SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period ended February 28, 2002
--- Transition report pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from ____________ to ____________
Commission file number 0 - 14188
Surge Components, Inc.
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(Exact name of small business issuer as specified in its charter)
New York 11-2602030
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
95 Jefryn Boulevard, Deer Park, NY 11729
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(Address of principal executive offices)
(631) 595-1818
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 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 X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of April 15, 2002:
9,022,448 shares of common stock, par value $.001 per share.
Transitional Small Business Disclosure Format (check one):
Yes No X
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
Index to Form 10-QSB
for the Period Ended February 28, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations and Comprehensive Loss 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis or Plan of Operation 9- 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, November 30,
2002 2001
---- ----
ASSETS
Current assets:
Cash and equivalents $ 924,000 $1,030,000
Marketable securities - available for sale 966,000 1,177,000
Accounts receivable (net of allowance for
doubtful accounts of $40,000) 1,474,000 1,610,000
Due under repurchase agreement 794,000 1,055,000
Inventory, net 2,137,000 2,311,000
Prepaid expenses and income taxes 336,000 142,000
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Total current assets 6,631,000 7,325,000
Fixed assets - net of accumulated depreciation
of $559,000 and $476,000 1,402,000 1,479,000
Other assets 8,000 8,000
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Total assets $8,041,000 $8,812,000
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3
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, November 30,
2002 2001
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,298,000 $ 2,316,000
Accrued expenses and taxes 753,000 1,113,000
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Total current liabilities 3,051,000 3,429,000
Deferred rent 34,000 29,000
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Total liabilities 3,085,000 3,458,000
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Commitments and contingencies
Shareholders' equity
Preferred stock - $.001 par value stock, 1,000,000 shares authorized:
Series A - 260,000 shares authorized, none outstanding. Series C -
100,000 shares authorized, 62,000 shares issued and outstanding,
convertible, redeemable,
liquidation preference of $5 per share -- --
Common stock - $.001 par value stock,
25,000,000 shares authorized, 9,022,448
shares issued and outstanding 9,000 9,000
Additional paid-in capital 23,065,000 23,081,000
Stock subscription receivable (8,000) (9,000)
Net unrealized loss on investment securities (77,000) (62,000)
Accumulated deficit (18,033,000) (17,665,000)
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Total shareholders' equity 4,956,000 5,354,000
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Total liabilities and shareholders' equity $ 8,041,000 $ 8,812,000
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See accompanying notes to consolidated financial statements.
4
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended
February 28,
2002 2001
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Net sales $2,794,000 $6,570,000
Cost of goods sold 2,012,000 5,006,000
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Gross profit 782,000 1,564,000
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Operating expenses:
General and administrative
expenses 838,000 2,091,000
Selling and shipping expenses 234,000 378,000
Financial consulting fees 75,000 1,129,000
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Total operating expenses 1,147,000 3,598,000
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Loss from operations (365,000) (2,034,000)
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Other income (expense):
Investment income 14,000 70,000
Interest expense (4,000) (90,000)
Loss on sale of marketable securities (8,000) (36,000)
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Total other income (expense) 2,000 (56,000)
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Loss before income taxes (363,000) (2,090,000)
Income taxes 5,000 3,000
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Net loss (368,000) (2,093,000)
Dividends on preferred stock 16,000 --
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Net loss available to common shareholders $ (384,000) $(2,093,000)
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Other comprehensive loss
Net loss (368,000) (2,093,000)
Unrealized holding (loss) gain on securities
arising during the period (15,000) 3,000
Reclassification adjustment - loss on sale of securities 8,000 36,000
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Total comprehensive loss $ (375,000) $(2,054,000)
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Loss available to common shareholders, per share
Basic $ (.04) $ (.32)
Diluted $ (.04) $ (.32)
Weighted average shares outstanding
Basic 9,022,000 6,644,000
Diluted 9,022,000 6,644,000
See accompanying notes to consolidated financial statements.
5
SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
February 28,
2002 2001
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OPERATING ACTIVITIES:
Net loss $ (368,000) $ (2,093,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 83,000 28,000
Provision for bad debts -- 129,000
Loss on sale of marketable securities 8,000 36,000
Unearned compensation -- 1,129,000
Deferred rent 5,000 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable 136,000 671,000
Inventory 174,000 667,000
Prepaid expenses and income taxes (194,000) (205,000)
Accounts payable (18,000) (157,000)
Accrued expenses and taxes (377,000) (294,000)
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NET CASH USED IN OPERATING ACTIVITIES (551,000) (89,000)
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INVESTING ACTIVITIES
Collections of amounts due under repurchase agreement 261,000 --
Purchase of marketable securities (12,000) (37,000)
Proceeds from sale of marketable securities 200,000 450,000
Acquisition of fixed assets (6,000) (516,000)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 443,000 (103,000)
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FINANCING ACTIVITIES
Collections from stock subscription receivable 2,000 --
Proceeds from exercise of stock options -- 36,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,000 36,000
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NET CHANGE IN CASH AND EQUIVALENTS (106,000) (156,000)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,030,000 2,906,000
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CASH AND EQUIVALENTS AT END OF PERIOD $ 924,000 $ 2,750,000
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SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 5,000 $ 3,000
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Interest paid $ 4,000 $ 7,000
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Conversion of convertible debt into common stock $ -- $ 2,479,000
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See accompanying notes to consolidated financial statements.
6
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2002
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying consolidated financial statements
of Surge Components Inc., Challenge/Surge, Inc., Superus Holdings, Inc.
("Superus"), Mail Acquisition Corp. ("Mail") and SolaWorks, Inc. contain all
adjustments necessary to present fairly the Company's financial position as of
February 28, 2002 and the related statements of operations and comprehensive
loss and cash flows for the three months ended February 28, 2002 and 2001.
The consolidated results of operations for the three months ended February 28,
2002 and 2001 are not necessarily indicative of the results to be expected for
the full year.
The accounting policies followed by the Company are set forth in Note B to the
Company's financial statements included in its Annual Report on Form 10-KSB, for
the year ended November 30, 2001.
NOTE 2 - SUPERUS BANKRUPTCY
In March 2002, Superus filed for bankruptcy protection under Chapter 7 of the
United States Bankruptcy code.
NOTE 3 - SETTLEMENT AGREEMENT
In April 2002, in connection with a Mutual Release, Settlement, Standstill and
Non-Disparagement Agreement by and among the Company and Equilink Capital
Partners, LLC, Robert DePalo, Old Oak Fund Inc. and Kenneth Orr (collectively,
the "Investors"), the Investors transferred back to the Company 252,000 shares
of common stock, 19,300 shares of Series C preferred stock, and certain
warrants, representing all of the Company's securities held by the Investors,
and agreed to, among other things, not to purchase any securities of the Company
and not to disparage the Company in any manner, in exchange for $225,000
($100,000 paid upon signing of the agreement and two payments of $62,500 due on
July 1, 2002 and November 1, 2002), in settlement of potential claims relating
to services provided by the Investors. The shares are being held in escrow until
the final payment has been made. In addition, the Company and the Investors
mutually agreed to release each other from all claims each party had, now has,
or in the future might have against the other. The Company will record a charge
of approximately $200,000 to income during the quarter ending May 31, 2002 in
connection with the settlement.
7
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2002
NOTE 4 - DUE UNDER REPURCHASE AGREEMENT
In September 2001, the Company entered into an agreement with a subsidiary
("Maple Chase") of Invensys Plc pursuant to which the Company paid approximately
$1,250,000 for certain inventory held by Maple Chase who agreed to repay the
Company, in non-interest bearing installments over 12 months for such inventory
(the "Repurchase Agreement"). For accounting purpose, the amount paid by the
Company under the Repurchase Agreement is being treated as a one-year financing.
As of February 28, 2002, the Company had received approximately $461,000. In
April 2002, the Company received the third scheduled payment of approximately
$323,000.
NOTE 5 - PREFERRED DIVIDENDS
The dividends on the Non-Voting Redeemable Convertible Series C Preferred Stock
totaling $15,500 for the semiannual period ended December 31, 2001 have not been
paid. The Company has accrued these dividends.
NOTE 6 - SEC INVESTIGATION
During the year ended November 30, 2000 and the quarter ended February 28, 2001,
the Company made certain questionable payments of approximately $2,137,000 and
$774,000, respectively. These payments are currently the subject of an
investigation by the Securities and Exchange Commission. The recipient of these
payments repaid $1 million in cash to the Company in the quarter ending May 31,
2001 which was included in other income. There can be no assurance that the
questionable payments and related investigation will not lead to other
proceedings.
8
Item 2. Management's Discussion and Analysis or Plan of Operation
Statements contained in this report include "forward-looking
statements" within the meaning of such term in Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause actual financial or operating results, performances or
achievements expressed or implied by such forward-looking statements not to
occur or be realized. Such forward-looking statements generally are based on our
best estimates of future results, performance or achievements, based upon
current conditions and the most recent results of the companies involved and
their respective industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as "may," "will," "project," "expect,"
"believe," "estimate," "anticipate," "intends," "continue," "potential,"
"opportunity" or similar terms, variations of those terms or the negative of
those terms or other variations of those terms or comparable words or
expressions. Potential risks and uncertainties include, among other things, such
factors as:
o our business strategies and future plans of operations,
o general economic conditions in the United States and elsewhere,
as well as the economic conditions affecting the industries in
which we operate,
o political and regulatory matters affecting the foreign countries
in which we operate or purchase goods and materials,
o the market acceptance and amount of sales of our products and
services,
o the extent that our distribution network and marketing programs
achieve satisfactory response rates,
o the effect of the current surplus of electronic component parts
in the broker distributor market on sales by our Challenge
subsidiary,
o our historical losses,
o the competitive environment within the electronic components
industry,
o our ability to raise additional capital, if and as needed,
o the cost-effectiveness of our product development activities,
o the effect of the delisting of our common stock from The Nasdaq
Stock Market,
o the extent of any further investigations or proceedings with
respect to the questionable payments.
9
Shareholders and others reading this report should carefully consider such
risks, uncertainties and other information, disclosures and discussions which
contain cautionary statements identifying important factors that could cause
actual results to differ materially from those provided in the forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Readers are urged to carefully review and consider the
various disclosures made by the Company in this Report and the Company's Annual
Report on Form 10-KSB for the year ended November 30, 2001, both of which have
been filed with the Commission. These reports attempt to advise interested
parties of the risks and factors that may affect the Company's business,
financial condition and results of operations and prospects.
Recent Developments
On April 12, 2002, Surge entered into a Mutual Release, Settlement,
Standstill and Non-Disparagement Agreement with Equilink Capital Partners, LLC,
Robert DePalo, Old Oak Fund Inc. and Kenneth Orr (collectively, the
"Investors"). Pursuant to such agreement, the Investors transferred back to
Surge 252,000 shares of common stock, 19,300 shares of Series C preferred stock,
and certain warrants, representing all of Surge's securities held by the
Investors, and agreed to, among other things, not to purchase any securities of
Surge and not to disparage the Company in any manner, in exchange for $225,000
($100,000 paid upon signing of the agreement and two payments of $62,500 due on
July 1, 2002 and November 1, 2002), in settlement of potential claims relating
to services provided by the Investors. The shares are being held in escrow until
the final payment has been made. In addition, the Company and the Investors
mutually agreed to release each other from all claims each party had, now has,
or in the future might have against the other. The Company will record a charge
of approximately $200,000 to income during the quarter ending May 31, 2002 in
connection with the settlement.
Results of Operations
Consolidated net sales for the three months ended February 28, 2002
decreased by approximately $3,776,000, or 57%, to approximately $2,794,000 as
compared to net sales of approximately $6,570,000 for the three months ended
February 28, 2001. The net sales for the three months ended February 28, 2002
for Surge without Challenge/Surge, Inc. ("Challenge"), one of the Company's
subsidiaries, decreased by approximately $857,000, or 33% when compared to the
three months ended February 28, 2001. The Company had lower sales during the
current year as a result of a slowdown in the electronics industry.
The net sales for the three months ended February 28, 2002 for Challenge
decreased by approximately $2,919,000, or 73% when compared to the three months
ended February 28, 2001. Challenge is experiencing a decline in sales due to a
slowdown in manufacturing among computer, telecommunications and phone
manufacturers. This slowdown is expected to exist through the second half of
2002. Any future improvements in sales and possible profitability is expected to
be based on future demand and supply for Challenge's product mix.
10
Our gross profit for the three months ended February 28, 2002 decreased by
approximately $782,000 or 50%, as compared to the three months ended February
28, 2001. Gross margin as a percentage of net sales, however, increased from
23.8% for the three months ended February 28, 2001 to 28% for the three months
ended February 28, 2002. This increase is due primarily to a change in our
product mix.
General and administrative expenses for the three months ended February 28,
2002 decreased by approximately $1,253,000, or 60%, as compared to the three
months ended February 28, 2001. The decrease is primarily due to costs
associated with funding the operations of MailEncrypt, which was unwound during
the fourth quarter of the fiscal year ended November 30, 2001, and overhead
attributable to Superus, which was inactive since the second quarter of 2001 and
has subsequently filed for bankruptcy protection under Chapter 7 of the United
States Bankruptcy Code. Superus incurred approximately $557,000 of expenses
relating to salaries, rent, professional fees, public relations and consulting
fees for the three months ended February 28, 2001.
Selling and shipping expenses for the three months ended February 28, 2002
decreased by approximately $144,000, or 38%, as compared to the three months
ended February 28, 2001. This decrease is primarily due to the decreased sales
commissions resulting from the lower sales in the current three-month period.
Financial consulting fees and expenses for the three months ended February
28, 2001 were approximately $1,129,000, based on the amortization of unearned
compensation recorded during the fiscal year ended November 30, 2000 for work to
be performed by the Company's investment banker in 2001. During the three months
ended February 28, 2002, the Company paid $75,000 to its investment banker for
work performed during the current quarter.
Interest expense decreased approximately $86,000 or 95% for the three
months ended February 28, 2002 as compared to the three months ended February
28, 2001. This decrease primarily is related to our conversion of our private
placement notes as of December 31, 2000. In July 2001, in order to avoid
disputes, we decided to accrue additional interest on the convertible notes
through the dates the notes were converted. Previously interest was accrued only
to December 31, 2000.
Investment income for the three months ended February 28, 2002
decreased by approximately $56,000, or 80%, as compared to the three months
ended February 28, 2001. This decrease is primarily related to our use of cash
and cash equivalents to fund losses and the reduction of interest rates.
As result of the foregoing, the Company on a consolidated basis had a net
loss of approximately $368,000 for the three months ended February 28, 2002, as
compared to approximately $2,093,000 for the three months ended February 28,
2001.
11
Liquidity and Capital Resources
Working capital decreased by $316,000 during the three months ended
February 28, 2002 from $3,896,000 at November 30, 2001, to $3,580,000, at
February 28, 2002. This decrease resulted primarily from the decrease in
inventory and amounts due under a repurchase agreement as partially offset by a
decrease in accrued expenses. Our current ratio increased from 2.1:1 at November
30, 2001, to 2.2:1 at February 28, 2002. Inventory turned 0.90 times during the
three months ended February 28, 2002 as compared to 1.86 times during the three
months ended February 28, 2001. The average number of days to collect
receivables decreased from 54 days to 50 days. We believe that working capital
levels are adequate to meet the current operating requirements of the Company.
At February 28, 2002, we had no existing lines of credit. The Company is
negotiating a $1 million line of credit from an asset based lender.
We continue to incur substantial operating costs. These costs principally
consist of rent, payroll, professional fees and marketing related charges. Our
ability to operate profitably in the future depends on increasing sales levels
and decreasing our expenses. To accomplish this goal, we continue to streamline
our operations by reducing payroll and are reviewing other possible reductions.
During the three months ended February 28, 2002, we had net cash used in
operating activities of approximately $535,000 as compared to approximately
$89,000 in the three months ended February 28, 2001. The increase in cash used
in operating activities resulted from the Company's net loss, a decrease in
accrued expenses and an increase in prepaid expenses and income taxes, partially
offset by a decrease in inventory.
We had net cash provided by investing activities of $443,000 for the three
months ended February 28, 2002, as compared to $103,000 used in investing
activities for the three months ended February 28, 2001. The net cash provided
by investing activities during the three months ended February 28, 2002 resulted
primarily from the sale of marketable securities and collection of amounts due
under a repurchase agreement ($261,000).
We anticipate that with our current cash position, marketable securities
available for sale and collections due under Repurchase Agreement will be
sufficient to meet our current financial requirements over at least the next
twelve months.
We had net cash provided by financing activities of approximately $2,000
for the three months ended February 28, 2002, as compared to net cash provided
by financing activities of approximately $36,000 for the three months ended
February 28, 2001. The cash provided by financing activities during the quarter
ended February 28, 2001 was a result of the proceeds from the exercise of stock
options.
12
As a result of the foregoing, the Company had a net decrease in cash and
equivalents of approximately $106,000 during the three months ended February 28,
2002, as compared to approximately $156,000 for the three months ended
February 28, 2001.
In April 2002, in connection with a Mutual Release, Settlement, Standstill
and Non-Disparagement Agreement by and among the Company and Equilink Capital
Partners, LLC, Robert DePalo, Old Oak Fund Inc. and Kenneth Orr (collectively,
the "Investors"), the Investors transferred back to the Company 252,000 shares
of common stock, 19,300 shares of Series C preferred stock, and certain
warrants, representing all of the Company's securities held by the Investors,
and agreed to, among other things, not to purchase any securities of the Company
and not to disparage the Company in any manner, in exchange for an aggregate of
$225,000 ($100,000 paid upon signing of the agreement and two payments of
$62,500 due on July 1, 2002 and November 1, 2002), in settlement of potential
claims relating to services provided by the Investors. The shares are being held
in escrow until the final payment has been made. In addition, the Company and
the Investors mutually agreed to release each other from all claims each party
had, now has, or in the future might have against the other. The Company will
record a charge of approximately $200,000 to income during the quarter ending
May 31, 2002 in connection with the settlement.
Inflation And Increasing Interest Rates
In the past two fiscal years, inflation has not had a significant impact on
our business. We have generally been able to offset the impact of rising costs
through purchase price reductions and increases in selling prices. 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.
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
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10.1 (a) Mutual Release, Settlement, Standstill and Non-Disparagement
Agreement, dated as of April 12, 2002, by and among Surge
Components, Inc. and Equilink Capital Partners, LLC,
Robert DePalo, Old Oak Fund Inc. and Kenneth Orr.
(b) Reports on Form 8K
None.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SURGE COMPONENTS, INC.
By: /s/ Steven J Lubman
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Steven J. Lubman
Vice President, Principal
Financial Officer, Secretary and
Director
Dated: April 22, 2002
14