Surge Components, Inc. 10-Q Oct. 15, 2019 6:40 AM



ITEM
1. FINANCIAL STATEMENTS.


See
notes to consolidated financial statements.


See
notes to consolidated financial statements.


SURGE
COMPONENTS, INC. AND SUBSIDIARIES



Notes
to Consolidated Financial Statements


 


NOTE
A – ORGANIZATION, DESCRIPTION OF COMPANY’S BUSINESS AND BASIS OF PRESENTATION


 


Surge
Components, Inc. (“Surge”) was incorporated in the State of New York and commenced operations on November 24, 1981
as an importer of electronic products, primarily capacitors and discrete semi-conductors selling to customers located principally
throughout North America. On June 24, 1988, Surge formed Challenge/Surge Inc. (“Challenge”), a wholly-owned subsidiary
to engage in the sale of electronic component products and sounding devices from established brand manufacturers to customers
located principally throughout North America.


 


In
May 2002, Surge and an officer of Surge founded and became sole owners of Surge Components, Limited (“Surge Limited”),
a Hong Kong corporation. Under current Hong Kong law, Surge Limited is required to have at least two shareholders. Surge owns
999 shares of the outstanding common stock and the officer of Surge owns 1 share of the outstanding common stock. The officer
of Surge has assigned his rights regarding his 1 share to Surge. Surge Limited started doing business in July 2002. Surge Limited
operations have been consolidated with the Company.  Surge Limited is responsible for the sale of Surge’s products
to customers located in Asia.


 


On
August 31, 2010, the Company changed its corporate domicile by merging into a newly-formed corporation, Surge Components, Inc.
(Nevada), which was formed in the State of Nevada for that purpose.  Surge Components Inc. is the surviving entity.


 


In
February 2019, the Company converted into a Delaware corporation. The number of authorized shares of common stock was decreased
to 50,000,000 shares.


 


NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


 


(1)
Principles of Consolidation:


 


The
consolidated financial statements include the accounts of Surge, Challenge, and Surge Limited (collectively the “Company”).  All
material intercompany balances and transactions have been eliminated in consolidation.


 


The
accompanying interim consolidated financial statements have been prepared without audit, in accordance with the instructions to
Form 10-Q for interim financial reporting and the rules and regulations of the Securities and Exchange Commission.


 


The
results and trends in these interim consolidated financial statements for the nine months ended August 31, 2019 and August 31,
2018 may not be representative of those for the full fiscal year or any future periods.


 


(2)
Accounts Receivable:


 


Trade
accounts receivable are recorded at the net invoice value and are not interest bearing. The Company considers receivables past
due based on the payment terms. The Company reviews its exposure to amounts receivable and reserves specific amounts if collectability
is no longer reasonably assured. The Company also reserves a percentage of its trade receivable balance based on collection history
and current economic trends that might impact the level of future credit losses. The Company re-evaluates such reserves on a regular
basis and adjusts its reserves as needed. Based on the Company’s operating history and customer base, bad debts to date
have not been material.


 


(3)
Revenue Recognition:


 


In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. generally
accepted accounting principles guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue,
the application of which will require significant judgment by the Company. The Company adopted the standard using the modified
retrospective approach in its fiscal year beginning December 1, 2017. The preponderance of the Company’s contracts with
customers are standard ship and bill arrangements where revenue is recognized at the time of shipment. Adoption of this ASU did
not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.


 


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 its 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 $2,402,000 and $3,434,000  for the nine months ended August 31, 2019
and August 31, 2018, 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 they are earned. Commission revenue totaled $462,111 and $31,968 for the nine months ended August
31, 2019 and August 31, 2018, respectively, which increase was due to commission income on new and existing accounts.


 


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 $4,961,000 and
$4,333,000 for the nine months ended August 31, 2019 and August 31, 2018, 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 August 31, 2019 was $1,206,901. The
Company, at August 31, 2019, has a reserve against slow moving and obsolete inventory of $250,565. From time to time the Company’s
products are subject to legislation from various authorities on environmental matters.


 


(5)
Depreciation and Amortization:


 


Fixed
assets are recorded at cost.  Depreciation is generally calculated on a straight line method and amortization of leasehold
improvements is provided for on the straight-line method over the estimated useful lives of the various assets as follows:


 








Furniture,
fixtures and equipment

5
– 7 years

Computer
equipment

5
years

Leasehold
Improvements

Estimated
useful life or lease term, whichever is shorter



 


Maintenance
and repairs are expensed as incurred while renewals and betterments are capitalized.


  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


  


NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


 


(6)
Concentration of Credit Risk:


 


Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. 
The Company maintains substantially all of its cash balances in a limited number of financial institutions.   At August
31, 2019 and November 30, 2018, the Company’s uninsured cash balances totaled $1,782,401 and $1,197,367, respectively.


 


(7)
Income Taxes:


 


The
Company’s deferred income taxes arise primarily from the differences in the recording of net operating losses, allowances
for bad debts, inventory reserves and depreciation expense for financial reporting and income tax purposes.  A valuation
allowance is provided when it has been determined to be more likely than not that the likelihood of the realization of deferred
tax assets will not be realized. See Note J.


 


The
Company follows the provisions of the Accounting Standards Codification (“ASC”) 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 the fiscal year ended November 30, 2015, and state tax
examinations for years before the fiscal year ended November 30, 2014. Management does not believe there will be any material
changes in our unrecognized tax positions over the next twelve months.


 


The
Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income
tax expense. As of the date of adoption of ASC 740, there was no accrued interest or penalties associated with any unrecognized
benefits, nor was any interest expense recognized during the nine months ended August 31, 2019 and August 31, 2018. 


  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


 


(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.


  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


 


(12)
Shipping Costs


 


The
Company classifies shipping costs as a component of selling expenses.  Shipping costs totaled $4,573 and $5,928 for
the nine months ended August 31, 2019 and August 31, 2018, 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 August 31, 2019 and August
31, 2018 totaled 134,373 and 212,373, respectively.


 


(14)
Stock Based Compensation


 


Stock
Based Compensation to Employees


 


The
Company accounts for its stock-based compensation for employees in accordance with ASC 718.   The Company recognizes
in its consolidated statements 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)
Recently Issued Standards


 


In
February 2016, the FASB issued ASU No. 2016-02, “Leases.” This ASU requires all lessees to be recognized on the balance
sheet as right to use assets and lease liabilities for the rights and obligations created by lease arrangements with terms greater
than 12 months. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and for interim periods
therein. The Company is in the process of assessing the impact the adoption this ASU will have on its consolidated financial position,
results of operations and cash flows. At a minimum, total assets and total liabilities will increase in the period the ASU is
adopted. Early adoption of this ASU is permitted. At August 31, 2019, the Company’s undiscounted future minimum payments
outstanding for lease obligations (including those currently included as capital lease obligations) were approximately $404,739.


  







 




SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
C – FIXED ASSETS


 


Fixed
assets consist of the following:


 











 

 

August 31,

 

 

November 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Furniture and Fixtures

 

$

327,971

 

 

$

327,971

 

Leasehold Improvements

 

 

995,356

 

 

 

991,646

 

Computer Equipment

 

 

1,066,516

 

 

 

1,063,005

 

Less-Accumulated Depreciation

 

 

(2,295,504

)

 

 

(2,266,627

)

Net Fixed Assets

 

$

94,339

 

 

$

115,995

 



 


Depreciation
and amortization expense for the nine months ended August 31, 2019 and August 31, 2018 was $28,877 and $36,730, respectively.


 


NOTE
D – CAPITALIZED LEASE OBLIGATIONS


 


The
Company is obligated under capitalized 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% per annum. The leases
terminate in 2022.


 


Future
minimum lease payments under these capitalized lease obligations as of August 31, 2019 are as follows:


 















2020

 

$

9,779

 

2021

 

$

9,779

 

2022

 

$

9,779

 

2023

 

$

2,447

 

 

 

 

 

 

Total

 

$

31,784

 

Less: interest portion

 

 

5,065

 

Present value of net minimum lease payments

 

$

26,719

 

Less: current portion

 

 

6,942

 

Non-current portion

 

$

19,777

 



 














Capital lease obligations mature as follows:

 

 

 

 

 

 

 

Twelve months ending August 31:

 

 

 


2019

 

$

6,942

 

2020

 

$

8,280

 

2021

 

$

9,088

 

2022

 

$

2,409

 

 

 

 

 

 

Principal payments remaining

 

$

26,719

 


  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
E – LINE OF CREDIT


 


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). As of August 31, 2019, the balance on the Credit Line
was $0. As of August 31, 2019, the Company was in compliance with the debt covenants for the Credit Line.


 




NOTE
F – ACCRUED EXPENSES


 


Accrued
expenses consist of the following:


 











 

 

August 31,

 

 

November 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Commissions

 

$

222,250

 

 

$

228,199

 

Preferred stock dividends

 

 

146,569

 

 

 

141,569

 

Other accrued expenses

 

 

196,633

 

 

 

233,435

 

 

 

 

 

 

 

 

 

 

Total

 

$

565,452

 

 

$

603,203

 



 


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 $1,201,000 at November 30, 2018. Pension expense for the nine months ended August 31, 2019 and August 31, 2018 was
$2,392 and $1,782, 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 $146,569 have not been paid for the semi-annual periods ended June 30, 2001 through the semi-annual payment due June
30, 2019.  The Company has accrued these dividends.  At August 31, 2019, 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 August 31, 2019.


  







  


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
H – SHAREHOLDERS’ EQUITY (Continued)


 


[2]
2010 Incentive Stock Plan


 


In
March 2010, the Company adopted, and in April 2010 the shareholders ratified, the 2010 Incentive Stock Plan (“2010 Stock
Plan”).  The 2010 Stock Plan provides for the grant of options to officers, employees, directors or consultants
to the Company to purchase an aggregate of 1,500,000 common shares.


 


Activity
in the 2010 Stock Plan for the nine months ended August 31, 2019 is summarized as follows:


 
















 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

Shares

 

 

Exercise

Price

 

 

 

 

 

 

 

 

Options outstanding December 1, 2018

 

 

175,000

 

 

$

0.99

 

Options issued in the nine months ended August 31, 2019

 

 

-

 

 

$

-

 

Options exercised in the nine months ended August 31, 2019

 

 

-

 

 

$

-

 

Options cancelled in the nine months ended August 31, 2019

 

 

(3,000

)

 

$

(1.15

)

Options outstanding at August 31, 2019

 

 

172,000

 

 

$

0.99

 

 

 

 

 

 

 

 

 

 

Options exercisable at August 31, 2019

 

 

172,000

 

 

$

0.99

 



 


[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
April 2016, the Company awarded one employee director 67,901 shares of its common stock and another employee director 31,250 shares
of its common stock under the 2015 Stock Plan as part of their 2015 bonus. The Company recorded a cost of $74,363 relating to
the issuance of these shares.


 


In
October 2016, one employee director exercised options to acquire 50,000 shares of common stock at $0.82 per share and 62,500 shares
of common stock at $0.80 per share. In October 2016, one employee director exercised options to acquire 25,000 shares of common
stock at $0.82 per share and 45,938 shares of common stock at $0.80 per share.


 


In
May 2019, the Company awarded one employee director 29,255 shares of its common stock and another director 17,952 shares of common
stock under the 2015 Stock Plan as part of their 2018 bonus. The Company recorded a cost of $88,750 relating to the issuance of
these shares.


 


The
intrinsic value of the exercisable options at August 31, 2019 totaled $380,600.  At August 31, 2019, the weighted average
remaining life of the stock options is 1.12 years. At August 31, 2019, there was no unrecognized compensation cost related to
the stock options granted under the plan.


  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
H – SHAREHOLDERS’ EQUITY (Continued)


 


[4]
Compensation of Directors


 


Compensation
for each non-employee director is $2,500 per month (and $3,500 per month for a non-employee director that serves as the chairman
of more than two committees of the Board of Directors).


 


NOTE
I – SETTLEMENT AGREEMENT
 


 


On
December 22, 2016, the Company entered into a settlement agreement (the “Settlement Agreement”) with Michael D. Tofias
and Bradley P. Rexroad (collectively, the “Stockholders”). The Settlement Agreement generally provided that:


 




 


the
Board and the Stockholders will identify a mutually acceptable independent director to join the Board as a Class C director
by February 28, 2017 and the Board will include that new director among its director nominees for the 2017 annual meeting;


  




 


the
Company will take all steps to (i) change its state of incorporation from the State of Nevada to the State of Delaware and
(ii) declassify the Board on a rolling basis by June 30, 2017, and the Company will convene a special meeting of stockholders
of the Company for the purpose of approving such actions, at which meeting the Stockholders and the Insiders will vote all
of their shares of common stock of the Company in favor of such actions, and


 




 


the
Company will commence an issuer tender offer to all of its stockholders to repurchase at least 5.0 million shares of its common
stock at a price of $1.43 per share (the “Tender Offer”), which the Company completed in March 2017 whereby it
purchased for cash 5,000,000 shares of its common stock, at a price of $1.43 per share, or $7,150,000.


 




 


the
Stockholders will tender all of the shares of common stock of the Company that they hold beneficially or of record in the
Tender Offer, subject to limited exceptions; and


 




 


the
Company’s officers and directors will not participate in the Tender Offer and will not transfer or sell any of their
shares until six months after the Tender Offer is completed.


 


Pursuant
to the Settlement Agreement, the Company also agreed to reimburse the expenses of the Stockholders associated with their investment
in the Company, including their proxy solicitation and litigation costs, in an amount not to exceed $300,000.


 


On
April 6, 2017, the Board of Directors elected Peter Levy as a Class C Director. He is an independent director.


  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
I – SETTLEMENT AGREEMENT (Continued)


 


On
October 4, 2018, the Company held its annual meeting of shareholders, at which shareholders approved (i) the change in the Company’s
state of incorporation from Nevada to Delaware and (ii) the declassification of the Company’s board of directors on a rolling
basis. No shareholders exercised their dissenters’ rights in connection with the reincorporation proposal. The Company was
reincorporated in Delaware on February 5, 2019.


 




 


until
the day after the announcement of the completion of the Tender Offer, the Board will be composed of no more than seven individuals;


 




 


the
Stockholders will tender all of the shares of common stock of the Company that they hold beneficially or of record in the
Tender Offer, subject to limited exceptions;


 




 


the
Company’s officers and directors will not participate in the Tender Offer and will not transfer or sell any of their
shares until six months after the Tender Offer is completed;


 




 


subject
to certain conditions, if the Tender Offer is not completed by March 15, 2017, the Company will (i) appoint the Stockholders
to the Board as Class A directors with terms expiring at the Company’s annual meeting of stockholders for fiscal year
2018 (the “2019 Meeting”) and (ii) reduce the size of the Board to six directors, including the Stockholders;


 




 


the
Stockholders will withdraw with prejudice their lawsuit against the Company and the Insiders pending in the State of Nevada;
and


 




 


the
Stockholders will be subject to customary standstill provisions until the termination of the Settlement Agreement.


 


On
October 4, 2018, the Company held its annual meeting of shareholders, at which shareholders approved (i) the change in the Company’s
state of incorporation from Nevada to Delaware and (ii) the declassification of the Company’s board of directors on a rolling
basis. No shareholders exercised their dissenters’ rights in connection with the annual meeting.


 


The
Settlement Agreement terminated on February 5, 2019, the date on which the Company completed its reincorporation from Nevada into
Delaware.


  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
J – 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:


 


















 

 

August 31,

 

 

November 30,

 

 

 

2019

 

 

2018

 

Deferred Tax Assets

 

 

 

 

 

 

Net operating loss

 

$

2,037,590

 

 

$

2,008,906

 

Allowance for bad debts

 

 

26,114

 

 

 

32,658

 

Inventory

 

 

60,746

 

 

 

69,757

 

Deferred rent

 

 

4,337

 

 

 

6,679

 

Other

 

 

55,609

 

 

 

62,071

 

Depreciation

 

 

74,655

 

 

 

73,140

 

Total deferred tax assets

 

 

2,259,051

 

 

 

2,253,211

 

Valuation allowance

 

 

(1,116,585

)

 

 

(1,270,587

)

 

 

 

 

 

 

 

 

 

Deferred Tax Assets

 

$

1,142,466

 

 

$

982,624

 



 


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 $154,000 during the nine months ended August 31, 2019.  This valuation is based
on management estimates of future taxable income. Although the degree of variability inherent in the estimates of future taxable
income is significant and subject to change in the near term, management believes, that the estimate is adequate. The estimated
valuation allowance is continually reviewed and as adjustments to the allowance become necessary, such adjustments are reflected
in the current operations.


  







 




SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
J – INCOME TAXES (Continued)


 


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


 


















 

 

Nine Months Ended

 

 

 

August 31,

2019

 

 

August 31,

2018

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Federal

 

$

(38,519

)

 

$

17,488

 

States

 

 

71,678

 

 

 

42,947

 

 

 

 

 

 

 

 

 

 

 

 

 

33,159

 

 

 

60,435

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

(126,275

)

 

 

9,394

 

States

 

 

(33,567

)

 

 

3,652

 

 

 

 

 

 

 

 

 

 

 

 

 

(159,842

)

 

 

13,046

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

(126,683

)

 

$

73,481

 



 


The
Company files a consolidated income tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of
approximately $6,313,000 for federal and state purposes, which expire through 2020. A reconciliation of the difference between
the expected income tax rate using the statutory federal tax rate and the Company’s effective rate is as follows: 


 













 

 

Nine Months ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2019

 

 

2018

 

U.S Federal Income tax statutory rate

 

 

21

%

 

 

21

%

Valuation allowance

 

 

(32

)%

 

 

(13

)%

State income taxes

 

 

4

%

 

 

4

%

Other

 

 

-

 

 

 

-

 

Effective tax rate

 

 

(7

)%

 

 

12

%



  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
K – RENTAL COMMITMENTS


 


The
Company leases its office and warehouse space through 2020 from a corporation that is controlled by officers/shareholders of the
Company (“Related Company”).  Annual minimum rental payments to the Related Company approximated $180,000
for the year ended November 30, 2018, and increase at the rate of three per cent per annum throughout the lease term.


 


Pursuant
to the lease, rent expense charged to operations differs from rent paid because of scheduled rent increases.  Accordingly,
the Company has recorded deferred rent.  Rent expense is calculated by allocating to rental payments, including those
attributable to scheduled rent increases, on a straight line basis, over the lease term.


 


In
June 2019, the Company renewed its lease to rent office space and a warehouse in Hong Kong for two years. Annual minimum rental
payments for this space are approximately $68,460.


 


In
January 2019, the Company entered into a lease to rent additional warehouse space in Hong Kong for two years. Annual minimum rental
payments for this space are approximately $36,840.


 


The
Company’s future minimum rental commitments at August 31, 2019 are as follows:


 


Twelve
Months Ended August 31,


 










2020

 

$

291,180

 

2021

 

$

81,775

 

2022

 

$

-

 

 

 

 

 

 

 

 

$

372,955

 



 


Net
rental expense for the nine months ended August 31, 2019 and August 31, 2018 were $265,114 and $237,196, respectively, of which
$197,418 and $194,734, respectively, was paid to the Related Company.


  







 


SURGE
COMPONENTS, INC. AND SUBSIDIARIES


 


Notes
to Consolidated Financial Statements


 


NOTE
L – 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
M – MAJOR CUSTOMERS


 


The
Company had two customers who accounted for 12% and 13% of net sales for the nine months ended August 31, 2019 and two customers
who accounted for 10% and 13% of net sales for the nine months ended August 31, 2018.  The Company had one customer
who accounted for 11% of accounts receivable at August 31, 2019 and two customers who each accounted for 11% of accounts receivable
at August 31, 2018.


 


NOTE
N – MAJOR SUPPLIERS


 


During
the nine months ended August 31, 2019 and August 31, 2018 there was one foreign supplier accounting for 39% and 46% of total inventory
purchased.


 


The
Company purchases substantially all of its products overseas.  For the nine months ended August 31, 2019, the Company
purchased 45% of its products from Taiwan, 17% from Hong Kong, 31% from elsewhere in Asia and the remaining 7% from the United
States.


 




NOTE
O – EXPORT SALES


 


The
Company’s export sales were as follows:


 











 

 

Nine Months Ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2019

 

 

2018

 

Canada

 

 

3,311,535

 

 

 

3,033,031

 

China

 

 

4,240,122

 

 

 

3,480,461

 

Other Asian Countries

 

 

1,811,454

 

 

 

1,341,707

 

South America

 

 

394,140

 

 

 

314,118

 

Europe

 

 

931,916

 

 

 

756,985

 



 


Revenues
are attributed to countries based on location of customer. 


  







Source link

Leave a Comment

Your email address will not be published. Required fields are marked *