UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended August 31, 2003
---------------
[ ] Transition report pursuant to Section 13 or 15(d) of the
Exchange Act
For the transition period from to
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Commission file number: 0-14188
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Surge Components, Inc.
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(Exact name of small business issuer as specified in its charter)
New York 11-2602030
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
95 Jefryn Boulevard, Deer Park, NY 11729
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(Address of principal executive offices)
(631) 595-1818
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(Issuer's telephone number)
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(Former name, former address and former fiscal year, if changed
since last report)
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As of
October 2, 2003: 8,743,326 shares of common stock, par value $.001
per share.
Transitional Small Business Disclosure Format (check one):
Yes No X
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
Index to Form 10-QSB
for the Period Ended August 31, 2003
Pages
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3-4
Consolidated Statements of Income Operations and
Comprehensive Loss 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis or Plan
of Operation. 11-22
Item 3. Controls and Procedures. 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 6. Exhibits and Reports on Form 8-K. 24
Signatures 25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, November 30,
2003 2002
--------- -----------
(unaudited)
ASSETS
------
Current assets:
Cash $ 730,443 $1,494,441
Marketable securities - available
for sale 276,044 270,145
Accounts receivable (net of allowance
for doubtful accounts of $40,335) 1,963,564 1,557,947
Inventory,net 1,874,322 2,121,198
Prepaid expenses and income taxes 81,267 116,946
---------- ----------
Total current assets 4,925,640 5,560,677
Fixed assets - net of accumulated
depreciation of $1,009,934
and $814,505 1,005,223 1,173,585
Other assets 4,901 4,054
---------- ----------
Total assets $5,935,764 $6,738,316
========== ==========
See accompanying notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, November 30,
2003 2002
----------- ----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Debt not in compliance with terms $ 379,030 $ 467,071
Accounts payable 1,827,779 1,774,738
Accrued expenses and taxes 698,463 859,320
---------- -----------
Total current liabilities 2,905,272 3,101,129
Deferred rent 59,487 48,306
---------- -----------
Total liabilities 2,964,759 3,149,435
---------- -----------
Minority interest 26,374 25,328
---------- -----------
Commitments and contingencies
Shareholders' equity
Preferred stock - $.001 par value stock,
1,000,000 shares authorized: Series A - 260,000
shares authorized, none outstanding. Series B -
200,000 shares authorized, none outstanding,
non-voting, convertible, redeemable. Series C -
100,000 shares authorized, 42,700
shares issued and outstanding, redeemable,
convertible,redeemable,liquidation preference
of $5 per share 43 43
Common stock - $.001 par value stock,
25,000,000 shares authorized, 8,743,326
shares issued and outstanding 8,744 8,744
Additional paid-in capital 22,959,605 22,980,955
Stock subscriptions receivable -- (3,500)
Accumulated other comprehensive loss-
unrealized loss on marketable securities-
available for sale (18,916) (17,439)
Accumulated deficit (20,004,845) (19,405,250)
----------- -----------
Total shareholders' equity 2,944,631 3,563,553
----------- -----------
Total liabilities and shareholders' equity $ 5,935,764 $ 6,738,316
=========== ===========
See accompanying notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
Nine Months Ended Three Months Ended
August 31, August 31,
2 0 0 3 2 0 0 2 2 00 3 2 0 0 2
-------- -------- --------- --------
Net sales $ 8,535,530 $ 8,362,575 $2,816,086 $ 3,000,176
Cost of goods sold 6,294,438 6,149,170 2,069,674 2,267,264
----------- ----------- ----------- -----------
Gross profit 2,241,092 2,213,405 746,412 732,912
----------- ----------- ----------- -----------
Operating expenses:
General and administrative expenses 2,003,598 2,564,792 638,737 741,287
Selling and shipping expenses 793,442 745,894 245,548 261,589
Financial consulting fees -- 268,850 -- --
----------- ----------- ----------- -----------
Total operating expenses 2,797,040 3,579,536 884,285 1,002,876
----------- ----------- ----------- -----------
Loss from operations (555,948) (1,366,131) (137,873) (269,964)
----------- ----------- ----------- -----------
Other income and (expense):
Investment income 15,607 43,238 3,680 7,862
Interest expense (82,157) (23,592) (17,861) (13,991)
Loss on sale of marketable securities -- (81,282) -- --
----------- ----------- ----------- -----------
Total other income and (expense) (66,550) (61,636) (14,181) (6,129)
----------- ----------- ------------ -----------
(622,498) 1,427,767) (152,054) (276,093)
Minority interest (32,704) 544 10,401 (544)
----------- ----------- ----------- -----------
Loss before income taxes (589,794) (1,427,223) (141,653) (275,549)
Income taxes 9,801 11,639 (2,271) 3,103
----------- ----------- ----------- -----------
Net loss (599,595) (1,438,862) (139,382) (278,652)
Dividends on preferred stock 47,525 26,175 10,675 10,675
----------- ----------- ----------- -----------
Net loss available to
common shareholders $ (647,120) $(1,465,037) $(150,057) $ (289,327)
=========== =========== =========== ===========
Other comprehensive loss:
Net loss (599,595) (1,438,862) (139,382) (278,652)
Unrealized holding (loss) gain on
securities arising during the period (1,477) (45,422) (1,762) 3,860
Reclassification adjustment-loss
on sale of securities -- 81,282 -- --
------------ ----------- ----------- -----------
Total comprehensive loss $ (601,072) $(1,403,002) $(141,144) $ (274,792)
============ =========== =========== ===========
Weighted average shares outstanding
Basic 8,743,326 8,881,298 8,743,326 8,752,926
Diluted 8,743,326 8,881,298 8,743,326 8,752,926
Loss available to common shareholders, per share
Basic $ (.07) $ (.16) $ (.02) $ (.03)
Diluted $ (.07) $ (.16) $ (.02) $ (.03)
See accompanying notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
August 31,
2 0 0 3 2 0 0 2
---------- ----------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES:
Net loss $ (599,595) $(1,438,862)
Adjustments to reconcile net
loss to net cash used from
operating activities:
Depreciation and amortization 195,429 253,084
Loss on sale of marketable securities -- 81,282
Minority interest 1,046 33,191
Deferred rent 11,181 15,220
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (405,617) (64,176)
Inventory 246,876 333,428
Prepaid expenses and other assets 34,832 (17,043)
Accounts payable 53,042 (326,293)
Accrued expenses and taxes (182,207) (312,947)
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (645,013) (1,443,116)
---------- ----------
INVESTING ACTIVITIES
Collections of amounts due under repurchase agreement -- 837,477
Purchase of marketable securities (7,377) (28,132)
Acquisition of fixed assets (27,067) (23,515)
Proceeds from sale of marketable securities -- 900,590
--------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (34,444) 1,686,420
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FINANCING ACTIVITIES
Collections from stock subscription receivable 3,500 4,000
Repurchase of shares -- (31,150)
Net borrowings on loan payable (88,041) 282,605
--------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (84,541) 255,455
--------- ----------
NET CHANGE IN CASH (763,998) 498,759
CASH AT BEGINNING OF PERIOD 1,494,441 1,030,181
--------- ----------
CASH AT END OF PERIOD $ 730,443 $ 1,528,940
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 8,676 $ 9,527
========== ===========
Interest paid $ 82,157 $ 23,418
========== ===========
See accompanying notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
In the opinion of management, the accompanying consolidated
financial statements of Surge Components, Inc., Challenge/Surge,
Inc., Superus Holdings, Inc. ("Superus"), Surge/Lelon, LLC, Surge
Acquisition Corporation and Surge Components, Limited contain all
adjustments necessary to present fairly the Company's financial
position as of August 31, 2003,the related statements of operations
and comprehensive loss for the nine and three months ended August
31, 2003 and 2002 and the statement of cash flows for the nine
months ended August 31, 2003 and 2002.
The consolidated results of operations for the nine and
three months ended August 31, 2003 and 2002 are not necessarily
indicative of the results to be expected for the full year.
The accounting policies followed by the Company are set
forth in Note B to the Company's financial statements included
in its Annual Report on Form 10-KSB,for the year ended November
30, 2002.
NOTE 2 - SUPERUS BANKRUPTCY
---------------------------
Included in accrued expenses are amounts totalling
approximately $248,000 which were accrued pending the disposition
of Superus' bankruptcy proceedings. Superus filed for bankruptcy
protection in March 2002 under Chapter 7 of the United States
Bankruptcy Code. The deadline for filing any objections to
discharge Superus' debt has passed and the Trustee has filed its
report stating that the bankruptcy estate has been fully
administered and may be discharged. The Bankruptcy Court,
however, has not yet approved the Trustee's report. The Company
will continue to accrue these expenses until such time as the
bankruptcy has been concluded.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
NOTE 3 - SETTLEMENT AGREEMENT
-----------------------------
In April 2002, in connection with a Mutual Release, Settlem
ent, Standstill and Non-Disparagement Agreement by and among the
Company and Equilink Capital Partners, LLC, Robert DePalo, Old
Oak Fund Inc. and Kenneth Orr (collectively, the "Investors"),
the Investors transferred transferred back to the Company
252,000 shares of common stock, and 19,300 shares of Series C
preferred stock, and certain warrants, representing all of the
Company's securities held by the Investors, and agreed to, among
other things, not to purchase any securities of the Company and
not to disparage Surge the Company in any manner, in exchange
for an aggregate of $225,000each of in settlement of potential
claims relating to services provided by the Investors. The
shares were held in escrow until the final payment was made.
In addition, the Company and the Investors mutually agreed
to release each other from all claims each party had, now has,
or in the future might have against the other. The Company
recorded a charge of approximately $193,850 to income during the
quarter ending May 31, 2002, in connection with the settlement.
NOTE 4 - PREFERRED DIVIDENDS
----------------------------
Dividends on the Non-Voting Redeemable Convertible Series C
Preferred Stock aggregating $47,525 for the semiannual periods
ended December 31, 2001, June 30, 2002, December 31, 2002 and
June 30, 2003, have not been paid. The Company has accrued these
dividends.
NOTE 5 - SEC INVESTIGATION
--------------------------
During the year ended November 30, 2000 and the quarter
ended February 28, 2001, the Company made certain potentially
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
NOTE 5 - SEC INVESTIGATION (Continued)
-------------------------------------
questionable payments of approximately $2,137,000 and $774,000,
respectively. These payments are currently the subject of an
investigation by the Securities and Exchange Commission. The
recipient of these payments repaid $1 million to the Company in
the quarter ending May 31, 2001, which was included in other
income.
In May 2001, the law firm Mintz Levin Cohn Ferris Glovsky
and Popeo, P.C., was engaged to assist in an investigation
concerning the payments and to recommend policies to prevent any
similar future payments. Due, in part to the previously disclosed
resignation of our outside counsel and such counsel's refusal to
be interviewed as part of the investigation, the Company was
unable to confirm what legal advice was rendered as to the making
of such payments. The investigation did not uncover any
additional payments similar to the previously disclosed
"potentially questionable payments". The Company has taken steps
to ensure that such payments are not made in the future,
including requiring that payments above $5,000 not be made to any
party except a party on a list approved by our audit committee,
requiring co-signatures on each check for more than $10,000 and
adopting a Code of Conduct. Except for proceedings relating to
the SEC inquiry commenced in October 2001, the Company is not
aware of any pending proceedings relating to the potentially
questionable payments. The Company has not been contacted by the
SEC regarding its investigations since March 2002. There can be
no assurance that these potentially questionable payments and
related investigation will not lead to other proceedings.
NOTE 7 - DEBT NOT IN COMPLIANCE WITH TERMS
------------------------------------------
In July 2002, the Company entered into a financing agreement
(the "Financing Agreement") with an asset-based lender (the "Lender")
providing for borrowings up to $1,000,000 (the "Credit Line").
Borrowings under the Credit Line accrue interest
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
NOTE 7 - DEBT NOT IN COMPLIANCE WITH TERMS (Continued)
-----------------------------------------------------
at the greater of the prime rate plus two percent (2.0%) or 6.75%
(6.75% at August 31, 2003). The Company pays one-quarter of one
percent (1/4 of 1%) annually as an unused line fee for the
difference between $1,000,000 and the average daily balance of
the Credit Line. The Credit Line is collateralized by
substantially all the Company's non-cash assets and contains
various financial covenants pertaining to the maintenance of
working capital and tangible net worth. On August 31, 2003, we
were not in compliance with the tangible net worth covenant. We
anticipate continuing to not be in compliance with such covenant
during Fiscal 2003. As such, the Lender may declare the Company
in default at anytime and has the following rights, among others:
(1) to demand immediate repayment of borrowings under the Credit
Line; (2) to receive a charge at the rate of two percent per
month upon the unpaid balance of the obligations under the
Financing Agreement (the "Obligations") from the date of default
until the date of our full payment of the Obligations, which
charge is in lieu of interest; (3) to receive all costs,
disbursements, charges and expenses that it incurs in the
collection and enforcement of the Obligations, including
attorneys fees; and (4) to enforce payment of or settle any of
our receivables and apply the net cash proceeds resulting from
such payment or settlement to the payment of the Obligations.
While we do not believe that the Lender will elect to exercise
any of such rights, if it did so during an inopportune time for
the Company, it could result in a severe liquidity crisis for the
Company. As of August 31, 2003, the Company has $379,030
outstanding under the Credit Line.
NOTE 8 - AUTHORIZED REPURCHASE
------------------------------
In November 2002, the Board of Directors authorized the
repurchase of up to 1,000,000 Common Shares at a price between $.04
and $.045. The Company has not repurchased any shares to
date pursuant to such authority.
Item 2. Management's Discussion and Analysis or Plan of Operation.
---------------------------------------------------------
Statements contained in this report include "forward-looking
statements" within the meaning of such term in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which could cause actual
financial or operating results, performances or achievements
expressed or implied by such forward-looking statements not to
occur or be realized. Such forward-looking statements generally
are based on our best estimates of future results, performance or
achievements, based upon current conditions and the most recent
results of the companies involved and their respective
industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as "may," "will,"
"project," "expect," "believe," "estimate," "anticipate,"
"intends," "continue," "potential," "opportunity" or similar
terms, variations of those terms or the negative of those terms
or other variations of those terms or comparable words or
expressions. Potential risks and uncertainties include, among
other things, such factors as:
- our business strategies and future plans of operations,
- general economic conditions in the United States and
elsewhere, as well as the economic conditions affecting the
industries in which we operate,
- political and regulatory matters affecting the foreign
countries in which we operate or purchase goods and materials
including the current war with Iraq and the recent health crisis
in the Far East,
- the market acceptance and amount of sales of our products
and services,
- the extent that our distribution network and marketing
programs achieve satisfactory response rates,
- the effect of the current surplus of electronic component
parts in the broker distributor market on sales by our Challenge
subsidiary,
- our historical losses,
- the competitive environment within the electronic components
industry,
- our ability to raise additional capital, if and as needed,
- the cost-effectiveness of our product development
activities,
- the effect of our non-compliance with the tangible net worth
covenant of our loan agreement with our principal lender,
- the effect of the delisting of our common stock, par value
$.001 per share (the "Common Shares") from the NASDAQ Stock
Market and the delisting of our Common Shares from The Boston
Stock Exchange,
- the extent of any further investigations or proceedings with
respect to certain potentially questionable payments made by
Surge during its fiscal year ended November 30, 2000 and its
quarter ended February 28, 2001 and
- the other factors and information discussed in other
sections of this report.
Shareholders and others reading this report should
carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain
cautionary statements identifying important factors that could
cause actual results to differ materially from those provided in
the forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise. Readers are urged to carefully review and consider
the various disclosures made by the Company in this Report and
the Company's Annual Report on Form 10-KSB for the year ended
November 30, 2002, both of which have been filed with the
Commission. These reports attempt to advise interested parties
of the risks and factors that may affect the Company's business,
financial condition and results of operations and prospects.
Critical Accounting Policies and Estimates
------------------------------------------
The preparation of financial statements and related
disclosures in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the
unaudited Consolidated Financial Statements and accompanying
notes. Estimates are used for, but not limited to, the accounting
for the allowance for doubtful accounts, inventories, income
taxes and loss contingencies. Management bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting
policies, among others, may be impacted significantly by
judgment, assumptions and estimates used in the preparation of
the unaudited Consolidated Financial Statements:
The allowance for doubtful accounts is maintained to
provide for losses arising from customers' inability to make
required payments. If there is deterioration of our customers'
credit worthiness and/or there is an increase in the length of
time that the receivables are past due greater than the
historical assumptions used, additional allowances may be
required. During February 2002, the Company obtained $1,500,000
of credit insurance covering most of its customers. In March
2003, the Company increased its coverage to $2,000,000 of credit
insurance.
Inventories, which consist solely of products held for
resale, are stated at the lower of cost (first-in, first-out
method) or market. Products are included in inventory when
shipped from the supplier. The Company, at August 31, 2003, has
a reserve against slow moving and obsolete inventory of
approximately $1,051,000.
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. Income
taxes are reported under the liability method pursuant to SFAS
No. 109 "accounting for income taxes". A valuation allowance is
provided when the likelihood of realization of deferred tax
assets is not assured. The Company has provided for a
valuation allowance totaling approximately $7,682,000.
Current accounting guidance allows for several options in
the reporting of stock options granted to employees or directors
as compensation. The Company has adopted the disclosure only
provisions of SFAS Number 123, "Accounting for Stock-Based
Compensation." Under these provisions, the Company has not
provided for a charge for compensation in its statements of
operations related to the granting of options to its employees
and directors. No such options were granted during the fiscal
year ended November 30, 2002 or for the nine months ended August
31, 2003.
Results of Operations
---------------------
Consolidated net sales for the nine months ended August 31,
2003 increased by $172,955, or 2%, to $8,535,530 as compared to
consolidated net sales of $8,362,575 for the nine months ended
August 31, 2002. Consolidated net sales for the three months
ended August 31, 2003 decreased by $184,090, or 6%, to $2,816,086
as compared to consolidated net sales of $3,000,176 for the three
months ended August 31, 2002.
The net sales for the nine months ended August 31, 2003 for
Surge without Challenge/Surge, Inc. ("Challenge"), one of the
Company's subsidiaries, decreased by $116,973, or 2%, when
compared to Surge's net sales for the nine months ended August
31, 2002. Net sales for the three months ended August 31, 2003
for Surge decreased by $395,148, or 20%, when compared to the
three months ended August 31, 2002. The decrease in sales
reflects the significant price competition in the electronic
component market and decreased demand of certain key customers'
products.
Net sales for the nine months ended August 31,2003 for Challenge
increased by $154,838, or 5%, when compared to the nine
months ended August 31, 2002. Net sales for the three months
ended August 31, 2003 for Challenge increased by $102,305, or
11%, when compared to the three months ended August 31, 2002.
Challenge continues to experience depressed sales in their
broker division due to a slowdown in manufacturing among
computer, telecommunications and phone manufacturers. This
slowdown is expected to adversely affect Challenge's sales for
2003. Any future improvements in sales (and possible
profitability) are expected to be based on future demand and
supply for Challenge's product mix. However, Challenge started
an audible products division in 1999. Sales of speakers, fans and
buzzers by this division increased steadily since their
introduction through the addition of sales representatives and
promotions. Currently, the majority of Challenge's sales are
comprised from audible products.
The electronics industry has historically experienced wide
fluctuations in the supply and demand of components. These
fluctuations have helped produce many occasions when supply and
demand for components have not been in balance. The supply
currently far exceeds the demand and has resulted in declining
average selling prices for our products as companies seek to sell
their inventories. Accordingly, the Company's ability to maintain
or increase revenues will be highly dependent on its ability to
increase sales volume of existing products and to successfully
introduce and sell new products.
Surge Components, Limited and Surge/Lelon, LLC comprise the
remainder of the nine and three months sales for the periods
ended August 31, 2003 totaling $148,208 and $120,400,
respectively.
While we cannot predict future performance, we believe
opportunities exist for growth in the United States and Asia. We
are continually looking into new product lines and strategic
partnerships, which could assist in the Company's growth.
Our gross profit for the nine months ended August 31, 2003
increased by 27,687, or 1%, as compared to the nine months ended
August 31, 2002. Our gross profit for the three months ended
August 31, 2003 increased by $13,500, or 2%, as compared to the
three months ended August 31, 2002. Gross profits as a
percentage of net sales decreased to 26.3% in the nine months
ended August 31, 2003 from approximately 26.5% in the nine months
ended August 31, 2002. The increase in our gross profit was a
result of increased sales from new customers. The decrease in the
gross profit as a percentage of net sales is a result of the
economic slowdown of electronic components and industry pricing
pressures requiring us to lower our prices.
General and administrative expenses for the nine months
ended August 31, 2003 decreased by $561,194, or 22%, as compared
to the nine months ended August 31, 2002. For the three months
ended August 31, 2003, general and administrative expenses
decreased by $102,550, or 14%, as compared to the three months
ended August 31, 2002. The decrease is primarily due to
decreased professional fees and through the Company's efforts to
reduce overhead.
Selling and shipping expenses for the nine months ended
August 31, 2003, increased by $47,548, or 6%, as compared to the
nine months ended August 31, 2002. This increase primarily is
due to commissions paid on the increase in sales. For the three
months ended August 31, 2003, selling and shipping expenses
decreased by $16,041, or 6%, as compared to the three months
ended August 31, 2002. This decrease for the quarter primarily
is due to less commissions paid on the decrease in sales.
No financial consulting fees and expenses were incurred
during the nine months ended August 31, 2003. Financial
consulting fees and expenses for the nine months ended August 31,
2002 were $268,850, representing the cost of the securities
issued in payment of such fees. These fees and expenses were
incurred in connection with an agreement with our investment
banker regarding services through May 2001 and reimbursement of
expenses. In April 2002, the Company entered into a settlement
agreement with such investment banker, as more fully explained
below in the liquidity and capital resource section.
Investment income for the nine months ended August 31, 2003
decreased by $27,631, or 64%, as compared to the nine months
ended August 31, 2002. Investment income for the three months
ended August 31, 2003 decreased by $4,182, or 53%, as compared
to the three months ended August 31, 2002. This decrease is
primarily related to our use of cash and cash
equivalents to fund losses and the reduction of interest rates on
our invested funds.
Interest expense increased by $58,565 or 248% for the nine
months ended August 31, 2003 as compared to the nine months ended
August 31, 2002. Investment expense increased by $3,870, or 28%,
for the three months ended August 31, 2003, as compared to the
three months ended August 31, 2002. This increase primarily is
related to the Company borrowing funds from an asset-based lender
starting in July 2002.
During the year ended November 30, 2000 and the quarter
ended February 28, 2001, we made certain potentially
questionable payments totaling approximately $2,137,000 and
$774,000, respectively. Such payments were made to the wife of
an employee of one of our suppliers in return for help obtaining
components from that supplier and another distributor.
According to management personnel responsible for making the
payments, prior to making any payment, the transaction was
disclosed to our legal counsel to determine whether payments to
an employee of a supplier would be legal. Management personnel
believed they had received reasonable assurances at the time,
and thereafter, that such payments were not illegal, so long as
the recipient of the payments received an IRS Form 1099, and all
payments were made by check. The costs of such payments were
recorded in our books and records and financial statements. We
duly issued a Form 1099 to the recipient of the payments.
According to Steven Lubman, Vice President, in mid-March 2001 he
became aware of a document in a criminal proceeding unrelated to
us in which similar payments were described as kickbacks. This
caused management to seek the affirmation of the legal advice
previously given. Legal counsel advised us by letter on or
about March 22, 2001, that, since the payments had been
described in a document in the unrelated criminal action as
kickbacks, disclosure of the document should be made to our
auditors, which was done. Such counsel stated in the letter
that no conclusion had been reached that such payments were
kickbacks. On April 17, 2001, we disclosed in our Form 10-QSB
Quarterly Report filing that the potentially questionable
payments had been made.
After receipt of the March 22, 2001 letter referred to
above, the Board determined to investigate the payments and ask
for the return of the payments. The Company requested that the
$3 million be repaid. $1 million was repaid to the Company. In
May 2001, the law firm of Mintz Levin Cohn Ferris Glovsky and
Popeo, P.C. was formally engaged by the Company to assist in an
investigation concerning the payments and to recommend policies
to prevent any similar future payments. Due, in part to the
previously disclosed resignation of our outside counsel and such
counsel's refusal to be interviewed as part of the
investigation, we were unable to confirm what legal advice was
rendered as to the making of such payments. The investigation
did not uncover any additional payments similar to the
previously disclosed "potentially questionable payments". We
have taken steps to ensure that such payments are not made in
the future, including requiring that all payments above $5,000
be made to a party on a list approved by our audit committee,
requiring co-signatures on each check for more than $10,000,
adopting a Code of Conduct, and seeking to add additional Board
and Audit Committee members, as well as, as soon as economically
feasible, a controller and chief financial officer. The Company
has not been contacted by the SEC regarding its investigation
since March 2002. Except for the SEC inquiry referred to above,
we are not aware of any pending proceedings relating to the
potentially questionable payments.
The Company received a letter from a lawyer from a
collection agency dated February 13, 2003 on behalf of Snow
Becker & Krauss P.C., our former legal counsel ("SBK") asserting
a claim for legal fees of approximately $665,000. These charges
are included in our liabilities on our Balance Sheet at August
31, 2003. These fees relate to services rendered by SBK between
one and two years ago. We responded to this letter by disputing
that the Company owes these fees and asserting that we believe
we have substantial counterclaims against SBK. The Company is
presently engaged in evaluating how it intends to proceed with
these claims. While we believe we have good claims against SBK,
we have no assurance that we will be successful in asserting
these claims against SBK, or whether SBK will be successful in
its claims against the Company.
The Company's substantial savings in general and
administrative expenses have significantly reduced the Company's
loss in the current fiscal year, but have been partially offset
by the decrease in the Company's gross profit percentage and
increases in selling and interest expenses.
As a result of the foregoing, the Company on a consolidated
basis had a net loss of $599,595 for the nine months ended August
31, 2003, as compared to $1,438,862 for the nine months ended
August 31, 2002. The Company had a consolidated net loss of
$139,382 for the three months ended August 31, 2003, as
compared to consolidated net loss of $278,652 for the three
months ended August 31, 2002.
Liquidity and Capital Resources
-------------------------------
Working capital decreased by $439,180 during the nine months
ended August 31, 2003 from $2,459,548 at November 30, 2002, to
$2,020,368, at August 31, 2003. This decrease resulted primarily
from the decrease in inventory and accrued expenses, the
repayment of debt and as partially offset by an increase in
accounts payable and accounts receivable. Our current ratio
decreased from 1.8:1 at November 30, 2002, to 1.7:1 at August 31,
2003. Inventory turned 3.1 times during the nine months ended
August 31, 2003 as compared to 2.8 times during the
nine months ended August 31, 2002. The average number of days to
collect receivables increased to 57 days from 54 days. We
believe that working capital levels and available financing are
adequate to meet the current operating requirements during the
next twelve months.
In July 2002, the Company entered into a financing agreement
(the "Financing Agreement") with an asset-based lender (the
SLender") providing for borrowings up to $1,000,000 (the "Credit
Line"). Borrowings under the Credit Line accrue interest at the
greater of the prime rate plus two percent (2.0%) or 6.75% per
annum (6.75% at August 31, 2003). The Company pays one-quarter of
one percent (1/4 of 1%) annually as an unused line fee for the
difference between $1,000,000 and the average daily outstanding
balance under the Credit Line. The Credit Line is collateralized
by substantially all the Company's non-cash assets and contains
various financial covenants pertaining to the maintenance of
working capital and tangible net worth. At August 31, 2003, we
were not in compliance with the tangible net worth covenant. We
anticipate continuing to be not in compliance with such covenant
during Fiscal 2003. As such, the Lender may declare the Company
in default at any time and has the following rights, among
others: (1) to demand immediate repayment of borrowings under the
Credit Line; (2) to receive a charge at the rate of two percent
per month upon the unpaid balance of the obligations under the
Financing Agreement (the "Obligations") from the date of default
until the date of our full payment of the Obligations, which
charge is in lieu of interest; (3) to receive all costs,
disbursements, charges and expenses that it incurs in the
collection and enforcement of the Obligations, including
attorneys fees; and (4) to enforce payment of or settle any of
our receivables and apply the net cash proceeds resulting from
such payment or settlement to the payment of the Obligations.
While we do not believe that the Lender will elect to exercise
such rights, if it did so at an inopportune time for the Company,
it could result in a severe liquidity crisis for the Company,
forcing us to use our available cash, which may or may not be
sufficient, and obtain alternative financing at a difficult time.
We incur substantial operating costs. These costs
principally consist of rent, payroll, professional fees,
insurance premiums and marketing related charges. Our ability to
operate profitably in the future depends on increasing sales
levels and decreasing our expenses. To accomplish this goal, we
are attempting to streamline our operations and reviewing other
possible areas of cost reductions.
Our headquarters are leased from a company owned by certain
of our officers, directors and shareholders. Rental costs for the
premises were approximately $150,000 for the nine months ended
August 31, 2003. The lease agreement calls for a three percent
(3%) increase each year and terminates September 30, 2010.
Amortization of the leasehold improvements is made ratably over
the shorter of the ten-year term of the lease or the life of the
improvements.
In November 2002, the Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common
stock at a price between $.04 and $.045. No action has been taken
on the above authorization, since the stock is currently trading
at a higher amount.
During the nine months ended August 31, 2003, we had net
cash used in operating activities of $645,013, as compared to
$1,443,116 in the nine months ended August 31, 2002. The
decrease in cash used in operating activities resulted
from the decrease in the Company's net loss,and decreases in accrued
expenses and inventory, partially offset by an increase in
accounts receivable.
We had net cash used in investing activities of $34,444 for
the nine months ended August 31, 2003, as compared to net cash
provided by investing activities of $1,686,420 for the nine
months ended August 31, 2002. The net cash used in investing
activities during the nine months ended August 31, 2003 resulted
primarily from the purchase of marketable securities and fixed
assets.
We had net cash used in financing activities of $84,541
as compared to net cash provided by financing activities of
approximately $255,455 for the nine months ended August 31,
2002. The cash used in financing activities during the nine
months ended August 31, 2003 was a result of the payments to the
credit line.
As a result of the foregoing, the Company had a net
decrease in cash and equivalents of $763,998 during the nine
months ended August 31, 2003, as compared to a net increase in
cash and equivalents of $498,759 for the nine months ended
August 31, 2002.
In April 2002, in connection with a Mutual Release, Settle
ment, Standstill and Non-Disparagement Agreement by and among
the Company and Equilink Capital Partners, LLC, Robert DePalo,
Old Oak Fund Inc. and Kenneth Orr (collectively, the
"Investors"), the Investors released the Company from potential
claims relating to services provided by the Investors,
transferred back to the Company 252,000 Common Shares, 19,300
shares of Series C preferred stock, and certain warrants,
representing all of the Company's securities held by the
Investors, and agreed, among other things, not to purchase any
securities of the Company and not to disparage the Company in
any manner, in exchange for $225,000. In addition, the Company
and the Investors mutually agreed to release each other from all
claims each party had, now has, or in the future might have
against the other. The Company recorded a $194,000 expense
during Fiscal 2002 in connection with this settlement.
In March 2002, we entered into an agreement with two
shareholders to settle a dispute as to the form of payment of
interest on certain 12% Convertible Promissory Notes. We agreed
to pay these shareholders an aggregate of $32,854, in exchange
for 17,522 Common Shares issued to them for converted interest.
In July 2000, Surge entered into a joint venture agreement
with Lelon (a supplier of component parts to Surge) to form
Surge/Lelon LLP, a Delaware limited liability partnership. The
Company has membership interests in the joint venture totaling
55%. Operations commenced in August 2002. These operations have
been consolidated with those of the Company. The ownership of
Lelon in this joint venture, totaling 45%, has been reported as a
minority interest. This joint venture was started in order to
more effectively market the products of the Lelon name brand. To
date, these operations have been relatively small.
In May 2002, Surge and an officer of Surge became the sole
owners of Surge Components, Limited, a Hong Kong corporation.
Under current Hong Kong law, Surge Components, Limited is
required to have at least two shareholders. Surge owns 999 shares
of the outstanding common stock and an officer of Surge owns one
share of the outstanding common stock. The officer of Surge has
assigned his rights regarding his one share to Surge. Operations
commenced in July 2002. These operations have been consolidated
with those of the Company. Surge Components, Limited was created
to better position the Company in the Asian markets.
We purchase a significant amount of our products from the
Asian market and in addition a number of our customers have
factories located in Asia. Surge Components Limited will help us
service these clients more effectively and in addition will
assist in the obtaining of new opportunities.
Inflation And Increasing Interest Rates
---------------------------------------
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. In addition, the interest on the
Company's line of credit is based upon the prime rate. Any
significant increase in the prime rate could significantly impact
our future operating results.
Item 3. Controls and Procedures.
-----------------------
The Company maintains "disclosure controls and procedures,"
as such term is defined in Rules 13a-15e and 15d-15e of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
that are designed to ensure that information required to be
disclosed in our reports, pursuant to the Exchange Act, is
recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding the
required disclosures. In designing and evaluating the disclosure
controls and procedures, management has recognized that any
controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the
desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost benefit
relationship of possible controls and procedures.
The Company's Chief Executive Officer and Chief Financial
Officer (its principal executive officer and principal financial
officer, respectively) has evaluated the effectiveness of its
"disclosure controls and procedures" as of the end of the period
covered by this Quarterly Report on Form 10-QSB. Based on his
evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure
controls and procedures are effective. There were no significant
changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the
date the controls were evaluated.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
By letters dated October 9, 2001 and January 17, 2002, we
were contacted by the SEC regarding the potentially questionable
payments previously disclosed, in which we were requested to
voluntarily furnish various documents. By letters dated October
23, 2001 and November 28, 2001, we voluntarily responded and
provided the SEC with such documents. On March 13, 2002, we
provided a supplemental response to the SEC. We have not had any
contact with, or received any letters from, the SEC concerning
this matter since March 2002.
On or about March 8, 2002, Superus filed a voluntary
petition seeking relief under Chapter 7 of the United States
Bankruptcy Code (the "Code") (Title 11) in the United States
Bankruptcy Court for the District of Delaware. A trustee was
appointed in the case and he held a meeting of creditors as
required by the Code. On June 18, 2002, the trustee filed his
report with the Court stating that the case was a no asset case
that had been fully administered and requesting that it be
discharged. There have been no objections filed to the report.
The deadline for filing any objections to discharge Superus' debt
has passed. The Court has not yet approved the trustee's report
or closed the case.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Certificate of Incorporation of the Company, as
amended.(1)
3.2 By-Laws of the Company.(1)
31.1 Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference from the Company's
Registration Statement on Form SB-2 (No 333-630
NY) declared effective by the Securities and
Exchange Commission on July 31, 1996.
(b) Reports on Form 8-K.
On July 17, 2003, the Company filed a Current Report on
Form 8-K with the Securities and Exchange Commission to
disclose the issuance of a press release announcing its
results of operations for its fiscal quarter ended May 31,
2003.
SIGNATURES
----------
In accordance with the requirements of the Securities
Exchange Act of 1934, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
SURGE COMPONENTS, INC.
By:/s/Ira Levy
------------------------
Ira Levy
Chief Executive Officer
and President (Principal
Executive and Financial
Officer)
Dated: October 7, 2003
Exhibit 31.1
CERTIFICATION 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-QSB 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 7, 2003
/s/Ira Levy
-------------------------------------
Ira Levy
Chief Executive Officer and President
(Principal Executive and 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-QSB for the period ending August
31, 2003, as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), Ira Levy, President, Chief
Executive Officer, and Chief Financial Officer of the Company
certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,
to the best of his knowledge:
(1) The Report fully complies with the requirements of
Section 13(a) or Section 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
result of operations of the Company.
October 7, 2003 /s/Ira Levy
-------------------------------------
Ira Levy
Chief Executive Officer and President
(Principal Executive and Financial
Officer)
This certification accompanies the Report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not,
except to the extent required by the Sarbanes-Oxley Act of 2002,
be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.