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 February 28, 2003
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[ ] 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 Identification No.)
incorporation or organization)
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
April 7, 2003, 8,743,326 shares of common stock, par value $.001
per share were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Index to Form 10-QSB
for the Period Ended February 28, 2003
PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements:
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Income Operations
and Comprehensive Income Loss 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis or
Plan of Operation. 10- 17
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signatures 19
Certifications 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, November 30,
2003 2002
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(Unaudited)
ASSETS
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Current assets:
Cash $1,390,899 $1,494,441
Marketable securities - available for sale 273,430 270,145
Accounts receivable (net of allowance for
doubtful accounts of $40,335) 2,004,962 1,557,947
Inventory, net 1,708,783 2,121,198
Prepaid expenses and income taxes 65,822 116,946
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Total current assets 5,443,896 5,560,677
Fixed assets - net of accumulated depreciation
and amortization of $880,747 and
$814,505 1,129,707 1,173,585
Other assets 4,294 4,054
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Total assets $6,577,897 $6,738,316
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, November 30,
2003 2002
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Debt not in compliance with terms $ 422,654 $ 467,071
Accounts payable 2,041,794 1,774,738
Accrued expenses 713,289 859,320
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Total current liabilities 3,177,737 3,101,129
Deferred rent 52,033 48,306
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Total liabilities 3,229,770 3,149,435
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Minority interest 13,870 25,328
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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,and a
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 22,970,280 22,980,955
Stock subscriptions receivable (2,100) (3,500)
Accumulated other comprehensive loss -
unrealized loss on marketable securities -
available for sale (16,864) (17,439)
Accumulated deficit (19,625,846) (19,405,250)
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Total shareholders' equity 3,334,257 3,563,553
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Total liabilities and
shareholders' equity $ 6,577,897 $ 6,738,316
========== ==========
See notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended
February 28,
2003 2002
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Net sales $3,040,335 $2,794,077
Cost of goods sold 2,232,650 2,011,856
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Gross profit 807,685 782,221
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Operating expenses:
Selling and shipping expenses 254,616 234,158
General and administrative
expenses 722,655 838,354
Financial consulting services -- 75,000
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Total operating expenses 977,271 1,147,512
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Loss before other income (expense)
and income taxes (169,586) (365,291)
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Other income (expense):
Investment income 6,478 14,429
Interest expense (58,699) (4,135)
Loss on sale of securities - (8,307)
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Other income (expense) (52,221) 1,987
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(221,807) (363,304)
Minority interest 11,453 -
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Loss before income taxes (210,354) (363,304)
Income taxes 10,242 5,043
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Net loss (220,596) (368,347)
Dividends on preferred stock 36,850 15,500
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Net loss available to
common shareholders $ (183,746) $ (383,847)
========== ===========
Other comprehensive loss
Net loss (220,596) (368,347)
Unrealized holding gain (loss)
on investment securities (575) (14,908)
Reclassification adjustment-
loss on sale of securities - 8,037
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Total comprehensive loss $(221,171) $ (375,218)
========= ===========
Weighted average shares outstanding
Basic 8,743,326 9,022,448
Diluted 8,743,326 9.022,448
(Loss) available to common
shareholders, per share
Basic $ (.02) $ (.04)
Diluted $ (.02) (.04)
See notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
February 28,
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(220,596) $ (368,347) $(2,093,265000)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and amortization 66,242 83,432
Minority interest (11,458) -
Loss on sale of securities - 8,307
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (447,015) 135,380
Inventory 412,415 174,741
Prepaid expenses and income taxes 50,884 (193,147)
Accounts payable 267,052 (17,923)
Accrued expenses and taxes (156,702) (376,792)
Deferred rent 3,727 5,318
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NET CASH FLOWS FROM OPERATING ACTIVITIES (35,451) (549,031)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (2,710) (12,241)
Proceeds from sale of marketable securities - 200,000
Collections of amounts due under repurchase
agreement - 260,459
Acquisition of fixed assets (22,364) (6,854)
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NET CASH FLOWS FROM INVESTING ACTIVITIES (25,074) 441,364
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock subscription
receivable 1,400 1,500
Net borrowings on loan payable (44,417) -
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NET CASH FLOWS FROM FINANCING ACTIVITIES (43,017) 1,500
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NET CHANGE IN CASH AND EQUIVALENTS (103,542) (106,167)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,494,441 1,030,181
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CASH AND EQUIVALENTS AT END OF PERIOD $1,390,899 $ 924,014
========= =========
SUPPLEMENTAL DISCLOSURE CASH FLOW INFORMATION:
Income taxes paid $ 5,329 $ 5,043
========= =========
Interest paid $ 58,699 $ 4,135
========= =========
See notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2003
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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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 February 28, 2003 and the related statements of
operations and comprehensive loss and cash flows for the three
months ended February 28, 2003 and 2002.
The consolidated results of operations for the three months ended
February 28, 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
---------------------------
In March 2002, Superus filed for bankruptcy protection under
Chapter 7 of the United States Bankruptcy code. The Court is
currently reviewing the bankruptcy petition.
Note 3 - SETTLEMENT AGREEMENT
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In April 2002, in connection with a Mutual Release, Settlement,
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 back to the Company 252,000 shares of
common stock, 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 disparage the Company in any manner, in exchange for $225,000
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.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2003
NOTE 4 - PREFERRED DIVIDENDS
----------------------------
Dividends on the Non-Voting Redeemable Convertible Series C
Preferred Stock aggregating $36,850 for the semiannual periods
ended December 31, 2001, June 30, 2002, and December 31, 2002, 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 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 "SEC". 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 6 - 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 at the greater of
the prime rate plus two percent (2.0%) or 6.75% (6.75% at February
28, 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
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2003
NOTE 6 - DEBT NOT IN COMPLIANCE WITH TERMS (continued)
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of the Credit Line. The Credit Line is collateralized by
substantially all the Company's assets and contains various
financial covenants pertaining to the maintenance of working
capital and tangible net worth. On February 28, 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 February 28, 2003, the Company has $422,654
outstanding under the Credit Line.
NOTE 7 - 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, performances 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 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 proposed 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 SEC. 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.
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 February 28, 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 $7,441,000.
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 three months ended February 28,
2003.
Results of Operations
Consolidated net sales for the three months ended February
28, 2003 increased by $246,258, or 9%, to $3,040,335 as
compared to net sales of $2,794,077 for the three months ended
February 28, 2002. The net sales for the three months ended
February 28, 2003 for Surge without Challenge/Surge, Inc.
("Challenge"), one of the Company's subsidiaries, increased by
$342,082, or 20% when compared to the three months ended
February 28, 2002. The Company had higher sales during the current
year as a result of obtaining new customers.
The net sales for the three months ended February 28, 2003 for
Challenge decreased by $95,824, or 9% when compared to the three
months ended February 28, 2002. Challenge continues to experience
depressed sales 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.
The semiconductor industry has historically experienced wide
fluctuations in the supply and demand of semiconductors. These
fluctuations have helped produce many occasions when supply and
demand for semiconductors 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.
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 three months ended February 28, 2003
increased by $25,464 or 3%, as compared to the three months
ended February 28, 2002. Gross margin as a percentage of net sales,
however, decreased from 28% for the three months ended February 28,
2002 to 27% for the three months ended February 28, 2003. The
increase in our gross profit was a result of increased sales from
new customers. The decrease in the gross margin 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 three months ended
February 28, 2003 decreased by $115,699, or 14%, as compared to
the three months ended February 28, 2002. The decrease is
primarily due to decreased professional fees.
Selling and shipping expenses for the three months ended
February 28, 2003 increased by $20,458, or 9%, as compared to the
three months ended February 28, 2002. This increase is primarily
due to the increased sales commissions and related selling expenses
resulting from higher sales in the current three-month period.
No financial consulting fees and expenses were incurred during
the three months ended February 28, 2003. Financial consulting fees
and expenses for the three months ended February 28, 2002 were
$75,000, 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 an investment
banker, as more fully explained below in the liquidity and capital
resource section.
Interest expense increased $54,564 for the three months ended
February 28, 2003, as compared to the three months ended February
28, 2002. This increase is attributable to the Company borrowing
funds from an asset based lender.
Investment income for the three months ended February 28, 2003
decreased by $7,951, or 55%, as compared to the three months ended
February 28, 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.
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 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 "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
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
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 February 28, 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
additional claims 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.
As result of the foregoing, the Company on a consolidated
basis had a net loss of $220,596 for the three months ended
February 28, 2003, as compared to $368,347 for the three months
ended February 28, 2002.
Liquidity and Capital Resources
Working capital decreased by $193,389 during the three
months ended February 28, 2003 from $2,459,548 at November 30,
2002, to $2,266,159, at February 28, 2003. This decrease resulted
primarily from the decrease in inventory and accrued expenses and
as partially offset by a increase in accounts payable and accounts
receivable. Our current ratio decreased from 1.8:1 at November 30,
2002, to 1.7:1 at February 28, 2003. Inventory turned 1.2 times
during the three months ended February 28, 2003 as compared to 0.90
times during the three months ended February 28, 2002. The average
number of days to collect receivables remained the same at 53 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 "Lender") 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 February 28, 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 assets and contains various
financial covenants pertaining to the maintenance of working
capital and tangible net worth. At February 28, 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 $52,700 for the three months ended
February 28, 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 three months ended February 28, 2003, we had net
cash used in operating activities of $35,451, as compared to
$549,031 in the three months ended February 28, 2002. The decrease
decrease in cash used in operating activities resulted from the
decrease in Company's net loss, a decrease in accrued expenses
and an increase in prepaid expenses and income taxes, partially
offset by a decrease in inventory.
We had net cash used in investing activities of $(25,074) for
the three months ended February 28, 2003, as compared to net cash
provided by investing activities of $441,364 for the three months
ended February 28, 2002. The net cash used in investing activities
during the three months ended February 28, 2003 resulted primarily
from the purchase of marketable securities and fixed assets.
We had net cash used in financing financing
activities of $43,017 for the three months ended February 28, 2003,
as compared to net cash provided by financing activities of
approximately $1,500 for the three months ended February 28, 2002.
The cash used in financing activities during the quarter ended
February 28, 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 $103,542 during the three months ended
February 28, 2003, as compared to $106,167 for the three months
ended February 28, 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.
Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the evaluation, the Chief Executive Officer and
Chief 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 of
their evaluation.
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. The Court has not yet approved
the trustee's report or closed the case. There have been no
objections filed to the report.
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)
99.1 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.
None.
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: April 11, 2003
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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I am
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and
procedures 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 quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filling date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that
involves management or other employees who have a significant role
in the registrant's internal controls.
6. The registrant's other certifying officers and I
have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: April 11, 2003
/s/Ira Levy
----------------------------------
Name: Ira Levy
Title: Chief Executive Officer
and President
(Principal Executive
Officer and Principal
Financial Officer)
Exhibit 99.1
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 February
28, 2003 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), Ira Levy, Chief Executive Officer
and President 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.
April 11, 2003
/s/Ira Levy
--------------------------
Name: Ira Levy
Title: 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.