Surge Components Inc 10-Q for FY2022 Q3
Surge Components Inc (SPRS)
About this 10-Q
Surge Components Inc filed this 10-Q on October 17, 2022, covering the quarter ended August 31, 2022 (FY2022 Q3).
Headline figures
Quarter ended August 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $13.96M
- up 31.3% from $10.63M a year earlier
- Net income
- $1.24M
- up 40.2% from net income of $881.24K a year earlier
- Diluted EPS
- $0.22
- up 46.7% from $0.15 a year earlier
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.) | |
| | ||
| (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 October 14, 2022, was
SURGE COMPONENTS, INC
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
| August 31, 2022 | November 30, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| 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 | $ | $ | ||||||
See notes to consolidated financial statements
1
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
| August 31, 2022 | November 30, 2021 | |||||||
| (unaudited) | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Operating lease liabilities, current maturities | ||||||||
| Financing lease payable, 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 deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See notes to consolidated financial statements.
2
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
| Nine Months Ended August 31, | Three Months Ended August 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and shipping expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income before other income (expense) and income taxes | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Other income PPP | - | |||||||||||||||
| Other income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income taxes | ||||||||||||||||
| Net income | ||||||||||||||||
| Dividends on preferred stock | ||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Net 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 Changes in Shareholders’ Equity-unaudited
Nine months ended August 31, 2021 and August 31, 2022
| Additional | ||||||||||||||||||||||||||||
| Series C Preferred | Common | Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance – December 1, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares as compensation | ||||||||||||||||||||||||||||
| Stock option exercise | - | ( | ) | |||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Balance – August 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Series C Preferred | Common | Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance – December 1, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Preferred stock dividends | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of shares as compensation | ||||||||||||||||||||||||||||
| Stock option issuance | - | - | ||||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Balance – August 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See notes to consolidated financial statements.
4
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended | ||||||||
August 31, 2022 | August 31, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Gain on Forgiveness of debt | ( | ) | ||||||
| Deferred income taxes | ||||||||
| Allowance for doubtful accounts | ||||||||
| Stock Compensation | ||||||||
| 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 | ( | ) | ( | ) | ||||
| NET CASH FLOWS USED IN INVESTING ACTIVITIES | $ | ( | ) | $ | ( | ) | ||
5
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
| Nine Months Ended | ||||||||
August 31, 2022 | August 31, 2021 | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repayment of financing lease obligations | $ | ( | ) | $ | ( | ) | ||
| NET CASH FLOWS USED IN 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.
6
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A – ORGANIZATION, DESCRIPTION OF COMPANY’S BUSINESS AND BASIS OF PRESENTATION
Surge Components, Inc. (“Surge”) was incorporated in the State of New York and commenced operations on November 24, 1981 as an importer of electronic products, primarily capacitors and discrete semi-conductors selling to customers located principally throughout North America. On June 24, 1988, Surge formed Challenge/Surge Inc. (“Challenge”), a wholly-owned subsidiary to engage in the sale of electronic component products and sounding devices from established brand manufacturers to customers located principally throughout North America.
In May 2002, Surge and an officer of Surge founded
and became sole owners of Surge Components, Limited (“Surge Limited”), a Hong Kong corporation. Under current Hong Kong law,
Surge Limited is required to have at least
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 and disclosures necessary for a fair presentation of these financial statements have been included. The results and trends in these interim consolidated financial statements for the nine months ended August 31, 2022 and August 31, 2021 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 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.
(3) Revenue Recognition:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. generally accepted accounting principles guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment by the Company. The Company adopted the standard using the modified retrospective approach in its fiscal year beginning December 1, 2017. The preponderance of the Company’s contracts with customers are standard ship and bill arrangements where revenue is recognized at the time of shipment.
7
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(3) Revenue Recognition (continued):
Revenue is recognized for products sold by the Company when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured, and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company’s warehouse.
For direct shipments, revenue is recognized when
product is shipped from the Company’s supplier. The Company has a long-term supply agreement with one of our suppliers. The Company
purchases the merchandise from the supplier and has the supplier directly ship to the customer through a freight forwarder. Title passes
to customer upon the merchandise being received by a freight forwarder. Direct shipments were approximately $
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 August 31, 2022 was $
(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 | ||
| 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 August 31, 2022 and November 30, 2021, the Company’s uninsured cash
balances totaled $
8
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(7) Income Taxes:
The Company’s deferred income taxes arise primarily from the differences in the recording of net operating losses, allowances for bad debts, inventory reserves and depreciation expense for financial reporting and income tax purposes. A valuation allowance is provided when it has been determined to be more likely than not that the likelihood of the realization of deferred tax assets will not be realized. See Note I.
The Company follows the provisions of the Accounting Standards Codification topic, ASC 740, “Income Taxes” (ASC 740). There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company’s financial condition or results of operations as a result of ASC 740.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2018, and state tax examinations for years before fiscal years ending November 30, 2017. 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, 2022 and August 31, 2021
(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 $
9
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(13) Earnings Per Share
Basic earnings per share includes no dilution
and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for
the period. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive
stock options and convertible preferred stock exercised into common stock. Total potentially dilutive shares excluded from diluted
weighted shares outstanding at August 31, 2022 and August 31, 2021 totaled
(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 $
The Company determines if a contract contains a lease at inception based on whether it conveys the right to control the use of an identified asset. Substantially all of the Company’s leases are classified as operating leases. The Company records operating lease right-of-use assets within “Other assets” and lease liabilities are recorded within “current and noncurrent liabilities” in the consolidated balance sheets. Lease expenses are recorded within “General and administrative expenses” in the consolidated statements of operations. Operating lease payments are presented within “Operating cash flows” in the consolidated statements of cash flows.
Operating lease right-of-use assets and lease liabilities are recognized based on the net present value of future minimum lease payments over the lease term starting on the commencement date. The Company generally is not able to determine the rate implicit in its leases and, as such, applies an incremental borrowing rate based on the Company’s cost of borrowing for the relevant terms of each lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Lease terms may include an option to extend or terminate a lease if it is reasonably certain that the Company will exercise such options. The Company has elected the practical expedient to not separate lease components from non-lease components, and also has elected not to record a right-of-use asset or lease liability for leases which, at inception, have a term of twelve months or less. Variable lease payments are recognized in the period in which the obligation for those payments is incurred.
10
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C – FIXED ASSETS
Fixed assets consist of the following:
| August 31, | November 30, | |||||||
| 2022 | 2021 | |||||||
| Furniture and Fixtures | $ | $ | ||||||
| Leasehold Improvements | ||||||||
| Computer Equipment | ||||||||
| Less-Accumulated Depreciation | ( | ) | ( | ) | ||||
| Net Fixed Assets | $ | $ | ||||||
Depreciation and amortization expense for the
nine months ended August 31, 2022 and August 31, 2021 were $
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
Future minimum lease payments under these financing lease obligations as of August 31, 2022 are as follows:
| 2022 | $ | |||
| Total | $ | |||
| Less: interest portion | ||||
| Present value of net minimum lease payments | $ | |||
| Less: current portion | ||||
| Non-current portion | $ |
Financing lease obligations mature as follows:
Twelve months ended August 31, 2022:
| 2022 | $ | |||
| Principal payments remaining | $ |
11
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E – LOANS PAYABLE
In February 2017, the Company obtained a line
of credit with a bank for up to $
The Company in May 2020 received loan proceeds
in the amount of approximately $
The unforgiven portion of the PPP loan is payable
over five years at an interest rate of
NOTE F – ACCRUED EXPENSES
Accrued expenses consist of the following:
| August 31, | November 30, | |||||||
| 2022 | 2021 | |||||||
| Commissions | $ | $ | ||||||
| Income taxes | ||||||||
| Preferred stock dividends | ||||||||
| Other accrued expenses | ||||||||
| $ | $ | |||||||
NOTE G – RETIREMENT PLAN
12
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H – SHAREHOLDERS’ EQUITY
[1] Preferred Stock:
In February 1996, the Company amended its Certificate
of Incorporation to authorize the issuance of
In November 2000, the Company authorized
Dividends aggregating $159,069 have not been paid for the semi-annual periods ended December 31, 2001 through the semi-annual payment due December 31, 2021. The Company has accrued these dividends. At August 31, 2022, there are 10,000 shares of Series C Preferred issued and outstanding.
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 May 2016 a total of
In May 2019, a total of
In April 2020, the Company awarded one non-employee
director
In April 2020, a total of
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.
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 20,000 shares of common stock, (b) one non-employee-director to purchase 30,000 shares of common stock, and (c) two Company officers to each purchase 40,000 shares of common stock at an exercise price of $3.55 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 $492,132 related to the granting of these options.
13
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE H – SHAREHOLDERS’ EQUITY (Continued)
[2] 2015 Incentive Stock Plan (continued)
Activity in the Company’s stock plans for the period ended August 31, 2022 is summarized as follows:
| Shares | Weighted Average Exercise Price | |||||||
| Options outstanding December 1, 2021 | $ | |||||||
| Options issued in the nine months ended August 31, 2022 | $ | |||||||
| Options exercised in the nine months ended August 31, 2022 | $ | |||||||
| Options cancelled in the nine months ended August 31, 2022 | $ | |||||||
| Options outstanding at August 31, 2022 | $ | |||||||
| Options exercisable at August 31, 2022 | $ | |||||||
The intrinsic value of the exercisable options
at August 31, 2022 totaled $
[3] Compensation of Directors
Compensation for each non-employee director is
$
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:
| August 31, | November 30, | |||||||
| 2022 | 2021 | |||||||
| Deferred Tax Assets | ||||||||
| Net operating loss | $ | $ | ||||||
| Allowance for bad debts | ||||||||
| Inventory | ||||||||
| Other | ||||||||
| Depreciation | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ||||||||
| Deferred Tax Assets | $ | $ | ||||||
14
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE I – INCOME TAXES (Continued)
The valuation allowance for the deferred tax assets relates principally to the uncertainty of the utilization of deferred tax assets and was calculated in accordance with the provisions of ASC 740, which requires that a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized.
The Company’s income tax expense consists of the following:
| Nine Months Ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| Current: | ||||||||
| Federal | $ | $ | ||||||
| States | ||||||||
| Deferred: | ||||||||
| Federal | ||||||||
| States | ||||||||
| Provision for income taxes | $ | $ | ||||||
The Company files a consolidated income tax return with its wholly-owned subsidiaries. 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, | |||||||
| 2022 | 2021 | |||||||
| U.S Federal Income tax statutory rate | % | % | ||||||
| Valuation allowance | % | |||||||
| State income taxes | % | % | ||||||
| Other | ( | )% | ||||||
| Effective tax rate | % | % | ||||||
15
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE J – OPERATING LEASE COMMITMENTS
The Company leases its office and warehouse space
through 2030 from a corporation that is partly owned by officers/shareholders of the Company (“Related Company”). Annual minimum
rental payments to the Related Company approximated $
The Company has a lease to rent office space and a warehouse in Hong Kong through June 2023. Annual minimum rental payments for this space are approximately $68,580.
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 has a lease to rent additional warehouse space in Hong Kong through November 30, 2023. Annual minimum rental payments for this space are approximately $70,908.
The Company’s future minimum rental commitments at August 31, 2022 are as follows:
Twelve Months Ended August 31,
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 and after | ||||
| $ |
Net rental expense for the nine months ended August
31, 2022 and August 31, 2021 were $
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 $
The Company’s compensation committee may
award these officers with periodic 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.
NOTE L – MAJOR CUSTOMERS
The Company had two customers who accounted for
16
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE M – MAJOR SUPPLIERS
During the nine months ended August 31, 2022 and
August 31, 2021 there was
The Company purchases substantially all of its
products overseas. For the nine months ended August 31, 2022, the Company purchased
NOTE N – EXPORT SALES
The Company’s export sales were as follows:
| Nine Months Ended | ||||||||
| August 31, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Canada | ||||||||
| China | ||||||||
| Other Asian Countries | ||||||||
| South America | ||||||||
| Europe | ||||||||
Revenues are attributed to countries based on location of customer.
NOTE P – SUBSEQUENT EVENTS
In early January 2020, an outbreak of a respiratory illness caused by the Coronovirus was identified in Wuhan, China. In response to the resulting pandemic, governments around the world took various preventative steps up to and including full or partial shutdowns. As a result of the drop in production in our suppliers and customers, the Company experienced order cancellations and order hold notices from customers. China’s massive population is subject to Covid spikes in different areas at different times. When this occurs an area can be locked down for two to three weeks. The Company, so far, has not been negatively impacted by these lockdowns but continues to watch this very closely. Although business has improved in 2022, 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 may have a material impact on the consolidated results of operations, cash flows and financial condition, but cannot be reasonably estimated at this time.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). These forward-looking statements are based on our management’s beliefs, assumptions, and expectations and on information currently available to our management. Generally, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements, which generally are not historical in nature. All statements that address operating or financial performance, events, or developments that we expect or anticipate will occur in the future are forward-looking statements, including without limitation our expectations with respect to the timing for our planned manufacturing expansion, the benefits of our products, customer leads, product sales, financings, or the commercial viability of, and prospects for, our business model. We may not actually achieve the plans, projections or expectations disclosed in forward-looking statements, and actual results, developments or events (including, without limitation, those related to our planned manufacturing capacity expansion and our sales and marketing initiatives) could differ materially from those disclosed in the forward-looking statements. Our management believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on forward-looking statements because they speak only as of the date when made. We do not assume any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by federal securities laws and the rules of the Securities and Exchange Commission (the “SEC”). We may not actually achieve the plans, projections or expectations disclosed in our forward-looking statements, and actual results, developments or events could differ materially and adversely from those disclosed in the forward-looking statements. Forward-looking statements are subject to a number of significant risks and uncertainties, including without limitation those described from time to time in our reports filed with the SEC.
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q as well as the risk factors and other disclosures contained in our Annual Report on Form 10-K for the period ended November 30, 2021.
Surge Components, Inc., and its wholly owned subsidiaries are referred to in this discussion as the “Company”, “we”, “our”, or “us”. “Common stock” refers to the common stock of the Company.
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 $159,796 and $169,360 for the nine months ended August 31, 2022 and August 31, 2021 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. Challenge also at times handles the brokering of certain products, helping their customers find parts that that regular suppliers can’t deliver.
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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.
The world of business continues to change because of “disruptors,” which are significant changes in traditional business practices that did not previously exist. For example, customers continue to centralize purchasing from regional purchasing and are stretching their payment terms. These changes also include customers moving their manufacturing operations from North America to Asia, and the trend of globalization. Some of our customers have been involved in mergers and acquisitions, causing consolidation. This trend makes business more complicated and costly for the Company. The Company must have a presence in Asia to service and further develop the business. For these reasons, we established Surge Ltd., our Hong Kong subsidiary. Currency fluctuations may also have an effect on doing business outside of North America. Customers have moved to reduce their supply chain, which could adversely affect the Company. In some market segments, demand for electronic components have decreased, and in other segments, the demand is still strong. Some technologies have become obsolete, while customers develop new products using different kinds of components. Management expects 2022 to be a year of continued change, in regards to pandemic healing, inflation and general economic conditions, challenge, in regards to maintaining consistent flow of products during shortages of certain products, and growth as we see our customers return to full production pace. These challenges could affect the Company in negative ways, possibly reducing sales and or profitability. 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, the cost of raw materials has increased, and due to that fact, factories have increased our costs. Our year-to-date sales reflect strong growth and the Company has a strong backlog with customers due to the increased demand for products and the fact that customers are placing orders further into 2023. The Company has also been able to handle the brokering of certain semiconductor products, helping their customers to keep product lines up and running by locating products that their regular suppliers can’t deliver. 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 sales and other key personnel in order to expand our marketing capabilities, our ability to secure adequate sources of products, which are in demand on commercially reasonable terms, our success in executing and managing growth, including monitoring an expanded level of operations and systems, controlling costs, the availability of adequate financing, the continued supply of products from our factories, the ability to withstand higher transportation costs and longer travel times due to the backup at the ports and our ability to deal successfully, with new and future disruptors. The tariffs continue to impact the Company. At this time there is a shortage of electronics components which could impact the Company’s growth. . The general supply chain challenges presents 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 economic conditions deteriorate. Financial news has been talking about the decreases in consumer demand for certain consumer goods such as PC’s and smartphones and the possibility of a recession in 2023. These economic conditions could have a negative impact on sales in the remainder of 2022 and in 2023. The combination of disruptors such as increased costs and longer lead times from factories to the Company could also have negative impacts on the business in the future.
Known Factors, Trends and Risks Impacting Our Business
Inflation
In the past two fiscal years, inflation has not had a significant impact on our business. However, any significant increase in inflation and interest rates could have a significant effect on the economy in general and, thereby, could affect our future operating results.
Interest Rate Sensitivity
We are not subject to interest rate sensitivities.
Impact of Covid-19
In March 2020, the World Health Organization categorized COVID-19 as a pandemic and it continues to impact the global economy. During the pandemic we did everything we could do to keep customers production running and keep operations as smooth and stable as possible, and we will continue to do our best to do so. The Company has experienced order cancellations and order hold notices from customers and we expect this could continue. While the worst effects of the pandemic may be behind us in the United States, the virus situation is still serious globally, and business with customers in different regions is impacted more or less based on the Covid status in that region. Spikes of Covid that may cause China lockdowns can have an adverse impact on manufacturing stability and the ability of our Asia salespeople to visit customers. Although the Company’s business has improved in the nine months ended August 31, 2022 and our customers’ outlook for their business is stronger than it was previously, we cannot guarantee that the increase in subsequent quarters will continue as the coronavirus conditions may change. Additionally, the spread of COVID-19 and the related actions implemented by governments of the United States and elsewhere across the globe, may worsen again over time. Thus, the pandemic may have an impact on the Company’s operations, the future effect of which will largely depend on future developments which are highly uncertain and cannot be predicted at this time. The Company continues to monitor its operations and applicable government recommendations and requirements.
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Critical Accounting Estimates
Accounts Receivable
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s estimates of recoverability of amounts due could be affected and the Company would adjust the allowance accordingly.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company’s warehouse. For direct shipments from our suppliers to our customer, revenue is recognized when product is shipped from the Company’s supplier. The Company acts as a sales agent for certain customers buying direct from one of its suppliers. The Company reports these commissions as revenues in the period earned.
The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.
Inventory Valuation
Inventories are recorded at the lower of cost or net realizable value. Write-downs of inventories to net realizable value are based on stock rotation, historical sales requirements and obsolescence as well as in the changes in the backlog. Reserves required for obsolescence were not material in any of the periods in the financial statements presented. If market conditions are less favorable than those projected by management, additional write-downs of inventories could be required. For example, each additional 1% of obsolete inventory would reduce operating income by approximately $73,000.
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.
Results of Operations
Consolidated net sales for the nine months ended August 31, 2022 increased by $11,994,412 or 42.3%, to $40,375,448 as compared to net sales of $28,381,036 for the nine months ended August 31, 2021. Consolidated net sales for the three months ended August 31, 2022, increased by $3,323,680 or 31.3%, to $13,955,954 as compared to net sales of $10,632,274 for the three months ended August 31, 2021. We attribute the increase to an increase in business with new customers as well as an increase in business with existing customers. We can also attribute some of the increase in sales during the nine and three months ended August 31, 2022, to one of the Company’s divisions brokering certain products. In Brokering, the Company helps customers find parts that their regular suppliers can not deliver. Net sales for the nine months ended August 31, 2022, and August 31, 2021 reflect $1,035,423 and $611,252, respectively of tariff costs that the Company was able to pass on to its customers.
Our gross profit for the nine months ended August 31, 2022, increased by $3,019,085 to $10,963,086, or 38%, as compared to $7,944,001 for the nine months ended August 31, 2021. Gross margin as a percentage of net sales decreased to 27.2% for the nine months ended August 31, 2022, compared to 28% for the nine months ended August 31, 2021. Gross profit for the three months ended August 31, 2022, increased by $542,216 to $3,628,929, or 17.6%, as compared to $3,086,713 for the three months ended August 31, 2021. Gross margin as a percentage of net sales decreased to 26% for the three months ended August 31, 2022, compared to 29% for the three months ended August 31, 2021. We attribute the increase in gross margin to an increase in sales volume in the nine and three months ended August 31, 2022. We attribute the decreae in gross margin as a perentage of sales to the Company selling certain products at a lower profit marging. 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 nine months ended August 31, 2022, 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 also moved some customer deliveries directly to Hong Kong in order to mitigate some of these costs. In the remainder of 2022, the Company expects the effects of the tariffs to be similar to 2021.
20
Selling and shipping expenses for the nine months ended August 31, 2022 was $2,501,208, an increase of $607,479, or 32.1%, as compared to $1,893,729 for nine months ended August 31, 2021. Selling and shipping expenses for the three months ended August 31, 2022 was $823,133, an increase of $204,787, or 33.1%, as compared to $618,346 for three months ended August 31, 2021. We attribute the increase to an increase in salesman payroll and commission expenses, as well as auto, travel and entertainment expenses and messenger and delivery expenses. These increases were offset by a decrease in freight out costs.
General and administrative expenses for the nine months ended August 31, 2022 was $4,767,820, an increase of $996,903, or 26.4%, as compared to $3,770,917 for the nine months ended August 31, 2021. General and administrative expenses for the three months ended August 31, 2022 was $1,395,580, an increase of $198,888, or 16.6% as compared to $1,196,692 for the three months ended August 31, 2021. The increase for the nine and three months ended August 31, 2022 is due primarily to increases in rent, utilities, health insurance and general insurance expenses, professional fees, office expenses as well as salaries and related payroll taxes, directors fees, bad debt expenses, consulting expenses, option expenses and public company expenses. These increases were offset by decreases in computer expenses as well as settlement expenses due to a settlement with a customer in the nine months ended August 31, 2021.
Depreciation expense for the nine months ended August 31, 2022 was $58,799, an increase of $6,226, or 11.8%, as compared to $52,573 for the nine months ended August 31, 2021. Depreciation expense for the three months ended August 31, 2022 was $20,728, an increase of $3,204, or 18.3%, as compared to $17,524 for the three months ended August 31, 2021. The increase is due to the company purchasing new equipment during 2021 and 2022.
Tax expense for the nine months ended August 31, 2022 was $894,212, an increase of $80,829 as compared to a tax expense of $813,383 for the nine months ended August 31, 2021. Tax expense for the three months ended August 31, 2022 was $181,392, a decrease of $191,536 as compared to a tax expense of $372,928 for the three months ended August 31, 2021. The changes result from our increase in net income for such periods.
As a result of the foregoing, net income for the nine months ended August 31, 2022 was $2,769,586, compared to a net income of $1,863,012 for the nine months ended August 31, 2021. The net income for the three months ended August 31, 2022 was $1,235,423, compared to a net income of $881,240 for the three months ended August 31, 2021.
Liquidity and Capital Resources
As of August 31, 2022 we had cash of $7,694,084, and working capital of $15,851,511. 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 nine months ended August 31, 2022, we had net cash flow provided by operating activities of $1,237,795, as compared to net cash flow provided by operating activities of $1,297,266 for the nine months ended August 31, 2021. The decrease in cash flow from operating activities resulted from an increase in inventory and a smaller increase in accounts payable, offset by increases in net income, stock based compensation and a smaller increase in accounts receivable.
21
We had net cash flow used in investing activities of $(48,351) for the nine months ended August 31, 2022, as compared to net cash flow used in investing activities of $(192,397) for the nine months ended August 31, 2021. We attribute the change to the Company purchasing more new equipment during the nine months ended August 31, 2021 than in 2022.
We had net cash flow used by financing activities of $(6,948) during the nine months ended August 31, 2022 as compared to $(6,331) provided by financing activities for nine months ended August 31, 2021.
As a result of the foregoing, the Company had a net increase in cash of $1,182,496 for the nine months ended August 31, 2022, as compared to a net increase in cash of $1,098,538 for the nine months ended August 31, 2021.
The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of August 31, 2022:
| Payments due | ||||||||||||||||||||
| 0 – 12 | 13 – 36 | 37 – 60 | More than | |||||||||||||||||
| Contractual Obligations | Total | Months | Months | Months | 60 Months | |||||||||||||||
| Capital Lease Obligations | $ | 1,613 | $ | 1,613 | $ | - | $ | - | $ | - | ||||||||||
| Operating leases | $ | 1,664,002 | 332,767 | 432,285 | 431,306 | 467,644 | ||||||||||||||
| Total obligations | $ | 1,665,615 | $ | 334,380 | $ | 432,285 | $ | 431,306 | $ | 467,644 | ||||||||||
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 August 31, 2022 and has concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Controls
During the three months ended August 31, 2022 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.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings to which the Company or any of its property is the subject.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
23
ITEM 6. EXHIBITS.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SURGE COMPONENTS, INC. | ||
| Date: October 17, 2022 | By: | /s/ Ira Levy |
| Name: | Ira Levy | |
| Title: | Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | |
25
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Ira Levy, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Surge Components, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 17, 2022 | By: | /s/ Ira Levy |
| Ira Levy | ||
|
Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Surge Components, Inc. (the “Company”) on Form 10-Q for the period ended August 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ira Levy, Chief Executive Officer (principal executive officer and principal financial officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: October 17, 2022 | By: | /s/ Ira Levy |
| Ira Levy | ||
|
Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) |