0001213900-17-010599.txt : 20171016 0001213900-17-010599.hdr.sgml : 20171016 20171016160543 ACCESSION NUMBER: 0001213900-17-010599 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 65 CONFORMED PERIOD OF REPORT: 20170831 FILED AS OF DATE: 20171016 DATE AS OF CHANGE: 20171016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SURGE COMPONENTS INC CENTRAL INDEX KEY: 0000747540 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 112602030 STATE OF INCORPORATION: NY FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27688 FILM NUMBER: 171138781 BUSINESS ADDRESS: STREET 1: 95 EAST JEFRYN BLVD CITY: DEER PARK STATE: NY ZIP: 11729 BUSINESS PHONE: 5165951818 MAIL ADDRESS: STREET 1: SURGE COMPONENTS INC STREET 2: 95 EAST JEFRYN BLVD CITY: DEER PARK STATE: NY ZIP: 11729 10-Q 1 f10q0817_surgecomponents.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended August 31, 2017

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER 000-27688

 

SURGE COMPONENTS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   11-2602030
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
95 East Jefryn Blvd., Deer Park, New York   11729
(Address of principal executive offices)   (Zip code)

 

Issuer's telephone number: (631) 595-1818

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer ☐ 
Non-accelerated filer  (Do not check if a smaller reporting company) Smaller reporting company ☒ 
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐   No ☒

 

As of October 16, 2017, the registrant had 5,224,431 shares of common stock, $.001 par value, outstanding.

 

 

 

 

 

 

SURGE COMPONENTS, INC

 

TABLE OF CONTENTS

 

  Page
PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements   1
     
Consolidated Balance Sheets as of  August 31, 2017 (unaudited) and November 30, 2016    1
     
Consolidated Statements of Operations for the nine and three  months ended August 31, 2017 and August 31, 2016 (unaudited)   3
     
Consolidated Statements of Cash Flows for the nine months ended August 31, 2017 and August 31, 2016 (unaudited)   4
     
Notes to Consolidated Financial Statements (unaudited)    6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   24
     
Item 4. Controls and Procedures    24
     
PART II - OTHER INFORMATION    
     
Item 1. Legal Proceedings   25
     
Item 1A. Risk Factors   25
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   25
     
Item 3. Defaults Upon Senior Securities   25
     
Item 4. Mine Safety Disclosures   25
     
Item 5. Other Information   25
     
Item 6. Exhibits   26
     
SIGNATURES   27

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

  

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

   August 31,   November 30, 
   2017   2016 
   (unaudited)     
ASSETS        
         
Current assets:        
Cash  $1,537,367   $7,120,601 
Accounts receivable - net of allowance for doubtful accounts of $160,895 and $159,976   6,043,381    5,558,808 
Inventory, net   2,813,582    2,929,570 
Prepaid expenses and income taxes   165,169    144,824 
Deferred income taxes   310,712    304,887 
           
Total current assets   10,870,211    16,058,690 
           
Fixed assets – net of accumulated depreciation and amortization of $2,209,187 and $2,185,540   73,185    81,974 
           
Deferred income taxes   621,425    609,773 
Other assets   13,384    13,384 
           
Total assets  $11,578,205   $16,763,821 

 

See notes to consolidated financial statements.

 

 1 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

(Continued)

 

   August 31,   November 30, 
   2017   2016 
   (unaudited)     
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable  $5,132,010   $3,237,592 
Loan Payable   600,000    - 
Accrued expenses and taxes   953,018    1,544,882 
Accrued salaries   540,187    431,111 
           
Total current liabilities   7,225,215    5,213,585 
           
Deferred rent   36,318    39,962 
           
Total liabilities   7,261,533    5,253,547 
           
Commitments and contingencies          
           
Shareholders’ equity:          
Preferred stock - $.001 par value, 5,000,000 shares authorized:          
Series A – 260,000 shares authorized, none outstanding, non-voting, convertible, redeemable.          
Series B – 200,000 shares authorized, none outstanding, voting, convertible, redeemable.          
           
Series C–100,000 shares authorized, 10,000 and 10,000 shares issued and outstanding, redeemable,  convertible, and a liquidation preference of $5 per share   10    10 
Series D – 75,000 shares authorized, none issued or outstanding, voting, convertible, redeemable.          
Common stock - $.001 par value, 75,000,000 shares authorized, 5,224,431 and 10,224,431 shares issued and outstanding   5,224    10,224 
Additional paid-in capital   16,557,310    23,702,310 
Accumulated deficit   (12,245,872)   (12,202,270)
           
Total shareholders’ equity   4,316,672    11,510,274 
           
Total liabilities and shareholders’ equity  $11,578,205   $16,763,821 

 

See notes to consolidated financial statements.

 

 2 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

(Unaudited)

 

   Nine Months Ended
August 31,
   Three Months Ended
August 31,
 
   2017   2016   2017   2016 
Net sales  $21,793,936   $21,639,650   $8,695,624   $8,243,197 
                     
Cost of goods sold   16,341,339    16,209,408    6,445,861    6,104,817 
                     
Gross profit   5,452,597    5,430,242    2,249,763    2,138,380 
                     
Operating expenses:                    
Selling and shipping expenses   1,892,777    1,848,239    671,802    657,093 
General and administrative expenses   3,565,066    3,092,754    1,020,208    1,003,779 
Depreciation and amortization   23,647    23,448    7,882    7,816 
                     
Total operating expenses   5,481,490    4,964,441    1,699,892    1,668,688 
                     
(Loss) income before other income (expense) and income taxes   (28,893)   465,801    549,871    469,692 
                     
Other income (expense):                    
Investment income   3,106    6,385    1    2,303 
Interest expense   (16,056)   -    (9,242)   - 
                     
Other income (expense)   (12,950)   6,385    (9,241)   2,303 
                     
(Loss) income before income taxes   (41,843)   472,186    540,630    471,995 
                     
Income taxes (benefit)   (3,241)   93,588    125,727    80,067 
                     
Net (loss) income   (38,602)   378,598    414,903    391,928 
Dividends on preferred stock   5,000    5,000    2,500    2,500 
                     
Net (loss) income available to common shareholders  $(43,602)  $373,598   $412,403   $389,428 
                     
Net (loss) income per share available to common shareholders:                    
                     
Basic  $(.01)  $.04   $.08   $.04 
Diluted  $(.01)  $.04   $.08   $.04 
                     
Weighted Shares Outstanding:                    
Basic   7,323,511    10,031,192    5,224,431    10,089,131 
Diluted   7,323,511    10,147,640    5,383,029    10,205,579 

 

See notes to consolidated financial statements.

 

 3 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(unaudited)

 

   Nine Months Ended 
   August 31,
2017
   August 31,
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net (loss) income  $(38,602)  $378,598 
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:          
Depreciation and amortization   23,647    23,448 
Stock compensation expense   -    74,363 
Deferred income taxes   (17,477)   70,704 
Allowance for doubtful accounts   919    24,004 
           
CHANGES IN OPERATING ASSETS AND LIABILITIES:          
Accounts receivable   (485,492)   (909,379)
Inventory   115,988    (133,894)
Prepaid expenses and income taxes   (20,345)   (31,588)
Other assets   -    - 
Accounts payable   1,894,418    522,339 
Deferred rent   (3,644)   (1,064)
Accrued expenses   (487,788)   (202,846)
           
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES   981,624    (185,315)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Acquisition of fixed assets   (14,858)   (1,520)
           
NET CASH FLOWS USED IN INVESTING ACTIVITIES  $(14,858)  $(1,520)

 

See notes to consolidated financial statements.

  

 4 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(unaudited)

(Continued)

 

   Nine Months Ended 
   August 31,
2017
   August 31,
2016
 
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Repurchase of Common Stock  $-   $(23,006)
Net Borrowings from Loan Payable   600,000    - 
Repurchase of Common Stock in Tender Offer   (7,150,000)   - 
           
NET CASH FLOWS USED IN FINANCING ACTIVITIES   (6,550,000)   (23,006)
           
NET CHANGE IN CASH   (5,583,234)   (209,841)
           
CASH AT BEGINNING OF PERIOD   7,120,601    7,169,118 
           
CASH AT END OF PERIOD  $1,537,367   $6,959,277 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
           
Income taxes paid  $14,875   $34,865 
           
Interest paid  $16,056   $- 
           
NONCASH INVESTING AND FINANCING ACTIVITIES:          
Accrued dividends on preferred stock  $5,000   $5,000 

 

See notes to consolidated financial statements.

 

 5 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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

 

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

 

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

 

On August 31, 2010, the Company changed its corporate domicile by merging into a newly-formed corporation, Surge Components, Inc. (Nevada), which was formed in the State of Nevada for that purpose.  Surge Components Inc. is the surviving entity. The number of common stock shares authorized for issuance was increased to 75,000,000 shares.

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(1) Principles of Consolidation:

 

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

 

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

 

The results and trends in these interim consolidated financial statements for the nine months ended August 31, 2017 and August 31, 2016 may not be representative of those for the full fiscal year or any future periods.

 

(2) Accounts Receivable:

 

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

 

(3) Revenue Recognition:

 

Revenue is recognized for products sold by the Company when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company’s warehouse. 

 

For direct shipments, revenue is recognized when product is shipped from the Company’s supplier. The Company has a long term supply agreement with one of its suppliers. The Company purchases the merchandise from the supplier and has the supplier directly ship the merchandise to the customer through the freight forwarder.  Title passes to the customer upon the merchandise being received by a freight forwarder. Direct shipments were approximately $2,825,000 and $2,885,000 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

 

The Company also acts as a sales agent to certain customers in North America for one of its suppliers. The Company reports these commissions as revenues in the period earned. Commission revenue totaled $230,646 and $301,396 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

  

The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.

 

 6 

 

  

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(3) Revenue Recognition (continued):

 

The Company and its subsidiaries currently have agreements with several distributors. There are no provisions for the granting of price concessions in any of the agreements.  Revenues under these distribution agreements were approximately $3,741,000 and $6,434,000 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

 

(4) Inventories:

 

Inventories, which consist solely of products held for resale, are stated at the lower of cost (first-in, first-out method) or market.  Products are included in inventory when the Company obtains title and risk of loss on the products, primarily when shipped from the supplier. Inventory in transit principally from foreign suppliers at August 31, 2017 was $1,144,000. At August 31, 2017, the Company has a reserve against slow moving and obsolete inventory of $262,874. From time to time, the Company’s products are subject to legislation from various authorities on environmental matters.

 

(5) Depreciation and Amortization:

 

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

 

Furniture, fixtures and equipment 5 - 7 years
Computer equipment 5 years
Leasehold Improvements Estimated useful life or lease term, whichever is shorter

 

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

 

 7 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

  

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(6) Concentration of Credit Risk:

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable.  The Company maintains substantially all of its cash in a limited number of financial institutions.   At August 31, 2017 and November 30, 2016, the Company’s uninsured cash balances totaled $972,872 and $4,550,807, respectively.

 

(7) Income Taxes:

 

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

 

The Company follows the provisions of the Accounting Standards Codification (“ASC”) 740, “Income Taxes.” There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company’s financial condition or results of operations as a result of ASC 740.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2013, and state tax examinations for years before fiscal years ending November 30, 2012. Management does not believe there will be any material changes in the Company’s unrecognized tax positions over the next twelve months.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of interest expense. There was no accrued interest or penalties associated with any unrecognized benefits, nor was any interest expense recognized during the nine months ended August 31, 2017 and August 31, 2016.

 

 8 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(8) Cash Equivalents:

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

(9) Use of Estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

 

(10) Marketing and promotional costs:

 

Marketing and promotional costs are expensed as incurred and have not been material to date. The Company has contractual arrangements with several of its distributors which provide for cooperative advertising rights to the distributor as a percentage of sales. Cooperative advertising is reflected as a reduction in revenues and has not been material to date.

 

(11) Fair Value of Financial Instruments:

 

The carrying amount of cash balances, accounts receivable, accounts payable and accrued expenses approximate their fair value based on the nature of those items. Estimated fair values of financial instruments are determined using available market information and appropriate valuation methodologies.  Considerable judgment is required to interpret the market data used to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.

 

 9 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(12) Shipping Costs

 

The Company classifies shipping costs as a component of selling expenses.  Shipping costs totaled $8,070 and $4,991 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

  

(13) Earnings (Loss) Per Share

 

Basic loss (earnings) per share includes no dilution and is computed by dividing net loss (income) available to common stockholders by the weighted average number of common shares outstanding for the period. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive stock options and convertible preferred stock will be exercised for shares of common stock. Dilutive securities are excluded from diluted weighted shares outstanding for the nine months ended August 31, 2017 since the Company had a net loss in the period and including the securities would be anti-dilutive. Total potentially dilutive shares excluded from diluted weighted shares outstanding at August 31, 2017 and August 31, 2016 totaled 402,000 and 518,991, respectively.

 

(14) Stock Based Compensation

 

Stock Based Compensation to Employees

 

The Company accounts for its stock-based compensation for employees in accordance with ASC 718.   The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees over the related vesting period.

 

Stock Based Compensation to Other than Employees

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

 

 10 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE C – FIXED ASSETS

 

Fixed assets consist of the following:

 

   August 31,   November 30, 
   2017   2016 
         
Furniture and Fixtures  $327,971   $327,971 
Leasehold Improvements   962,637    956,637 
Computer Equipment   991,764    982,906 
Less-Accumulated Depreciation   (2,209,187)   (2,185,540)
Net Fixed Assets  $73,185   $81,974 

 

Depreciation and amortization expense for the nine months ended August 31, 2017 and August 31, 2016 was $23,647 and $23,448, respectively.

 

NOTE D – LINE OF CREDIT

 

In February 2017, the Company obtained a line of credit with a bank for up to $3,000,000 (the “Credit Line”). Borrowings under the Credit Line are due upon demand and accrue interest at the greater of the prime rate or the LIBOR rate plus two percent (and may be increased by three percent in the event the Company fails to (i) repay all amounts due on the Credit Line upon demand or (ii) comply with any terms or conditions relating to the Credit Line). As of August 31, 2017, the balance on the Credit Line was $600,000. As of August 31, 2017, the Company was not in compliance with the covenant for the debt service coverage ratio.

 

NOTE E – ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

    August 31,     November 30,  
    2017     2016  
             
Commissions   $ 226,268     $ 281,888  
Preferred Stock Dividends     136,569       131,569  
Other accrued expenses     147,090       321,465  
Accrued Professional Fees     443,091       809,960  
    $ 953,018     $ 1,544,882  

 

NOTE F – RETIREMENT PLAN

 

In June 1997, the Company adopted a qualified 401(k) retirement plan for all full-time employees who are twenty-one years of age and have completed twelve months of service.  The plan allows total employee contributions of up to fifteen percent (15%) of the eligible employee’s salary. The Company makes a matching contribution of twenty percent (20%) of each employee’s contribution up to five percent (5%) of the employee’s salary.  Net assets for the plan, as estimated by Union Central, Inc., which maintains the plan’s records, were approximately $1,229,000 at November 30, 2016. Pension expense for the nine months ended August 31, 2017 and August 31, 2016 was $773 and $1,535, respectively.

 

 11 

 

 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE G – SHAREHOLDERS’ EQUITY

 

[1] Preferred Stock:

 

In February 1996, the Company amended its Certificate of Incorporation to authorize the issuance of 1,000,000 shares of preferred stock in one or more series. In August 2010, the number of preferred shares authorized for issuance was increased to 5,000,000 shares.

 

In January 2000, the Company authorized 260,000 shares of preferred stock as Non-Voting Redeemable Convertible Series A Preferred Stock (“Series A Preferred Stock”). None of the Series A Preferred Stock is outstanding as of August 31, 2017.

 

In November 2000, the Company authorized 200,000 shares of preferred stock as Voting Redeemable Convertible Series B Preferred Stock (“Series B Preferred Stock”). None of the Series B Preferred Stock is outstanding as of August 31, 2017.

 

In November 2000, the Company authorized 100,000 shares of preferred stock as Non-Voting Redeemable Convertible Series C Preferred Stock (“Series C Preferred”). Each share of Series C Preferred is automatically convertible into 10 shares of our common stock upon shareholder approval.  If the Series C Preferred were converted into common stock on or before April 15, 2001, these shares were entitled to cumulative dividends at the rate of $.50 per share per annum commencing April 15, 2001 payable on June 30 and December 31 of each year.  In November 2000, 70,000 shares of the Series C Preferred were issued in payment of financial consulting services to its investment banker and a shareholder of the Company.  In April 2001, 8,000 shares of the Series C Preferred were repurchased and cancelled.  

 

In April 2002, in connection with a Mutual Release, Settlement, Standstill and Non-Disparagement Agreement among other provisions, certain investors transferred back to the Company 252,000 shares of common stock, 19,300 shares of Series C preferred stock, and certain warrants, in exchange for $225,000. These repurchased shares were cancelled.

 

In February 2006, the Company settled with a shareholder to repurchase 10,000 shares of Series C Preferred plus accrued dividends for $50,000.

 

Pursuant to exchange agreements dated as of March 14, 2011, 9,000 shares of Series C Preferred were returned to the Company for cancellation in exchange for 112,500 shares of common stock.

 

In October 2014, 2,000 shares of Series C Preferred were converted into 20,000 shares of common stock.

 

In April 2015, the Company entered into a settlement agreement with a shareholder pursuant to which 7,500 shares of Series C Preferred were returned to the Company for cancellation in exchange for 110,000 shares of common stock plus $65,000 for accrued dividends and legal fees and expenses.

 

In July 2015, 4,200 shares of Series C Preferred were exchanged for 42,000 shares of common stock and $29,838 in accrued dividends.

 

Dividends aggregating $136,569 have not been paid for the semi-annual periods ended December 31, 2001 through the semi-annual payment due June 30, 2017.  The Company has accrued these dividends.  At August 31, 2017, there are 10,000 shares of Series C Preferred issued and outstanding.

 

In October 2016, the Company authorized 75,000 shares of preferred stock as Voting Non-Redeemable Convertible Series D Preferred Stock (“Series D Preferred”). None of the Series D Preferred Stock is outstanding as of August 31, 2017.

 

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SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE G – SHAREHOLDERS’ EQUITY (Continued)

 

[2] 2010 Incentive Stock Plan

 

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

 

Activity in the 2010 Incentive Plan for the nine months ended August 31, 2017 is summarized as follows:

 

          Weighted  
          Average  
    Shares     Exercise
Price
 
             
Options outstanding December 1, 2016     352,000     $ 0.87  
Options issued in the nine months ended August 31, 2017     -     $ -  
Options exercised in the nine months ended August 31, 2017     -     $ -  
Options cancelled in the nine months ended August 31, 2017     (50,000   $ 0.51  
Options outstanding at August 31, 2017     302,000     $ 0.92  
                 
Options exercisable at August 31, 2017     302,000     $ 0.92  

 

[3] 2015 Equity Incentive Plan

 

In November 2015, the Company adopted and its shareholders ratified, the 2015 Equity Incentive Plan (“2015 Incentive Plan”). The 2015 Incentive Plan provides for the grant of awards to officers, employees, directors or consultants to the Company to purchase up to an aggregate of 1,500,000 shares of common stock.

 

In May 2016 a total of 99,151 shares were issued to the Company’s officers as part of their 2015 bonus compensation under the 2015 Incentive Plan.

 

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SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE G – SHAREHOLDERS’ EQUITY (Continued)

 

Stock Compensation

 

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

 

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

 

The intrinsic value of the exercisable options at August 31, 2017 totaled $0.  At August 31, 2017 the weighted average remaining life of the stock options is 1.3 years.  At August 31, 2017, there was no unrecognized compensation cost related to the stock options granted under the Company’s incentive plans.

 

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SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE G – SHAREHOLDERS’ EQUITY (Continued)

 

[4] Authorized Repurchase of Shares:

 

In November 2015, the Board of Directors authorized the Company to purchase up to $500,000 of common stock in the open market or in privately negotiated transactions. Pursuant to such authority and pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), a total of 57,283 shares were repurchased by the Company for approximately $48,300. In January 2017, the Company terminated its repurchase program.

 

In March 2017, the Company completed a tender offer whereby it purchased for cash 5,000,000 shares of its common stock, at a price of $1.43 per share, or $7,150,000.

 

[5] Compensation of Directors

 

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

 

NOTE H – SETTLEMENT AGREEMENT

 

On or about October 31, 2016, Michael D. Tofias and Bradley P. Rexroad (collectively, the “Stockholders”) filed a Complaint and Motion for Preliminary Injunction against the Company in the eighth Judicial District Court, Clark County, Nevada, Case No. A-16-745890-B, seeking relief including, inter alia, immediate inspection of certain books and records and a 60-day postponement of the scheduled annual meeting of stockholders (“Annual Meeting”). On November 16, 2016, after the Company postponed the Annual Meeting and provided certain books and records to the Stockholders, the Stockholders filed an Amended Complaint, which named all members of the Board as defendants and alleged that the directors had breached their fiduciary duty to the Stockholders. On December 1, 2016, following a hearing, the Court denied the request for a preliminary injunction.  On December 22, 2016, the Company entered into a settlement agreement (the “Settlement Agreement”) with the Stockholders.

 

The Settlement Agreement provides that:

 

  the Stockholders irrevocably withdraw their director nominations for the Board and stockholder proposals for the Company’s annual meeting of stockholders for fiscal year 2015 (the “Meeting”);

 

  the Stockholders will vote all of their shares of common stock of the Company in accordance with the Board’s recommendations with respect to the election of the Board’s director nominees, the ratification of the Company’s independent registered public accounting firm for the fiscal year ending November 30, 2016 (the “2017 Meeting”) and the ratification of the Company’s rights plan;

 

  the Company will hold the Meeting on January 5, 2017 and will hold its annual meeting of stockholders for fiscal year 2016 by December 29, 2017;

 

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

 

  the Company will not make any stock or option grants or grant any other non-cash compensation to its current officers and directors until December 23, 2017;

 

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

 

  The Company will commence an issuer tender offer to all of its stockholders to repurchase at least 5,000,000 shares of its common stock at at price of $1.43 per share (the “Tender Offer”), which Tender Offer will be completed by March 15, 2017.

 

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SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE H – SETTLEMENT AGREEMENT (Continued)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Settlement Agreement terminates on the date that is 15 business days prior to the deadline for the submission of director nomination and stockholder proposals for the 2019 Meeting.

 

NOTE I – INCOME TAXES

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates in effect in the years in which the differences are expected to reverse.  

 

The Company’s deferred income taxes are comprised of the following:

 

   August 31,   November 30, 
   2017   2016 
Deferred Tax Assets        
    Net operating loss  $3,937,672   $4,208,030 
    Allowance for bad debts   49,643    49,276 
    Inventory   97,126    100,446 
    Deferred Rent   14,505    15,961 
    Depreciation   148,548    149,172 
    Total deferred tax assets   4,247,494    4,522,885 
    Valuation allowance   (3,315,357)   (3,608,225)
           
        Total  $932,137   $914,660 

 

The valuation allowance for the deferred tax assets relates principally to the uncertainty of the utilization of deferred tax assets and was calculated in accordance with the provisions of ASC 740, which requires that a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The valuation allowance decreased by approximately $293,000 during the nine months ended August 31, 2017.  This valuation is based on management estimates of future taxable income. Although the degree of variability inherent in the estimates of future taxable income is significant and subject to change in the near term, management believes, that the estimate is adequate. The estimated valuation allowance is continually reviewed and as adjustments to the allowance become necessary, such adjustments are reflected in the current operations.

 

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SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE I – INCOME TAXES (Continued)

 

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

 

   Nine Months Ended 
   August 31,
2017
   August 31,
2016
 
         
Current:        
Federal  $821   $5,217 
States   13,415    17,667 
           
    14,236    22,884 
Deferred:          
Federal   (13,544)   54,796 
States   (3,933)   15,908 
           
    (17,477)   70,704 
           
Provision for income taxes  $(3,241)  $93,588 

 

The Company files a consolidated income tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of approximately $9,844,000 for federal and state purposes, which expire through 2020. A reconciliation of the difference between the expected income tax rate using the statutory federal tax rate and the Company’s effective rate is as follows: 

 

   Nine Months Ended 
   August 31,   August 31, 
   2017   2016 
U.S Federal Income tax statutory rate   (34)%   34%
Valuation allowance   30%   (22)%
State income taxes   (3)%   8%
Other   -    - 
Effective tax rate   (7)%   20%

 

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SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE J – RENTAL COMMITMENTS

 

The Company leases its office and warehouse space through 2020 from a corporation that is controlled by officers/shareholders of the Company (“Related Company”).  Annual minimum rental payments to the Related Company approximated $173,000 for the year ended November 30, 2016, and increase at the rate of three per cent per annum throughout the lease term.

 

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

 

In June 2015, the Company renewed its lease to rent office space and a warehouse in Hong Kong for two years and is currently in negotiations to renew the lease. Annual minimum rental payments for this space are approximately $58,500.

 

The Company’s future minimum rental commitments at August 31, 2017 are as follows:

 

2018  $178,662 
2019  $182,236 
2020  $185,880 
2021  $15,516 
   $562,294 

 

Net rental expense for the nine months ended August 31, 2017 and August 31, 2016 were $235,334 and $233,504 respectively, of which $192,102 and $189,522 respectively, was paid to the Related Company.

 

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SURGE COMPONENTS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE K – EMPLOYMENT AND OTHER AGREEMENTS

 

In February 2016, the Company entered into revised employment agreements with two officers of the Company. Pursuant to these agreements, the base salary for one officer is $275,000 and the base salary for the other officer is $225,000. The agreements continue until terminated by either party.

 

The Company’s compensation committee may award these officers with bonuses and will review the base salary amounts for each of the officers on an annual basis to determine if any changes to the base salary amounts need to be made and may also award these officers with annual bonuses.  Pursuant to the employment agreements, the officers are prohibited from engaging in activities which are competitive with those of the Company during their employment with the Company and for one year following termination.  If the agreement is terminated other than for cause, the officer would be entitled to all base salary earned through the date of termination, accrued but unused vacation, all vested equity, and bonus amounts payable to the officer through the date of termination. The officers would also be entitled to receive an additional thirty-six months of annual compensation equal to the average of his base salary and bonus for the three calendar years prior to the date of termination, payable in accordance with the Company’s regular payroll practice over a 52-week period.

 

NOTE L – MAJOR CUSTOMERS

 

The Company had one customer who accounted for 13% of net sales for the nine months ended August 31, 2017 and two customers who accounted for 12% and 11% of net sales for the nine months ended August 31, 2016.  The Company had no customers who accounted for 10% of accounts receivable at August 31, 2017 and November 30, 2016.

 

NOTE M – MAJOR SUPPLIERS

 

During the nine months ended August 31, 2017 and August 31, 2016, there was one foreign supplier accounting for 49% and 51% of total inventory purchased.

 

The Company purchases substantially all of its products overseas.  For the nine months ended August 31, 2017, the Company purchased 52% of its products from Taiwan, 14% from Hong Kong, 30% from elsewhere in Asia and less than 1% overseas outside of Asia. The Company purchases the balance of its products in the United States.

 

NOTE N – EXPORT SALES

 

The Company’s export sales were as follows:

 

   Nine Months Ended 
   August 31,   August 31, 
   2017   2016 
Canada   2,945,872    3,397,316 
China   3,506,149    4.597,904 
Other Asian Countries   1,391,537    993,521 
South America   300,130    235,960 
Europe   1,042,237    314,814 

 

Revenues are attributed to countries based on location of customer. 

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion contains forward-looking statements. All statements other than statements of historical facts contained herein, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, forward-looking statements can be identified by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading “Risk Factors” in our Annual Report on Form 10-K. Also, these forward-looking statements represent our estimates and assumptions only as of the date of the filing of this report. Except as required by law, we assume no obligation to update any forward-looking statements for events or circumstances occurring after the date of the filing of this report.

 

Overview

 

The Company operates with two sales groups, Surge Components (“Surge”) and Challenge Electronics (“Challenge”). Surge is a supplier of electronic products and components. These products include capacitors, which are electrical energy storage devices, and discrete semiconductor components, such as rectifiers, transistors and diodes, which are single function low power semiconductor products that are packaged alone as compared to integrated circuits such as microprocessors. The products sold by Surge are typically utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, audio products, temperature control products, lighting products, energy related products, computer related products, various types of consumer products, garage door openers, household appliances, power supplies and security equipment. These products are sold to both original equipment manufacturers, commonly referred to as OEMs, who incorporate them into their products, and to distributors of the lines of products we sell, who resell these products within their customer base. These products are manufactured predominantly in Asia by approximately sixteen independent manufacturers. We act as the master distribution agent utilizing independent sales representative organizations in North America to sell and market the products for one such manufacturer pursuant to a written agreement. When we act as a sales agent, our supplier who sold the product to the customer pays us a commission. The amount of the commission is determined based on the profit margin of the product. Commission revenue totaled $230,646 and $301,396 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

 

Challenge is engaged in the sale of electronic components. In 1999, Challenge began as a division to sell audible components. We have been able to increase the types of products that we sell because some of our suppliers introduced new products, and we also located other products from new suppliers. Our core products include buzzers, speakers, microphones, resonators, alarms, chimes, filters, and discriminators. We now also work with our suppliers to have our suppliers customize many of the products we sell for many customers through the customers’ own designs and those that we work with our suppliers to have our suppliers redesign for them at our suppliers’ factories. We have an engineer on our staff who works with our suppliers on such redesigns and assists with the introduction of new product lines. We are continually looking to expand the line of products that we sell. We sell these products through independent representatives that earn a commission on the products we sell. We are also working with local, regional, and national distributors to sell these products to local accounts in every state.  

  

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The Company has a Hong Kong office to effectively handle the transfer business from United States customers purchasing and manufacturing in Asia after designing the products in the United States. This office has strengthened the Company’s global position, improving our capabilities and service to our customer base.

 

The electronic components industry continues to change, and at this time there is a shortage of certain electronic components in the markets that the Company serves, which may continue through the first half of 2018. The Company believes that this may be a potential opportunity for the Company to achieve business from new customers who are seeking alternative suppliers.

 

The world of business is constantly changing because of “disruptors,” which are significant changes in traditional business practices that did not previously exist.  For example, customers are moving to centralized purchasing from regional purchasing and are stretching their payment terms.  These changes also include customers moving their manufacturing operations from North America to Asia, and the trend of globalization. This trend makes business more complicated and costly for the Company. The Company must have a presence in Asia to service and further develop the business. For these reasons, we established Surge Ltd., our Asia subsidiary. Currency fluctuations also have an effect on doing business outside of North America. As we pay our suppliers in U.S dollars, whenever the currency exchange rate between U.S dollars and other countries’ currencies change, a supplier is receiving more or less U.S. dollars for its currency, and therefore may raise the prices it charges us accordingly. Customers have moved to reduce their supply chain, which could adversely affect the Company. In some market segments, demand for electronic components have decreased, and in other segments, the demand is still strong. Some technologies have become obsolete, while customers develop new products using different kinds of components. 

 

These challenges could affect the Company in negative ways, possibly reducing sales and or profitability. In order for the Company to grow, we will depend on, among other things, the continued growth of the electronics and semiconductor industries, our ability to withstand intense price competition, our ability to obtain new customers, our ability to retain and attract sales and other key personnel in order to expand our marketing capabilities, our ability to secure adequate sources of products, which are in demand on commercially reasonable terms, our success in executing and managing growth,  including monitoring  an expanded level of operations  and systems, controlling costs, the availability of adequate financing, and our ability to deal successfully with new and future disruptors.

 

Critical Accounting Policies

 

Accounts Receivable

 

The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s estimates of recoverability of amounts due could be affected and the Company would adjust the allowance accordingly.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company’s warehouse. For direct shipments from our suppliers to our customer, revenue is recognized when product is shipped from the Company’s supplier. The Company acts as a sales agent for certain customers buying direct from one of its suppliers. The Company reports these commissions as revenues in the period earned.

 

The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.

 

Inventory Valuation

 

Inventories are recorded at the lower of cost or market. Write-downs of inventories to market value are based on stock rotation, historical sales requirements and obsolescence as well as in the changes in the backlog. Reserves required for obsolescence were not material in any of the periods in the financial statements presented. If market conditions are less favorable than those projected by management, additional write-downs of inventories could be required. For example, each additional 1% of obsolete inventory would reduce operating income by approximately $31,000.

 

The Company does not have price protection agreements with any of its vendors and assumes the risk of changes in the prices of its products. The Company does not believe there is a significant risk with regards to the lack of price protection agreements since many of its inventory items are purchased to fulfill purchase orders received.

 

Income Taxes

 

We have made a number of estimates and assumptions relating to the reporting of a deferred income tax asset to prepare our financial statements in accordance with generally accepted accounting principles. These estimates have a significant impact on our valuation allowance relating to deferred income taxes. Our estimates could materially impact the financial statements.

 

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Results of Operations

 

Consolidated net sales for the nine months ended August 31, 2017 increased by $154,286 or less than 1%, to $21,793,936 as compared to net sales of $21,639,650 for the nine months ended August 31, 2016. Consolidated net sales for the three months ended August 31, 2017 increased by $452,427 or 5.5%, to $8,695,624 as compared to net sales of $8,243,197 for the three months ended August 31, 2016.We attribute the increase in the nine months and three months period to the increase in business with new customers as well as additional business with existing customers. In addition, certain of the Company’s customers having excess inventory in the beginning of 2017. This resulted in those customers delaying ordering products from us during the three months ended February 28, 2017. Sales for those customers increased after February 28, 2017.

 

Our gross profit for the nine months ended August 31, 2017 increased by $22,355 to $5,452,597, or less than 1%, as compared to $5,430,242 for the nine months ended August 31, 2016. Gross margin as a percentage of net sales remained relatively flat at 25% for the nine months ended August 31, 2017, as compared to 25.1% for the nine months ended August 31, 2016. Our gross profit for the three months ended August 31, 2017 increased by $111,383 to $2,249,763, or 5.2%, as compared to $2,138,380 for the three months ended August 31, 2016. Gross margin as a percentage of net sales remained relatively flat at 25.9% for the three months ended August 31, 2017 compared to 25.9% for the three months ended August 31, 2016. Profit margins in 2016 and 2017 have been impacted as a result of certain of our customers, who are some of the biggest buyers of components, demanding the lowest prices for our products. Our industry will continue to receive pressure from customers for price reductions. Some of them further demand periodic price reductions on a quarterly or semi-annual basis, as opposed to annual fixed pricing. We work with electronic manufacturing service subcontractor customers who manufacture products for other customers who do not have their own manufacturing operations. At times we are not able to recover these price reductions from our suppliers. The Company has agreements with these subcontractor customers to provide periodic cost reductions through rebates in the amount of 5%. These reductions only affect future shipments of our products, and do not affect existing orders. These reductions can have a negative impact on our profit margins since they reduce the amount of commissions we can earn. Even though this rebate can impact the Company’s gross profit margin, these subcontractor customers represent very significant potential growth for the Company, because they can help the Company become an approved supplier at the customers they manufacture for, and they purchase our components for these customers. We believe it would be very difficult for the Company to achieve business at these customers without the help of these subcontractor customers.

 

Selling and shipping expenses for the nine months ended August 31, 2017 was $1,892,277, an increase of $44,538, or 2.4%, as compared to $1,848,239 for the nine months ended August 31, 2016. Selling and shipping expenses for the three months ended August 31, 2017 was $671,802, an increase of $14,709, or 2.2%, as compared to $657,093 for the three months ended August 31, 2016. We attribute the increase for the nine months ended August 31, 2017 to hiring additional salespeople to grow the business, as well as increases in selling expenses such as commissions and freight out and shipping expenses, offset by a decrease in advertising and travel and entertainment expenses. We attribute the increase for the three months ended August 31, 2017 to increases resulting from hiring additional salespeople and freight out expenses as well as travel expenses and commissions, offset by decreases in entertainment, advertising and sales payroll expenses.

 

General and administrative expenses for the nine months ended August 31, 2017 was $3,565,066, an increase of $472,312, or 15.3%, as compared to $3,092,754 for the nine months ended August 31, 2016. General and administrative expenses for the three months ended August 31, 2017 was $1,020,208, an increase of $16,429, or 1.6%, as compared to $1,003,779 for the three months ended August 31, 2016. The increase during the nine months ended August 31, 2017 is due primarily to the costs of approximately $37,000 that the Company incurred during the proxy contest and related settlement with certain shareholders of the Company and costs of approximately $330,000 that the Company incurred in connection with the tender offer completed by the Company in March 2017 and other related expenses. The Company is in discussions with its insurance carrier regarding reimbursement for some of the costs the Company incurred in connection with the contested proxy, settlement agreement and tender offer. Other increases are due to the hiring of additional employees and increased costs for public company expenses, health insurance, computer and consulting expenses as well as increases in general insurance, maintenance fees, directors fees, bank charges, and executive compensation related to prior year and partially offset by decreases in temporary help expense, utilities, bad debt expenses, dues and subscriptions and promotional expenses.  We attribute the increase in the three months ended August 31, 2017 to hiring new employees, increases in health insurance, general insurance, maintenance expenses and directors fees, offset by decreases in office expenses, temporary help, professional fees, dues and subscriptions and bad debt expenses.

 

Depreciation expense for the nine months ended August 31, 2017 was $23,647, an increase of $199, or less than one percent, as compared to $23,448 for the nine months ended August 31, 2016. Depreciation expense for the three months ended August 31, 2017 was $7,882, an increase of $66, or less than one percent, as compared to $7,816 for the three months ended August 31, 2016. 

 

Investment income for the nine months ended August 31, 2017 was $3,106, a decrease of $3,279, or 51.4%, compared to $6,385 for the nine months ended August 31, 2016. Investment income for the three months ended August 31, 2017 was $1, a decrease of $2,302, or 100% compared to $2,303 for the three months ended August 31, 2016. We attribute the decrease to the decrease in the Company’s cash balance due to the tender offer completed in March 2017.

 

Interest expense for the nine months ended August 31, 2017 was $16,056 as compared to $0 for the nine months ended August 31, 2017. Interest expense for the three months ended August 31, 2017 was $9,242 as compared to $0 for the three months ended August 31, 2016. We attribute the increase to the utilization of the credit line that the Company obtained to help fund its operations following the tender offer completed in March 2017.

  

 22 

 

 

The tax benefit for the nine months ended August 31, 2017 was $(3,241), a decrease of $96,829 or 103.5% as compared to a tax expense of $93,588 for the nine months ended August 31, 2016. Tax expense for the three months ended August 31, 2017 was $125,727, an increase of $45,660 or 57% as compared to a tax expense of $80,067 for the three months ended August 31, 2016. The changes result from our net income (loss) for such periods and management’s revised estimate of future taxable income and the related impact on the reported deferred tax. The change in the valuation allowance is based on management estimates of future taxable income. The degree of variability inherent in the estimates of future taxable income is significant and subject to change in the near term. The Company reviews its estimates of future taxable income in each reporting period and adjustments to the valuation allowance are reflected in the current operations.

 

As a result of the foregoing, the net loss for the nine months ended August 31, 2017 was $38,602, compared to a net income of $378,598 for the nine months ended August 31, 2016. The net income for the three months ended August 31, 2017 was $414,903, compared to a net income of $391,928 for the three months ended August 31, 2016.

 

Liquidity and Capital Resources

 

As of August 31, 2017 we had cash of $1,537,367, and working capital of $3,644,996. In March 2017, the Company completed a tender offer purchasing for cash 5,000,000 shares of its common stock at a price of $1.43 per share. In February 2017, the Company obtained a line of credit with a bank for up to $3,000,000. As of August 31, 2017 the balance on the line of credit was $600,000. We believe that our working capital levels and available financing are adequate to meet our operating requirements during the next twelve months.

 

During the nine months ended August 31, 2017, we had net cash flow provided by operating activities of $981,624, as compared to net cash flow used in operating activities of $(185,315) for the nine months ended August 31, 2016. The increase in cash flow from operating activities resulted from an increase in accounts payable, a decrease in inventory and a smaller increase in accounts receivable as partially offset by the net loss and an increase in accrued expenses.

 

We had net cash flow used in investing activities of $(14,858) for the nine months ended August 31, 2017, as compared to net cash flow used in investing activities of $(1,520) for the nine months ended August 31, 2016. We attribute the change to the Company purchasing new equipment during the nine months ended August 31, 2017.

 

We had net cash flow used in financing activities totaling $(6,550,000) during the nine months ended August 31, 2017 as compared to $(23,006) for the nine months ended August 31, 2016. We attribute the change to the Company completing the tender offer in March 2017 and the use of the line of credit in the nine months ended August 31, 2017.

 

As a result of the foregoing, the Company had a net decrease in cash of $5,583,234 for the nine months ended August 31, 2017, as compared to a net decrease in cash of $209,841 for the nine months ended August 31, 2016.

  

 23 

 

 

In November 2015, the Board of Directors authorized the Company to purchase up to $500,000 of shares of common stock in the open market or in privately negotiated transactions. The Company repurchased 57,283 shares to date pursuant to such authority. In January 2017, the Board of Directors terminated the repurchase program.

 

In March 2017, the Company completed a tender offer whereby it purchased for cash 5,000,000 shares of its common stock, at a price of $1.43 per share, or $7,150,000. In February 2017, the Company obtained a line of credit of up to $3.0 million for working capital. In March 2017, the Company borrowed $1,000,000 under the line of credit for working capital purposes and to be repaid out of expected cash flows from operations. Since March 2017, the Company has repaid $400,000 under the line of credit and as of August 31, 2017 the balance on the line of credit was $600,000. As of August 31, 2017, the Company was not in compliance with the covenant for the debt service coverage ratio for the line of credit.

 

The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of August 31, 2017:

 

       Payments due         
       0 – 12   13 – 36   37 – 60   More than 
Contractual Obligations  Total   Months   Months   Months   60 Months 
                     
Long-term debt  $-   $-   $-   $-   $- 
Operating leases  $562,294    178,662    368,116    15,116    - 
                          
Total obligations  $562,294   $178,662   $368,116   $15,116   $- 

 

Inflation

 

In the past two fiscal years, inflation has not had a significant impact on our business. However, any significant increase in inflation and interest rates could have a significant effect on the economy in general and, thereby, could affect our future operating results.

 

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“Commission”). Ira Levy, the Company’s principal executive officer and principal financial officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of August 31, 2017 and has concluded that, as of such date, our disclosure controls and procedures were effective.

 

Changes in Internal Controls

 

During the three months ended August 31, 2017, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 24 

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

There are no legal proceedings to which the Company or any of its property is the subject.

 

ITEM 1A. RISK FACTORS.

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None. 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

  

 25 

 

 

ITEM 6. EXHIBITS.

 

Exhibit Number   Description
     
31.1   Certification by principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification by principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

  

 26 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SURGE COMPONENTS, INC.
     
Date: October 16, 2017 By: /s/ Ira Levy
  Name: Ira Levy
  Title: Chief Executive Officer
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)

 

 

27

 

 

EX-31.1 2 f10q0817ex31-1_surge.htm CERTIFICATION

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, Ira Levy, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Surge Components, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: October 16, 2017 By: /s/ Ira Levy
    Ira Levy
   

Chief Executive Officer

(Principal Executive Officer and

Principal Financial Officer)

 

EX-32.1 3 f10q0817ex32-1_surge.htm CERTIFICATION

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Surge Components, Inc. (the "Company") on Form 10-Q for the period ended August 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ira Levy, Chief Executive Officer (principal executive officer and principal financial officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: October 16, 2017 By: /s/ Ira Levy
    Ira Levy
   

Chief Executive Officer

(Principal Executive Officer and

Principal Financial Officer)

 

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style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px; text-align: justify; color: #000000; text-transform: none; text-indent: 36pt; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">Surge Components, Inc. (&#8220;Surge&#8221;) was incorporated in the State of New York and commenced operations on November 24, 1981 as an importer of electronic products, primarily capacitors and discrete semi-conductors selling to customers located principally throughout North America. On June 24, 1988, Surge formed Challenge/Surge Inc. 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Under current Hong Kong law, Surge Limited is required to have at least two shareholders. Surge owns 999 shares of the outstanding common stock and the officer of Surge owns 1 share of the outstanding common stock. The officer of Surge has assigned his rights regarding his 1 share to Surge. Surge Limited started doing business in July 2002. 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(Nevada), which was formed in the State of Nevada for that purpose.&#160;&#160;Surge Components Inc. is the surviving entity. 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The Company purchases the merchandise from the supplier and has the supplier directly ship the merchandise to the customer through the freight forwarder.&#160;&#160;Title passes to the customer upon the merchandise being received by a freight forwarder. 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The Company is no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2013<b>,</b>&#160;and state tax examinations for years before fiscal years ending November 30, 2012. 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Document and Entity Information - shares
9 Months Ended
Aug. 31, 2017
Oct. 16, 2017
Document and Entity Information [Abstract]    
Entity Registrant Name SURGE COMPONENTS INC  
Entity Central Index Key 0000747540  
Amendment Flag false  
Trading Symbol SPRS  
Current Fiscal Year End Date --11-30  
Document Type 10-Q  
Document Period End Date Aug. 31, 2017  
Document Fiscal Year Focus 2017  
Document Fiscal Period Focus Q3  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   5,224,431
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Consolidated Balance Sheets - USD ($)
Aug. 31, 2017
Nov. 30, 2016
Current assets:    
Cash $ 1,537,367 $ 7,120,601
Accounts receivable - net of allowance for doubtful accounts of $160,895 and $159,976 6,043,381 5,558,808
Inventory, net 2,813,582 2,929,570
Prepaid expenses and income taxes 165,169 144,824
Deferred income taxes 310,712 304,887
Total current assets 10,870,211 16,058,690
Fixed assets - net of accumulated depreciation and amortization of $2,209,187 and $2,185,540 73,185 81,974
Deferred income taxes 621,425 609,773
Other assets 13,384 13,384
Total assets 11,578,205 16,763,821
Current liabilities:    
Accounts payable 5,132,010 3,237,592
Loan Payable 600,000
Accrued expenses and taxes 953,018 1,544,882
Accrued salaries 540,187 431,111
Total current liabilities 7,225,215 5,213,585
Deferred rent 36,318 39,962
Total liabilities 7,261,533 5,253,547
Commitments and contingencies
Shareholders' equity:    
Common stock - $.001 par value, 75,000,000 shares authorized, 5,224,431 and 10,224,431 shares issued and outstanding 5,224 10,224
Additional paid-in capital 16,557,310 23,702,310
Accumulated deficit (12,245,872) (12,202,270)
Total shareholders' equity 4,316,672 11,510,274
Total liabilities and shareholders' equity 11,578,205 16,763,821
Series A Preferred stock    
Shareholders' equity:    
Preferred stock - $.001 par value, 5,000,000 shares authorized:
Series B Preferred stock    
Shareholders' equity:    
Preferred stock - $.001 par value, 5,000,000 shares authorized:
Series C Preferred stock    
Shareholders' equity:    
Preferred stock - $.001 par value, 5,000,000 shares authorized: 10 10
Series D Preferred stock    
Shareholders' equity:    
Preferred stock - $.001 par value, 5,000,000 shares authorized:
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Consolidated Balance Sheets (Parenthetical) - USD ($)
Aug. 31, 2017
Nov. 30, 2016
Allowance for doubtful accounts of accounts receivable $ 160,895 $ 159,976
Accumulated depreciation and amortization on fixed assets $ 2,209,187 $ 2,185,540
Preferred stock, par value $ 0.001 $ 0.001
Preferred stock, shares authorized 5,000,000 5,000,000
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 75,000,000 75,000,000
Common stock, shares issued 5,224,431 10,224,431
Common stock, shares outstanding 5,224,431 10,224,431
Series A Preferred stock    
Preferred stock, shares authorized 260,000 260,000
Preferred stock, shares outstanding
Series B Preferred stock    
Preferred stock, shares authorized 200,000 200,000
Preferred stock, shares outstanding
Series C Preferred stock    
Preferred stock, shares authorized 100,000 100,000
Preferred stock, shares issued 10,000 10,000
Preferred stock, shares outstanding 10,000 10,000
Preferred stock, liquidation preference per share $ 5 $ 5
Series D Preferred stock    
Preferred stock, shares authorized 75,000 75,000
Preferred stock, shares issued
Preferred stock, shares outstanding
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Consolidated Statements of Operations (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Aug. 31, 2017
Aug. 31, 2016
Aug. 31, 2017
Aug. 31, 2016
Income Statement [Abstract]        
Net sales $ 8,695,624 $ 8,243,197 $ 21,793,936 $ 21,639,650
Cost of goods sold 6,445,861 6,104,817 16,341,339 16,209,408
Gross profit 2,249,763 2,138,380 5,452,597 5,430,242
Operating expenses:        
Selling and shipping expenses 671,802 657,093 1,892,777 1,848,239
General and administrative expenses 1,020,208 1,003,779 3,565,066 3,092,754
Depreciation and amortization 7,882 7,816 23,647 23,448
Total operating expenses 1,699,892 1,668,688 5,481,490 4,964,441
(Loss) income before other income (expense) and income taxes 549,871 469,692 (28,893) 465,801
Other income (expense):        
Investment income 1 2,303 3,106 6,385
Interest expense (9,242) (16,056)
Other income (expense) (9,241) 2,303 (12,950) 6,385
(Loss) income before income taxes 540,630 471,995 (41,843) 472,186
Income taxes (benefit) 125,727 80,067 (3,241) 93,588
Net (loss) income 414,903 391,928 (38,602) 378,598
Dividends on preferred stock 2,500 2,500 5,000 5,000
Net (loss) income available to common shareholders $ 412,403 $ 389,428 $ (43,602) $ 373,598
Net (loss) income per share available to common shareholders:        
Basic $ 0.08 $ 0.04 $ (0.01) $ 0.04
Diluted $ 0.08 $ 0.04 $ (0.01) $ 0.04
Weighted Shares Outstanding:        
Basic 5,224,431 10,089,131 7,323,511 10,031,192
Diluted 5,383,029 10,205,579 7,323,511 10,147,640
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Consolidated Statements of Cash Flows (Unaudited) - USD ($)
9 Months Ended
Aug. 31, 2017
Aug. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net (loss) income $ (38,602) $ 378,598
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:    
Depreciation and amortization 23,647 23,448
Stock compensation expense 74,363
Deferred income taxes (17,477) 70,704
Allowance for doubtful accounts 919 24,004
CHANGES IN OPERATING ASSETS AND LIABILITIES:    
Accounts receivable (485,492) (909,379)
Inventory 115,988 (133,894)
Prepaid expenses and income taxes (20,345) (31,588)
Other assets
Accounts payable 1,894,418 522,339
Deferred rent (3,644) (1,064)
Accrued expenses (487,788) (202,846)
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES 981,624 (185,315)
CASH FLOWS FROM INVESTING ACTIVITIES:    
Acquisition of fixed assets (14,858) (1,520)
NET CASH FLOWS USED IN INVESTING ACTIVITIES (14,858) (1,520)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Repurchase of Common Stock (23,006)
Net Borrowings from Loan Payable 600,000
Repurchase of Common Stock in Tender Offer (7,150,000)
NET CASH FLOWS USED IN FINANCING ACTIVITIES (6,550,000) (23,006)
NET CHANGE IN CASH (5,583,234) (209,841)
CASH AT BEGINNING OF PERIOD 7,120,601 7,169,118
CASH AT END OF PERIOD 1,537,367 6,959,277
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:    
Income taxes paid 14,875 34,865
Interest paid 16,056
NONCASH INVESTING AND FINANCING ACTIVITIES:    
Accrued dividends on preferred stock $ 5,000 $ 5,000
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Organization, Description of Company's Business and Basis of Presentation
9 Months Ended
Aug. 31, 2017
Organization, Description of Company's Business and Basis of Presentation [Abstract]  
ORGANIZATION, DESCRIPTION OF COMPANY'S BUSINESS AND BASIS OF PRESENTATION

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

 

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

 

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

 

On August 31, 2010, the Company changed its corporate domicile by merging into a newly-formed corporation, Surge Components, Inc. (Nevada), which was formed in the State of Nevada for that purpose.  Surge Components Inc. is the surviving entity. The number of common stock shares authorized for issuance was increased to 75,000,000 shares.

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Summary of Significant Accounting Policies
9 Months Ended
Aug. 31, 2017
Summary of Significant Accounting Policies [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(1) Principles of Consolidation:

 

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

 

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

 

The results and trends in these interim consolidated financial statements for the nine months ended August 31, 2017 and August 31, 2016 may not be representative of those for the full fiscal year or any future periods.

 

(2) Accounts Receivable:

 

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

 

(3) Revenue Recognition:

 

Revenue is recognized for products sold by the Company when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company’s warehouse. 

 

For direct shipments, revenue is recognized when product is shipped from the Company’s supplier. The Company has a long term supply agreement with one of its suppliers. The Company purchases the merchandise from the supplier and has the supplier directly ship the merchandise to the customer through the freight forwarder.  Title passes to the customer upon the merchandise being received by a freight forwarder. Direct shipments were approximately $2,825,000 and $2,885,000 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

 

The Company also acts as a sales agent to certain customers in North America for one of its suppliers. The Company reports these commissions as revenues in the period earned. Commission revenue totaled $230,646 and $301,396 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

  

The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.

  

The Company and its subsidiaries currently have agreements with several distributors. There are no provisions for the granting of price concessions in any of the agreements.  Revenues under these distribution agreements were approximately $3,741,000 and $6,434,000 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

 

(4) Inventories:

 

Inventories, which consist solely of products held for resale, are stated at the lower of cost (first-in, first-out method) or market.  Products are included in inventory when the Company obtains title and risk of loss on the products, primarily when shipped from the supplier. Inventory in transit principally from foreign suppliers at August 31, 2017 was $1,144,000. At August 31, 2017, the Company has a reserve against slow moving and obsolete inventory of $262,874. From time to time, the Company’s products are subject to legislation from various authorities on environmental matters.

 

(5) Depreciation and Amortization:

 

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

 

Furniture, fixtures and equipment 5 - 7 years
Computer equipment 5 years
Leasehold Improvements Estimated useful life or lease term, whichever is shorter

 

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

 

(6) Concentration of Credit Risk:

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable.  The Company maintains substantially all of its cash in a limited number of financial institutions.   At August 31, 2017 and November 30, 2016, the Company’s uninsured cash balances totaled $972,872 and $4,550,807, respectively.

 

(7) Income Taxes:

 

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

 

The Company follows the provisions of the Accounting Standards Codification (“ASC”) 740, “Income Taxes.” There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company’s financial condition or results of operations as a result of ASC 740.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2013, and state tax examinations for years before fiscal years ending November 30, 2012. Management does not believe there will be any material changes in the Company’s unrecognized tax positions over the next twelve months.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of interest expense. There was no accrued interest or penalties associated with any unrecognized benefits, nor was any interest expense recognized during the nine months ended August 31, 2017 and August 31, 2016.

 

(8) Cash Equivalents:

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

(9) Use of Estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

 

(10) Marketing and promotional costs:

 

Marketing and promotional costs are expensed as incurred and have not been material to date. The Company has contractual arrangements with several of its distributors which provide for cooperative advertising rights to the distributor as a percentage of sales. Cooperative advertising is reflected as a reduction in revenues and has not been material to date.

 

(11) Fair Value of Financial Instruments:

 

The carrying amount of cash balances, accounts receivable, accounts payable and accrued expenses approximate their fair value based on the nature of those items. Estimated fair values of financial instruments are determined using available market information and appropriate valuation methodologies.  Considerable judgment is required to interpret the market data used to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.

  

(12) Shipping Costs

 

The Company classifies shipping costs as a component of selling expenses.  Shipping costs totaled $8,070 and $4,991 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

  

(13) Earnings (Loss) Per Share

 

Basic loss (earnings) per share includes no dilution and is computed by dividing net loss (income) available to common stockholders by the weighted average number of common shares outstanding for the period. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive stock options and convertible preferred stock will be exercised for shares of common stock. Dilutive securities are excluded from diluted weighted shares outstanding for the nine months ended August 31, 2017 since the Company had a net loss in the period and including the securities would be anti-dilutive. Total potentially dilutive shares excluded from diluted weighted shares outstanding at August 31, 2017 and August 31, 2016 totaled 402,000 and 518,991, respectively.

 

(14) Stock Based Compensation

 

Stock Based Compensation to Employees

 

The Company accounts for its stock-based compensation for employees in accordance with ASC 718.   The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees over the related vesting period.

 

Stock Based Compensation to Other than Employees

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

XML 17 R8.htm IDEA: XBRL DOCUMENT v3.8.0.1
Fixed Assets
9 Months Ended
Aug. 31, 2017
Fixed Assets [Abstract]  
FIXED ASSETS

NOTE C – FIXED ASSETS

 

Fixed assets consist of the following:

 

  August 31,  November 30, 
  2017  2016 
       
Furniture and Fixtures $327,971  $327,971 
Leasehold Improvements  962,637   956,637 
Computer Equipment  991,764   982,906 
Less-Accumulated Depreciation  (2,209,187)  (2,185,540)
Net Fixed Assets $73,185  $81,974 

 

Depreciation and amortization expense for the nine months ended August 31, 2017 and August 31, 2016 was $23,647 and $23,448, respectively.

XML 18 R9.htm IDEA: XBRL DOCUMENT v3.8.0.1
Line of Credit
9 Months Ended
Aug. 31, 2017
Line of Credit [Abstract]  
LINE OF CREDIT

NOTE D – LINE OF CREDIT

 

In February 2017, the Company obtained a line of credit with a bank for up to $3,000,000 (the “Credit Line”). Borrowings under the Credit Line are due upon demand and accrue interest at the greater of the prime rate or the LIBOR rate plus two percent (and may be increased by three percent in the event the Company fails to (i) repay all amounts due on the Credit Line upon demand or (ii) comply with any terms or conditions relating to the Credit Line). As of August 31, 2017, the balance on the Credit Line was $600,000. As of August 31, 2017, the Company was not in compliance with the covenant for the debt service coverage ratio.

XML 19 R10.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accrued Expenses
9 Months Ended
Aug. 31, 2017
Accrued Expenses [Abstract]  
ACCRUED EXPENSES

NOTE E – ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

  August 31,  November 30, 
  2017  2016 
       
Commissions $226,268  $281,888 
Preferred Stock Dividends  136,569   131,569 
Other accrued expenses  147,090   321,465 
Accrued Professional Fees  443,091   809,960 
  $953,018  $1,544,882
XML 20 R11.htm IDEA: XBRL DOCUMENT v3.8.0.1
Retirement Plan
9 Months Ended
Aug. 31, 2017
Retirement Plan [Abstract]  
RETIREMENT PLAN

NOTE F – RETIREMENT PLAN

 

In June 1997, the Company adopted a qualified 401(k) retirement plan for all full-time employees who are twenty-one years of age and have completed twelve months of service.  The plan allows total employee contributions of up to fifteen percent (15%) of the eligible employee’s salary. The Company makes a matching contribution of twenty percent (20%) of each employee’s contribution up to five percent (5%) of the employee’s salary.  Net assets for the plan, as estimated by Union Central, Inc., which maintains the plan’s records, were approximately $1,229,000 at November 30, 2016. Pension expense for the nine months ended August 31, 2017 and August 31, 2016 was $773 and $1,535, respectively.

XML 21 R12.htm IDEA: XBRL DOCUMENT v3.8.0.1
Shareholders' Equity
9 Months Ended
Aug. 31, 2017
Shareholders' Equity [Abstract]  
SHAREHOLDERS' EQUITY

NOTE G – SHAREHOLDERS’ EQUITY

 

[1] Preferred Stock:

 

In February 1996, the Company amended its Certificate of Incorporation to authorize the issuance of 1,000,000 shares of preferred stock in one or more series. In August 2010, the number of preferred shares authorized for issuance was increased to 5,000,000 shares.

 

In January 2000, the Company authorized 260,000 shares of preferred stock as Non-Voting Redeemable Convertible Series A Preferred Stock (“Series A Preferred Stock”). None of the Series A Preferred Stock is outstanding as of August 31, 2017.

 

In November 2000, the Company authorized 200,000 shares of preferred stock as Voting Redeemable Convertible Series B Preferred Stock (“Series B Preferred Stock”). None of the Series B Preferred Stock is outstanding as of August 31, 2017.

 

In November 2000, the Company authorized 100,000 shares of preferred stock as Non-Voting Redeemable Convertible Series C Preferred Stock (“Series C Preferred”). Each share of Series C Preferred is automatically convertible into 10 shares of our common stock upon shareholder approval.  If the Series C Preferred were converted into common stock on or before April 15, 2001, these shares were entitled to cumulative dividends at the rate of $.50 per share per annum commencing April 15, 2001 payable on June 30 and December 31 of each year.  In November 2000, 70,000 shares of the Series C Preferred were issued in payment of financial consulting services to its investment banker and a shareholder of the Company.  In April 2001, 8,000 shares of the Series C Preferred were repurchased and cancelled.  

 

In April 2002, in connection with a Mutual Release, Settlement, Standstill and Non-Disparagement Agreement among other provisions, certain investors transferred back to the Company 252,000 shares of common stock, 19,300 shares of Series C preferred stock, and certain warrants, in exchange for $225,000. These repurchased shares were cancelled.

 

In February 2006, the Company settled with a shareholder to repurchase 10,000 shares of Series C Preferred plus accrued dividends for $50,000.

 

Pursuant to exchange agreements dated as of March 14, 2011, 9,000 shares of Series C Preferred were returned to the Company for cancellation in exchange for 112,500 shares of common stock.

 

In October 2014, 2,000 shares of Series C Preferred were converted into 20,000 shares of common stock.

 

In April 2015, the Company entered into a settlement agreement with a shareholder pursuant to which 7,500 shares of Series C Preferred were returned to the Company for cancellation in exchange for 110,000 shares of common stock plus $65,000 for accrued dividends and legal fees and expenses.

 

In July 2015, 4,200 shares of Series C Preferred were exchanged for 42,000 shares of common stock and $29,838 in accrued dividends.

 

Dividends aggregating $136,569 have not been paid for the semi-annual periods ended December 31, 2001 through the semi-annual payment due June 30, 2017.  The Company has accrued these dividends.  At August 31, 2017, there are 10,000 shares of Series C Preferred issued and outstanding.

 

In October 2016, the Company authorized 75,000 shares of preferred stock as Voting Non-Redeemable Convertible Series D Preferred Stock (“Series D Preferred”). None of the Series D Preferred Stock is outstanding as of August 31, 2017.

 

[2] 2010 Incentive Stock Plan

 

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

 

Activity in the 2010 Incentive Plan for the nine months ended August 31, 2017 is summarized as follows:

 

     Weighted 
     Average 
  Shares  Exercise
Price
 
       
Options outstanding December 1, 2016  352,000  $0.87 
Options issued in the nine months ended August 31, 2017  -  $- 
Options exercised in the nine months ended August 31, 2017  -  $- 
Options cancelled in the nine months ended August 31, 2017  (50,000 $0.51 
Options outstanding at August 31, 2017  302,000  $0.92 
         
Options exercisable at August 31, 2017  302,000  $0.92 

 

[3] 2015 Equity Incentive Plan

 

In November 2015, the Company adopted and its shareholders ratified, the 2015 Equity Incentive Plan (“2015 Incentive Plan”). The 2015 Incentive Plan provides for the grant of awards to officers, employees, directors or consultants to the Company to purchase up to an aggregate of 1,500,000 shares of common stock.

 

In May 2016 a total of 99,151 shares were issued to the Company’s officers as part of their 2015 bonus compensation under the 2015 Incentive Plan.

 

Stock Compensation

 

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

 

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

 

The intrinsic value of the exercisable options at August 31, 2017 totaled $0.  At August 31, 2017 the weighted average remaining life of the stock options is 1.3 years.  At August 31, 2017, there was no unrecognized compensation cost related to the stock options granted under the Company’s incentive plans.

 

[4] Authorized Repurchase of Shares:

 

In November 2015, the Board of Directors authorized the Company to purchase up to $500,000 of common stock in the open market or in privately negotiated transactions. Pursuant to such authority and pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), a total of 57,283 shares were repurchased by the Company for approximately $48,300. In January 2017, the Company terminated its repurchase program.

 

In March 2017, the Company completed a tender offer whereby it purchased for cash 5,000,000 shares of its common stock, at a price of $1.43 per share, or $7,150,000.

 

[5] Compensation of Directors

 

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

XML 22 R13.htm IDEA: XBRL DOCUMENT v3.8.0.1
Settlement Agreement
9 Months Ended
Aug. 31, 2017
Settlement Agreement [Abstract]  
SETTLEMENT AGREEMENT

NOTE H – SETTLEMENT AGREEMENT

 

On or about October 31, 2016, Michael D. Tofias and Bradley P. Rexroad (collectively, the “Stockholders”) filed a Complaint and Motion for Preliminary Injunction against the Company in the eighth Judicial District Court, Clark County, Nevada, Case No. A-16-745890-B, seeking relief including, inter alia, immediate inspection of certain books and records and a 60-day postponement of the scheduled annual meeting of stockholders (“Annual Meeting”). On November 16, 2016, after the Company postponed the Annual Meeting and provided certain books and records to the Stockholders, the Stockholders filed an Amended Complaint, which named all members of the Board as defendants and alleged that the directors had breached their fiduciary duty to the Stockholders. On December 1, 2016, following a hearing, the Court denied the request for a preliminary injunction.  On December 22, 2016, the Company entered into a settlement agreement (the “Settlement Agreement”) with the Stockholders.

 

The Settlement Agreement provides that:

 

 the Stockholders irrevocably withdraw their director nominations for the Board and stockholder proposals for the Company’s annual meeting of stockholders for fiscal year 2015 (the “Meeting”);

 

 the Stockholders will vote all of their shares of common stock of the Company in accordance with the Board’s recommendations with respect to the election of the Board’s director nominees, the ratification of the Company’s independent registered public accounting firm for the fiscal year ending November 30, 2016 (the “2017 Meeting”) and the ratification of the Company’s rights plan;

 

 the Company will hold the Meeting on January 5, 2017 and will hold its annual meeting of stockholders for fiscal year 2016 by December 29, 2017;

 

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

 

 the Company will not make any stock or option grants or grant any other non-cash compensation to its current officers and directors until December 23, 2017;

 

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

 

 The Company will commence an issuer tender offer to all of its stockholders to repurchase at least 5,000,000 shares of its common stock at at price of $1.43 per share (the “Tender Offer”), which Tender Offer will be completed by March 15, 2017.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Settlement Agreement terminates on the date that is 15 business days prior to the deadline for the submission of director nomination and stockholder proposals for the 2019 Meeting.

XML 23 R14.htm IDEA: XBRL DOCUMENT v3.8.0.1
Income Taxes
9 Months Ended
Aug. 31, 2017
Income Taxes [Abstract]  
INCOME TAXES

NOTE I – INCOME TAXES

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates in effect in the years in which the differences are expected to reverse.  

 

The Company’s deferred income taxes are comprised of the following:

 

  August 31,  November 30, 
  2017  2016 
Deferred Tax Assets      
    Net operating loss $3,937,672  $4,208,030 
    Allowance for bad debts  49,643   49,276 
    Inventory  97,126   100,446 
    Deferred Rent  14,505   15,961 
    Depreciation  148,548   149,172 
    Total deferred tax assets  4,247,494   4,522,885 
    Valuation allowance  (3,315,357)  (3,608,225)
         
        Total $932,137  $914,660 

 

The valuation allowance for the deferred tax assets relates principally to the uncertainty of the utilization of deferred tax assets and was calculated in accordance with the provisions of ASC 740, which requires that a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The valuation allowance decreased by approximately $293,000 during the nine months ended August 31, 2017.  This valuation is based on management estimates of future taxable income. Although the degree of variability inherent in the estimates of future taxable income is significant and subject to change in the near term, management believes, that the estimate is adequate. The estimated valuation allowance is continually reviewed and as adjustments to the allowance become necessary, such adjustments are reflected in the current operations.

 

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

 

  Nine Months Ended 
  August 31, 
2017
  August 31, 
2016
 
       
Current:      
Federal $821  $5,217 
States  13,415   17,667 
         
   14,236   22,884 
Deferred:        
Federal  (13,544)  54,796 
States  (3,933)  15,908 
         
   (17,477)  70,704 
         
Provision for income taxes $(3,241) $93,588 

 

The Company files a consolidated income tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of approximately $9,844,000 for federal and state purposes, which expire through 2020. A reconciliation of the difference between the expected income tax rate using the statutory federal tax rate and the Company’s effective rate is as follows: 

 

  Nine Months Ended 
  August 31,  August 31, 
  2017  2016 
U.S Federal Income tax statutory rate  (34)%  34%
Valuation allowance  30%  (22)%
State income taxes  (3)%  8%
Other  -   - 
Effective tax rate  (7)%  20%
XML 24 R15.htm IDEA: XBRL DOCUMENT v3.8.0.1
Rental Commitments
9 Months Ended
Aug. 31, 2017
Rental Commitments [Abstract]  
RENTAL COMMITMENTS

NOTE J – RENTAL COMMITMENTS

 

The Company leases its office and warehouse space through 2020 from a corporation that is controlled by officers/shareholders of the Company (“Related Company”).  Annual minimum rental payments to the Related Company approximated $173,000 for the year ended November 30, 2016, and increase at the rate of three per cent per annum throughout the lease term.

 

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

 

In June 2015, the Company renewed its lease to rent office space and a warehouse in Hong Kong for two years and is currently in negotiations to renew the lease. Annual minimum rental payments for this space are approximately $58,500.

 

The Company’s future minimum rental commitments at August 31, 2017 are as follows:

 

2018 $178,662 
2019 $182,236 
2020 $185,880 
2021 $15,516 
  $562,294 

 

Net rental expense for the nine months ended August 31, 2017 and August 31, 2016 were $235,334 and $233,504 respectively, of which $192,102 and $189,522 respectively, was paid to the Related Company.

XML 25 R16.htm IDEA: XBRL DOCUMENT v3.8.0.1
Employment and Other Agreements
9 Months Ended
Aug. 31, 2017
Employment and Other Agreements [Abstract]  
EMPLOYMENT AND OTHER AGREEMENTS

NOTE K – EMPLOYMENT AND OTHER AGREEMENTS

 

In February 2016, the Company entered into revised employment agreements with two officers of the Company. Pursuant to these agreements, the base salary for one officer is $275,000 and the base salary for the other officer is $225,000. The agreements continue until terminated by either party.

 

The Company’s compensation committee may award these officers with bonuses and will review the base salary amounts for each of the officers on an annual basis to determine if any changes to the base salary amounts need to be made and may also award these officers with annual bonuses.  Pursuant to the employment agreements, the officers are prohibited from engaging in activities which are competitive with those of the Company during their employment with the Company and for one year following termination.  If the agreement is terminated other than for cause, the officer would be entitled to all base salary earned through the date of termination, accrued but unused vacation, all vested equity, and bonus amounts payable to the officer through the date of termination. The officers would also be entitled to receive an additional thirty-six months of annual compensation equal to the average of his base salary and bonus for the three calendar years prior to the date of termination, payable in accordance with the Company’s regular payroll practice over a 52-week period.

XML 26 R17.htm IDEA: XBRL DOCUMENT v3.8.0.1
Major Customers
9 Months Ended
Aug. 31, 2017
Major Customers [Abstract]  
MAJOR CUSTOMERS

NOTE L – MAJOR CUSTOMERS

 

The Company had one customer who accounted for 13% of net sales for the nine months ended August 31, 2017 and two customers who accounted for 12% and 11% of net sales for the nine months ended August 31, 2016.  The Company had no customers who accounted for 10% of accounts receivable at August 31, 2017 and November 30, 2016.

XML 27 R18.htm IDEA: XBRL DOCUMENT v3.8.0.1
Major Suppliers
9 Months Ended
Aug. 31, 2017
Major Suppliers [Abstract]  
MAJOR SUPPLIERS

NOTE M – MAJOR SUPPLIERS

 

During the nine months ended August 31, 2017 and August 31, 2016, there was one foreign supplier accounting for 49% and 51% of total inventory purchased.

 

The Company purchases substantially all of its products overseas.  For the nine months ended August 31, 2017, the Company purchased 52% of its products from Taiwan, 14% from Hong Kong, 30% from elsewhere in Asia and less than 1% overseas outside of Asia. The Company purchases the balance of its products in the United States.

XML 28 R19.htm IDEA: XBRL DOCUMENT v3.8.0.1
Export Sales
9 Months Ended
Aug. 31, 2017
Export Sales [Abstract]  
EXPORT SALES

NOTE N – EXPORT SALES

 

The Company’s export sales were as follows:

 

  Nine Months Ended 
  August 31,  August 31, 
  2017  2016 
Canada  2,945,872   3,397,316 
China  3,506,149   4.597,904 
Other Asian Countries  1,391,537   993,521 
South America  300,130   235,960 
Europe  1,042,237   314,814 

 

Revenues are attributed to countries based on location of customer.

XML 29 R20.htm IDEA: XBRL DOCUMENT v3.8.0.1
Summary of Significant Accounting Policies (Policies)
9 Months Ended
Aug. 31, 2017
Summary of Significant Accounting Policies [Abstract]  
Principles of Consolidation

(1) Principles of Consolidation:

 

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

 

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

 

The results and trends in these interim consolidated financial statements for the nine months ended August 31, 2017 and August 31, 2016 may not be representative of those for the full fiscal year or any future periods.

Accounts Receivable

(2) Accounts Receivable:

 

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

Revenue Recognition

(3) Revenue Recognition:

 

Revenue is recognized for products sold by the Company when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company’s warehouse. 

 

For direct shipments, revenue is recognized when product is shipped from the Company’s supplier. The Company has a long term supply agreement with one of its suppliers. The Company purchases the merchandise from the supplier and has the supplier directly ship the merchandise to the customer through the freight forwarder.  Title passes to the customer upon the merchandise being received by a freight forwarder. Direct shipments were approximately $2,825,000 and $2,885,000 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

 

The Company also acts as a sales agent to certain customers in North America for one of its suppliers. The Company reports these commissions as revenues in the period earned. Commission revenue totaled $230,646 and $301,396 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

  

The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.

 

The Company and its subsidiaries currently have agreements with several distributors. There are no provisions for the granting of price concessions in any of the agreements.  Revenues under these distribution agreements were approximately $3,741,000 and $6,434,000 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

Inventories

(4) Inventories:

 

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 the Company obtains title and risk of loss on the products, primarily when shipped from the supplier. Inventory in transit principally from foreign suppliers at August 31, 2017 was $1,144,000. At August 31, 2017, the Company has a reserve against slow moving and obsolete inventory of $262,874. From time to time, the Company’s products are subject to legislation from various authorities on environmental matters.

Depreciation and Amortization

(5) Depreciation and Amortization:

 

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

 

Furniture, fixtures and equipment5 - 7 years
Computer equipment5 years
Leasehold ImprovementsEstimated useful life or lease term, whichever is shorter

 

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

Concentration of Credit Risk

(6) Concentration of Credit Risk:

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable.  The Company maintains substantially all of its cash in a limited number of financial institutions.   At August 31, 2017 and November 30, 2016, the Company’s uninsured cash balances totaled $972,872 and $4,550,807, respectively.

Income Taxes

(7) Income Taxes:

 

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

 

The Company follows the provisions of the Accounting Standards Codification (“ASC”) 740, “Income Taxes.” There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company’s financial condition or results of operations as a result of ASC 740.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2013, and state tax examinations for years before fiscal years ending November 30, 2012. Management does not believe there will be any material changes in the Company’s unrecognized tax positions over the next twelve months.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of interest expense. There was no accrued interest or penalties associated with any unrecognized benefits, nor was any interest expense recognized during the nine months ended August 31, 2017 and August 31, 2016.

Cash Equivalents

(8) Cash Equivalents:

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Use of Estimates

(9) Use of Estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Marketing and promotional costs

(10) Marketing and promotional costs:

 

Marketing and promotional costs are expensed as incurred and have not been material to date. The Company has contractual arrangements with several of its distributors which provide for cooperative advertising rights to the distributor as a percentage of sales. Cooperative advertising is reflected as a reduction in revenues and has not been material to date.

Fair Value of Financial Instruments

(11) Fair Value of Financial Instruments:

 

The carrying amount of cash balances, accounts receivable, accounts payable and accrued expenses approximate their fair value based on the nature of those items. Estimated fair values of financial instruments are determined using available market information and appropriate valuation methodologies.  Considerable judgment is required to interpret the market data used to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.

Shipping Costs

(12) Shipping Costs

 

The Company classifies shipping costs as a component of selling expenses.  Shipping costs totaled $8,070 and $4,991 for the nine months ended August 31, 2017 and August 31, 2016 respectively.

Earnings (Loss) Per Share

(13) Earnings (Loss) Per Share

 

Basic loss (earnings) per share includes no dilution and is computed by dividing net loss (income) available to common stockholders by the weighted average number of common shares outstanding for the period. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive stock options and convertible preferred stock will be exercised for shares of common stock. Dilutive securities are excluded from diluted weighted shares outstanding for the nine months ended August 31, 2017 since the Company had a net loss in the period and including the securities would be anti-dilutive. Total potentially dilutive shares excluded from diluted weighted shares outstanding at August 31, 2017 and August 31, 2016 totaled 402,000 and 518,991, respectively.

Stock Based Compensation

(14) Stock Based Compensation

 

Stock Based Compensation to Employees

 

The Company accounts for its stock-based compensation for employees in accordance with ASC 718.   The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees over the related vesting period.

 

Stock Based Compensation to Other than Employees

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

XML 30 R21.htm IDEA: XBRL DOCUMENT v3.8.0.1
Summary of Significant Accounting Policies (Tables)
9 Months Ended
Aug. 31, 2017
Summary of Significant Accounting Policies [Abstract]  
Schedule of estimated useful life of fixed assets
Furniture, fixtures and equipment5 - 7 years
Computer equipment5 years
Leasehold ImprovementsEstimated useful life or lease term, whichever is shorter
XML 31 R22.htm IDEA: XBRL DOCUMENT v3.8.0.1
Fixed Assets (Tables)
9 Months Ended
Aug. 31, 2017
Fixed Assets [Abstract]  
Schedule of fixed assets
  August 31,  November 30, 
  2017  2016 
       
Furniture and Fixtures $327,971  $327,971 
Leasehold Improvements  962,637   956,637 
Computer Equipment  991,764   982,906 
Less-Accumulated Depreciation  (2,209,187)  (2,185,540)
Net Fixed Assets $73,185  $81,974
XML 32 R23.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accrued Expenses (Tables)
9 Months Ended
Aug. 31, 2017
Accrued Expenses [Abstract]  
Schedule of accrued expenses
  August 31,  November 30, 
  2017  2016 
       
Commissions $226,268  $281,888 
Preferred Stock Dividends  136,569   131,569 
Other accrued expenses  147,090   321,465 
Accrued Professional Fees  443,091   809,960 
  $953,018  $1,544,882 
XML 33 R24.htm IDEA: XBRL DOCUMENT v3.8.0.1
Shareholders' Equity (Tables)
9 Months Ended
Aug. 31, 2017
Shareholders' Equity [Abstract]  
Schedule of stock option incentive plan activity
     Weighted 
     Average 
  Shares  Exercise
Price
 
       
Options outstanding December 1, 2016  352,000  $0.87 
Options issued in the nine months ended August 31, 2017  -  $- 
Options exercised in the nine months ended August 31, 2017  -  $- 
Options cancelled in the nine months ended August 31, 2017  (50,000 $0.51 
Options outstanding at August 31, 2017  302,000  $0.92 
         
Options exercisable at August 31, 2017  302,000  $0.92 
XML 34 R25.htm IDEA: XBRL DOCUMENT v3.8.0.1
Income Taxes (Tables)
9 Months Ended
Aug. 31, 2017
Income Taxes [Abstract]  
Schedule of deferred income taxes
  August 31,  November 30, 
  2017  2016 
Deferred Tax Assets      
    Net operating loss $3,937,672  $4,208,030 
    Allowance for bad debts  49,643   49,276 
    Inventory  97,126   100,446 
    Deferred Rent  14,505   15,961 
    Depreciation  148,548   149,172 
    Total deferred tax assets  4,247,494   4,522,885 
    Valuation allowance  (3,315,357)  (3,608,225)
         
        Total $932,137  $914,660 
Schedule of income tax expense
  Nine Months Ended 
  August 31, 
2017
  August 31, 
2016
 
       
Current:      
Federal $821  $5,217 
States  13,415   17,667 
         
   14,236   22,884 
Deferred:        
Federal  (13,544)  54,796 
States  (3,933)  15,908 
         
   (17,477)  70,704 
         
Provision for income taxes $(3,241) $93,588
Schedule of difference between expected income tax rate using statutory federal tax rate and company's effective rate
  Nine Months Ended 
  August 31,  August 31, 
  2017  2016 
U.S Federal Income tax statutory rate  (34)%  34%
Valuation allowance  30%  (22)%
State income taxes  (3)%  8%
Other  -   - 
Effective tax rate  (7)%  20%
XML 35 R26.htm IDEA: XBRL DOCUMENT v3.8.0.1
Rental Commitments (Tables)
9 Months Ended
Aug. 31, 2017
Rental Commitments [Abstract]  
Schedule of future minimum rental commitments

 

2018 $178,662 
2019 $182,236 
2020 $185,880 
2021 $15,516 
  $562,294 
XML 36 R27.htm IDEA: XBRL DOCUMENT v3.8.0.1
Export Sales (Tables)
9 Months Ended
Aug. 31, 2017
Export Sales [Abstract]  
Schedule of export sales
  Nine Months Ended 
  August 31,  August 31, 
  2017  2016 
Canada  2,945,872   3,397,316 
China  3,506,149   4.597,904 
Other Asian Countries  1,391,537   993,521 
South America  300,130   235,960 
Europe  1,042,237   314,814 
XML 37 R28.htm IDEA: XBRL DOCUMENT v3.8.0.1
Organization, Description of Company's Business and Basis of Presentation (Details)
May 31, 2002
Shareholder
shares
Aug. 31, 2017
shares
Nov. 30, 2016
shares
Aug. 31, 2010
shares
Organization, Description of Company's Business and Basis of Presentation (Textual)        
Minimum number of shareholders to hold equity | Shareholder 2      
Number of shares outstanding - held by surge 999      
Number of shares outstanding - held by officers of surge 1      
Ownership rights transferred to parent company 1      
Common stock shares authorized for issuance   75,000,000 75,000,000 75,000,000
XML 38 R29.htm IDEA: XBRL DOCUMENT v3.8.0.1
Summary of Significant Accounting Policies (Details)
9 Months Ended
Aug. 31, 2017
Furniture, fixtures and equipment [Member] | Maximum [Member]  
Property, Plant and Equipment [Line Items]  
Property, plant and equipment, useful life 7 years
Furniture, fixtures and equipment [Member] | Minimum [Member]  
Property, Plant and Equipment [Line Items]  
Property, plant and equipment, useful life 5 years
Computer equipment [Member]  
Property, Plant and Equipment [Line Items]  
Property, plant and equipment, useful life 5 years
Leasehold Improvements [Member]  
Property, Plant and Equipment [Line Items]  
Property, plant and equipment, estimated useful lives Estimated useful life or lease term, whichever is shorter
XML 39 R30.htm IDEA: XBRL DOCUMENT v3.8.0.1
Summary of Significant Accounting Policies (Details Textual) - USD ($)
9 Months Ended
Aug. 31, 2017
Aug. 31, 2016
Nov. 30, 2016
Summary of Significant Accounting Policies (Textual)      
Direct shipments revenue $ 2,825,000 $ 2,885,000  
Commission revenue 230,646 301,396  
Revenues from distribution agreements 3,741,000 6,434,000  
Inventory in transit from foreign suppliers 1,144,000    
Reserve against slow moving and obsolete inventory 262,874    
Amount of uninsured cash balances 972,872   $ 4,550,807
Shipping costs $ 8,070 $ 4,991  
Diluted weighted shares outstanding 402,000 518,991  
XML 40 R31.htm IDEA: XBRL DOCUMENT v3.8.0.1
Fixed Assets (Details) - USD ($)
Aug. 31, 2017
Nov. 30, 2016
Schedule of fixed assets    
Less-Accumulated Depreciation $ (2,209,187) $ (2,185,540)
Net Fixed Assets 73,185 81,974
Furniture and Fixtures [Member]    
Schedule of fixed assets    
Fixed assets gross 327,971 327,971
Leasehold Improvements [Member]    
Schedule of fixed assets    
Fixed assets gross 962,637 956,637
Computer Equipment [Member]    
Schedule of fixed assets    
Fixed assets gross $ 991,764 $ 982,906
XML 41 R32.htm IDEA: XBRL DOCUMENT v3.8.0.1
Fixed Assets (Details Textual) - USD ($)
3 Months Ended 9 Months Ended
Aug. 31, 2017
Aug. 31, 2016
Aug. 31, 2017
Aug. 31, 2016
Fixed Assets (Textual)        
Depreciation and amortization expense $ 7,882 $ 7,816 $ 23,647 $ 23,448
XML 42 R33.htm IDEA: XBRL DOCUMENT v3.8.0.1
Line of Credit (Details) - USD ($)
9 Months Ended
Aug. 31, 2017
Feb. 28, 2017
Line of Credit (Textual)    
Line of credit $ 600,000 $ 3,000,000
Line of credit, interest rate, description Borrowings under the Credit Line are due upon demand and accrue interest at the greater of the prime rate or the LIBOR rate plus two percent (and may be increased by three percent in the event the Company fails to (i) repay all amounts due on the Credit Line upon demand or (ii) comply with any terms or conditions relating to the Credit Line).  
XML 43 R34.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accrued Expenses (Details) - USD ($)
Aug. 31, 2017
Nov. 30, 2016
Schedule of accrued expenses    
Commissions $ 226,268 $ 281,888
Preferred Stock Dividends 136,569 131,569
Other accrued expenses 147,090 321,465
Accrued Professional Fees 443,091 809,960
Accrued expenses, Total $ 953,018 $ 1,544,882
XML 44 R35.htm IDEA: XBRL DOCUMENT v3.8.0.1
Retirement Plan (Details) - USD ($)
1 Months Ended 9 Months Ended
Jun. 30, 1997
Aug. 31, 2017
Aug. 31, 2016
Nov. 30, 2016
Retirement Plan (Textual)        
Number of completed age for qualification of retirement plan 21 years      
Number of completed years of service for qualification of retirement plan 12 months      
Description for retirement plan Company adopted a qualified 401(k) retirement plan for all full-time employees who are twenty-one years of age and have completed twelve months of service.      
Total employee contributions 15.00%      
Employer matching contribution percentage 20.00%      
Employee deferral percentage 5.00%      
Net assets for plan       $ 1,229,000
Pension expense   $ 773 $ 1,535  
XML 45 R36.htm IDEA: XBRL DOCUMENT v3.8.0.1
Shareholders' Equity (Details) - 2010 Incentive Stock Plan [Member] - Stock options [Member]
9 Months Ended
Aug. 31, 2017
$ / shares
shares
Shares  
Options outstanding December 1, 2016 | shares 352,000
Options issued in the nine months ended August 31, 2017 | shares
Options exercised in the nine months ended August 31, 2017 | shares
Options cancelled in the nine months ended August 31, 2017 | shares (50,000)
Options outstanding at August 31, 2017 | shares 302,000
Options exercisable at August 31, 2017 | shares 302,000
Weighted Average Exercise Price  
Options outstanding December 1, 2016 | $ / shares $ 0.87
Options issued in the nine months ended August 31, 2017 | $ / shares
Options exercised in the nine months ended August 31, 2017 | $ / shares
Options cancelled in the nine months ended August 31, 2017 | $ / shares 0.51
Options outstanding at August 31, 2017 | $ / shares 0.92
Options exercisable at August 31, 2017 | $ / shares $ 0.92
XML 46 R37.htm IDEA: XBRL DOCUMENT v3.8.0.1
Shareholders' Equity (Details Textual) - USD ($)
1 Months Ended 9 Months Ended 12 Months Ended
Mar. 14, 2011
Mar. 31, 2017
Jul. 31, 2015
Apr. 30, 2015
Oct. 31, 2014
Feb. 28, 2006
Apr. 30, 2002
Apr. 30, 2001
Nov. 30, 2000
Aug. 31, 2017
Nov. 30, 2016
Oct. 31, 2016
Aug. 31, 2010
Dec. 31, 2001
Jan. 31, 2000
Feb. 29, 1996
Shareholders' Equity (Textual)                                
Preferred stock, shares authorized                   5,000,000 5,000,000          
Dividend payable                           $ 136,569    
Number of shares repurchased during the period   5,000,000                            
Common Stock [Member]                                
Shareholders' Equity (Textual)                                
Number of shares repurchased during the period                   (57,283)            
Preferred Stock [Member]                                
Shareholders' Equity (Textual)                                
Preferred stock, shares authorized                         5,000,000     1,000,000
Non-Voting Redeemable Convertible Series A Preferred Stock ("Series A Preferred") [Member]                                
Shareholders' Equity (Textual)                                
Preferred stock, shares authorized                   260,000 260,000       260,000  
Preferred stock, shares outstanding                          
Voting Redeemable Convertible Series B Preferred Stock ("Series B Preferred") [Member]                                
Shareholders' Equity (Textual)                                
Preferred stock, shares authorized                 200,000 200,000 200,000          
Preferred stock, shares outstanding                            
Non-Voting Redeemable Convertible Series C Preferred Stock ("Series C Preferred") [Member]                                
Shareholders' Equity (Textual)                                
Preferred stock, shares authorized                 100,000 100,000 100,000          
Preferred stock, shares outstanding                   10,000 10,000          
Preferred stock, shares issued                   10,000 10,000          
Number of shares converted into common stock upon conversion     4,200   2,000       10              
Cumulative dividend per share per annum                 $ 0.50              
Preferred stock issued in payment of financial consulting services                 70,000              
Stock repurchased and cancelled             19,300 8,000                
Amount paid for repurchase under Standstill and Non-Disparagement Agreement             $ 225,000                  
Number of shares repurchased during the period           10,000                  
Accrued dividends     $ 29,838 $ 65,000   $ 50,000                    
Number of preferred stock returned for cancellation in exchange for shares of common stock 9,000     7,500                        
Number of common shares issued in conversion of preferred stock 112,500     110,000 20,000                      
Non-Voting Redeemable Convertible Series C Preferred Stock ("Series C Preferred") [Member] | Common Stock [Member]                                
Shareholders' Equity (Textual)                                
Number of shares converted into common stock upon conversion     42,000                          
Stock repurchased and cancelled             252,000                  
Voting Non-Redeemable Convertible Series D Preferred Stock ("Series D Preferred") [Member]                                
Shareholders' Equity (Textual)                                
Preferred stock, shares authorized                   75,000 75,000 75,000        
Preferred stock, shares outstanding                          
Preferred stock, shares issued                          
XML 47 R38.htm IDEA: XBRL DOCUMENT v3.8.0.1
Shareholders' Equity (Details Textual 1) - USD ($)
1 Months Ended 9 Months Ended 12 Months Ended
Oct. 31, 2016
May 31, 2016
Mar. 31, 2010
Aug. 31, 2017
Nov. 30, 2015
Stock options [Member]          
Shareholders' Equity (Textual)          
Recorded cost of shares       $ 0  
Weighted average remaining life       1 year 3 months 19 days  
Stock options [Member] | Another employee director [Member]          
Shareholders' Equity (Textual)          
Number of common shares purchased for options granted   31,250      
Options granted cost   $ 74,363      
Stock options [Member] | One employee director [Member]          
Shareholders' Equity (Textual)          
Number of common shares purchased for options granted   67,901      
Options granted cost   $ 74,363      
Exercise of options, shares 50,000        
Options exercised shares of common stock per share $ 0.82        
Stock options [Member] | One employee director 1 [Member]          
Shareholders' Equity (Textual)          
Exercise of options, shares 62,500        
Options exercised shares of common stock per share $ 0.80        
Stock options [Member] | One employee director 2 [Member]          
Shareholders' Equity (Textual)          
Exercise of options, shares 25,000        
Options exercised shares of common stock per share $ 0.82        
Stock options [Member] | One employee director 3 [Member]          
Shareholders' Equity (Textual)          
Exercise of options, shares 45,938        
Options exercised shares of common stock per share $ 0.80        
2010 Incentive Stock Plan [Member] | Stock options [Member]          
Shareholders' Equity (Textual)          
Number of common shares purchased for options granted     1,500,000    
Exercise of options, shares        
Options exercised shares of common stock per share        
2015 Incentive Stock Plan [Member] | Officer One [Member]          
Shareholders' Equity (Textual)          
Issuance of shares as compensation, shares   99,151      
2015 Incentive Stock Plan [Member] | Stock options [Member]          
Shareholders' Equity (Textual)          
Number of common shares purchased for options granted         1,500,000
XML 48 R39.htm IDEA: XBRL DOCUMENT v3.8.0.1
Shareholders' Equity (Details Textual 2) - USD ($)
1 Months Ended 12 Months Ended
Mar. 31, 2017
Nov. 30, 2015
Aug. 31, 2017
Shareholders' Equity (Textual)      
Stock repurchased during period, Value $ 7,150,000    
Board of Directors [Member]      
Shareholders' Equity (Textual)      
Stock repurchased during period, Value   $ 500,000  
Repurchase of common stock, Shares     57,283
Repurchase of common stock, Value     $ 48,300
XML 49 R40.htm IDEA: XBRL DOCUMENT v3.8.0.1
Shareholders' Equity (Details Textual 3) - USD ($)
9 Months Ended
Aug. 31, 2017
Mar. 31, 2017
Shareholders' Equity (Textual)    
Common stock, per share   $ 1.43
Non-employee director [Member] | Stock options [Member]    
Shareholders' Equity (Textual)    
Compensation $ 3,500  
Non-employee director one [Member] | Stock options [Member]    
Shareholders' Equity (Textual)    
Compensation $ 2,500  
XML 50 R41.htm IDEA: XBRL DOCUMENT v3.8.0.1
Settlement Agreement (Details) - USD ($)
1 Months Ended 9 Months Ended
Mar. 31, 2017
Dec. 22, 2016
Aug. 31, 2017
Settlement Agreement (Textual)      
Repurchase of common stock 5,000,000    
Common stock, per share $ 1.43    
Settlement Agreement [Member]      
Settlement Agreement (Textual)      
Repurchase of common stock   5,000,000  
Common stock, per share   $ 1.43  
Tender offer, description  
Tender Offer is not completed by March 15, 2017, the Company will (i) appoint the Stockholders to the Board as Class A directors with terms expiring at the Company's annual meeting of stockholders for fiscal year 2018 (the "2019 Meeting") and (ii) reduce the size of the Board to six directors, including the Stockholders.
 
Litigation costs     $ 300,000
XML 51 R42.htm IDEA: XBRL DOCUMENT v3.8.0.1
Income Taxes (Details) - USD ($)
Aug. 31, 2017
Nov. 30, 2016
Deferred Tax Assets    
Net operating loss $ 3,937,672 $ 4,208,030
Allowance for bad debts 49,643 49,276
Inventory 97,126 100,446
Deferred Rent 14,505 15,961
Depreciation 148,548 149,172
Total deferred tax assets 4,247,494 4,522,885
Valuation allowance (3,315,357) (3,608,225)
Total $ 932,137 $ 914,660
XML 52 R43.htm IDEA: XBRL DOCUMENT v3.8.0.1
Income Taxes (Details 1) - USD ($)
3 Months Ended 9 Months Ended
Aug. 31, 2017
Aug. 31, 2016
Aug. 31, 2017
Aug. 31, 2016
Current:        
Federal     $ 821 $ 5,217
States     13,415 17,667
Current, total     14,236 22,884
Deferred:        
Federal     (13,544) 54,796
States     (3,933) 15,908
Deferred, total     (17,477) 70,704
Provision for income taxes $ 125,727 $ 80,067 $ (3,241) $ 93,588
XML 53 R44.htm IDEA: XBRL DOCUMENT v3.8.0.1
Income Taxes (Details 2)
3 Months Ended
Aug. 31, 2017
Aug. 31, 2016
Schedule of difference between expected income tax rate using statutory federal tax rate and company's effective rate    
U.S Federal Income tax statutory rate (34.00%) 34.00%
Valuation allowance 30.00% (22.00%)
State income taxes (3.00%) 8.00%
Other
Effective tax rate (7.00%) 20.00%
XML 54 R45.htm IDEA: XBRL DOCUMENT v3.8.0.1
Income Taxes (Details Textual)
9 Months Ended
Aug. 31, 2017
USD ($)
Income Taxes (Textual)  
Valuation allowance for deferred tax assets $ 293,000
Net operating loss carryforwards $ 9,844,000
Net operating loss carryforwards, expiration date Nov. 30, 2020
XML 55 R46.htm IDEA: XBRL DOCUMENT v3.8.0.1
Rental Commitments (Details)
Aug. 31, 2017
USD ($)
Schedule of future minimum rental commitments  
2018 $ 178,662
2019 182,236
2020 185,880
2021 15,516
Future minimum rental commitments $ 562,294
XML 56 R47.htm IDEA: XBRL DOCUMENT v3.8.0.1
Rental Commitments (Details Textual) - USD ($)
9 Months Ended 12 Months Ended
Jun. 30, 2015
Aug. 31, 2017
Aug. 31, 2016
Nov. 30, 2016
Rental Commitments (Textual)        
Lease expiration period   Nov. 30, 2020    
Net rental expense   $ 235,334 $ 233,504  
Related Company [Member]        
Rental Commitments (Textual)        
Annual minimum rental payments       $ 173,000
Percentage of increase in rental payment       3.00%
Net rental expense   $ 192,102 $ 189,522  
Related Company [Member] | Hong Kong [Member]        
Rental Commitments (Textual)        
Annual minimum rental payments $ 58,500      
Term of lease 2 years      
XML 57 R48.htm IDEA: XBRL DOCUMENT v3.8.0.1
Employment and Other Agreements (Details)
1 Months Ended
Feb. 29, 2016
USD ($)
Shareholder
Employment and Other Agreements (Textual)  
Number of officers involved in employment agreements | Shareholder 2
Period officer prohibited involving in competitive activities during employment, description One year following termination.
Compensation, description An additional thirty-six months of annual compensation equal to the average of his base salary and bonus for the three calendar years prior to the date of termination, payable in accordance with the Company's regular payroll practice over a 52-week period.
Officer One [Member]  
Employment and Other Agreements (Textual)  
Base salary $ 275,000
Officer Two [Member]  
Employment and Other Agreements (Textual)  
Base salary $ 225,000
XML 58 R49.htm IDEA: XBRL DOCUMENT v3.8.0.1
Major Customers (Details)
1 Months Ended 9 Months Ended
Nov. 30, 2016
Aug. 31, 2017
Customers
Aug. 31, 2016
Customers
Supplier
Sales [Member]      
Major Customers (Textual)      
Number of customers   1  
Percentage of concentration   13.00%  
Sales [Member] | Customer One [Member]      
Major Customers (Textual)      
Number of customers     2
Percentage of concentration     12.00%
Sales [Member] | Customer Two [Member]      
Major Customers (Textual)      
Number of customers | Supplier     2
Percentage of concentration     11.00%
Accounts receivable [Member]      
Major Customers (Textual)      
Percentage of concentration 10.00% 10.00%  
XML 59 R50.htm IDEA: XBRL DOCUMENT v3.8.0.1
Major Suppliers (Details) - Supplier concentration risk [Member] - Total Inventory Purchased [Member] - Supplier
9 Months Ended
Aug. 31, 2017
Aug. 31, 2016
Foreign supplier [Member]    
Major Suppliers (Textual)    
Percentage of inventory purchased of products 49.00% 51.00%
Number of supplier 1 1
Taiwan [Member]    
Major Suppliers (Textual)    
Percentage of inventory purchased of products 52.00%  
Hong Kong [Member]    
Major Suppliers (Textual)    
Percentage of inventory purchased of products 14.00%  
Asia [Member]    
Major Suppliers (Textual)    
Percentage of inventory purchased of products 30.00%  
Overseas outside of Asia [Member]    
Major Suppliers (Textual)    
Portion of overseas products Less than 1%.  
XML 60 R51.htm IDEA: XBRL DOCUMENT v3.8.0.1
Export Sales (Details) - USD ($)
9 Months Ended
Aug. 31, 2017
Aug. 31, 2016
Canada [Member]    
Revenues from External Customers and Long-Lived Assets [Line Items]    
Export sales $ 2,945,872 $ 3,397,316
China [Member]    
Revenues from External Customers and Long-Lived Assets [Line Items]    
Export sales 3,506,149 4,597,904
Other Asian Countries [Member]    
Revenues from External Customers and Long-Lived Assets [Line Items]    
Export sales 1,391,537 993,521
South America [Member]    
Revenues from External Customers and Long-Lived Assets [Line Items]    
Export sales 300,130 235,960
Europe [Member]    
Revenues from External Customers and Long-Lived Assets [Line Items]    
Export sales $ 1,042,237 $ 314,814
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