ended February 28, 2023. The changes result from our decrease in net income for the 2024 period.
As a result of the foregoing, net loss for the three months ended February 29, 2024 was $(72,001), compared to a net income of $395,160 for the three months ended February 28, 2023.
Liquidity and Capital Resources
As of February 29, 2024 we had cash of $9,091,787, marketable securities of $2,928,008, and working capital of $17,928,425. We believe that our working capital levels are adequate to meet our operating requirements during the next twelve months. The Company is exploring and evaluating opportunities for growth and expansion using the Company’s cash resources.
During the three months ended February 29, 2024, we had net cash flow provided by operating activities of $1,135,514, as compared to net cash flow provided by operating activities of $1,525,733 for the three months ended February 28, 2023. The decrease in cash flow from operating activities was primarily the result of lower net income as well as accounts receivable and accounts payable and accrued expenses as partially offset by lower inventory levels in 2024.
We had net cash flow provided by investing activities of $321,474 from financing activities for the three months ended February 29, 2024, as compared to net cash flow used in investing activities of $(22,699) for the three months ended February 28, 2023. We attribute the change to proceeds of approximately $321,000 from marketable debt securities in the form of Treasury bills and notes issued by the United States Treasury.
We had net cash flow of $0 during the three months ended February 29, 2024 as compared to $0 for the three months ended February 28, 2023.
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As a result of the foregoing, the Company had a net increase in cash of $1,456,988 for three months ended February 29, 2024, as compared to a net increase in cash of $1,503,034 for the three months ended February 28, 2023.
The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of February 29, 2024:
| Payments due | ||||||||||||||||||||
| 0 – 12 | 13 – 36 | 37 – 60 | More than | |||||||||||||||||
| Contractual Obligations | Total | Months | Months | Months | 60 Months | |||||||||||||||
| Financing Lease Obligations | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Operating leases | $ | 1,633,507 | 353,025 | 488,116 | 435,615 | 356,751 | ||||||||||||||
| Total obligations | $ | 1,633,507 | $ | 353,025 | $ | 488,116 | $ | 435,615 | $ | 356,751 | ||||||||||
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“Commission”). Ira Levy, the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of February 29, 2024 and has concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Controls
During the three months ended February 29, 2024 there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings to which the Company or any of its property is the subject.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
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ITEM 6. EXHIBITS.
| Exhibit Number |
Description | |
| 31.1 | Certification by Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification by Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SURGE COMPONENTS, INC. | ||
| Date: April 15, 2024 | By: | /s/ Ira Levy |
| Name: | Ira Levy | |
| Title: | Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | |
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