UNITED STATES
 
 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
___________________________
 
FORM 10-K
 
 
(mark one)
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended November 30, 2011
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _______ to _______
 
Commission File No. 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 Boulevard
Deer Park, New York
11729
(Address of principal executive offices)
(Zip Code)
   
(631) 595-1818
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class
to be so Registered:
Name of each exchange on which registered
None
None

Securities registered under Section 12(g) of the Act:

Units
Common Stock, Par Value $0.001
Class B Warrants
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [_]     No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes [_]    No [X]

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 [X] 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 [ X] No [ ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or amendment to Form 10-K.       [  ]

 Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a small reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):

Large Accelerated Filer [_]                                                                Accelerated Filer [_]
Non-accelerated Filer     [_]                                                                Smaller reporting company [X]
(Do not check if a smaller reporting company)

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

As of May 31, 2011, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock, was approximately $4.5 million.   

The Registrant’s common stock outstanding as of February 13, 2012, was 9,035,012 shares of common stock.

 
 
 
 
 
SURGE COMPONENTS, INC.
 
PART I
   
     
Item 1.
Business
2
Item 1A.
Risk Factors
10
Item 1B.
Unresolved Staff Comments
14
Item 2.
Properties.
14
Item 3.
Legal Proceedings.
14
Item 4.
Mine Safety Disclosure.
14
     
PART II
   
     
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
15
Item 6.
Selected Financial Data.
16
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
16
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
19
Item 8.
Financial Statements and Supplementary Data.
19
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
19
Item 9A.
Controls and Procedures.
20
Item 9B.
Other Information.
20
     
PART III
   
     
Item 10.
Directors, Executive Officers, and Corporate Governance.
21
Item 11.
Executive Compensation.
23
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
25
Item 13. 
Certain Relationships and Related Transactions, and Director Independence.
26
Item 14.
Principal Accounting Fees and Services.
26
     
PART IV
   
     
Item 15.
Exhibits and Financial Statement Schedules.
27
     
SIGNATURES
29
     
Consolidated Financial Statements 
F-1
     
 
 
 
 
 
 
FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. All statements other than statements of historical facts contained in this report, 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." 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 after the date of the filing of this report.
 
This report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and investors are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this report and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this report. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
 

 
 
 

 
1
 
 
 
PART I
 
Item 1.   Business.
 
References to "we," "us," "our", "our company" and "the company" refer to Surge Components, Inc. ("Surge" or the "Company") and, unless the context indicates otherwise, includes Surge's wholly-owned subsidiaries, Challenge/Surge, Inc. ("Challenge"), and Surge Components, Limited ("Surge Limited”).

We were incorporated under the laws of the State of New York on November 24, 1981, and re-incorporated in Nevada on August 26, 2010. Surge, a supplier of electronic products and components (i.e. capacitors, diodes, PC Boards), completed an initial public offering of its securities in 1984 and a second offering of its securities in August 1996. Challenge, a New York corporation formed in 1988 and a wholly-owned subsidiary of Surge, supplies audible products, including buzzers, speakers, and microphones. Our principal executive offices are located at 95 East Jefryn Boulevard, Deer Park, New York 11729 and our telephone number is (631) 595-1818.
 
The Company reincorporated in Nevada because Nevada is a nationally-recognized leader in adopting and implementing comprehensive and flexible corporation laws that are frequently revised and updated to accommodate changing legal and business needs.
In connection with the reincorporation, the following material changes to the Company’s certificate of incorporation and by-laws were effected:
 
●
The authorized capital of the Company increased from 26,000,000 shares, consisting of 25,000,000 shares of common stock, par value of $0.001 and 1,000,000 shares of preferred stock, par value of $0.001, to 80,000,000 shares, consisting of 75,000,000 shares of common stock, par value $0.001, and 5,000,000 shares of preferred stock, par value $0.001.
 
●
The board of directors of the Company was divided into three classes, with each class as nearly equal in number as the then-authorized number of directors constituting the board of directors permits, with the term of the office of one class expiring each year.

 In July 1996, the Company filed a Form 8-A/A pursuant to which it registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Units (consisting of the Company’s common stock and Class A Warrants), Common Stock and Class A Warrants.  In May 2003, the Securities and Exchange Commission (“SEC”) approved an application submitted by the Company to deregister the Common Stock and Class A Warrants from registration under Section 12(b) (“Deregistration”).  Nevertheless, the Company's Units and Class B Warrants remained registered under Section 12(g) and therefore Company still had reporting obligations from 2004 to 2010 but failed to file the required reports. Please see our risk factor discussing the material consequences of our failure to file such reports. From 2004 through the date of this report, none of the Company’s officers or directors sold any of the Company’s securities.  Further, to the Company’s knowledge from 2004 through 2010, only 3 shareholders of record have sold shares pursuant to Rule 144.  None of these shareholders were officers or directors of the Company, and they sold or transferred an aggregate of 75,684 shares, which met the requirements for sale under Rule 144 of Rules and Regulations of the Securities Act of 1933 as amended, because the Company has never been a shell company, the shares were held for over a year and the sellers were not affiliates of the Company at the time of the sale or transfer or during the preceding three months.   These sales do not include free trading shares of the Company’s stock which may have been sold by beneficial owners who hold stock in street name. From 2004 through December 31, 2011, the Company held one meeting of its shareholders (in April 2010), at which only holders of Common Stock were solicited for votes.  
 
Our Common Stock was listed on the Nasdaq SmallCap Market (now known as the Nasdaq Capital Market) until November 2001. Our Common Stock was delisted in connection with certain questionable payments in the aggregate amount of $3,000,000 made by the Company during the year ended November 30, 2000 and the quarter ended February 28, 2001. Such payments were made to the wife of an employee of one of our suppliers in return for help obtaining components from that supplier and another distributor. According to management personnel responsible for making the payments, prior to making any payment, they disclosed the transaction to our legal counsel to determine whether payments to an employee of a supplier would be legal. Management personnel believed they had received reasonable assurances at the time and thereafter, that such payments were not illegal, so long as the recipient of the payments received an IRS Form 1099, and all payments were made by check.
 
The costs of such payments were recorded in our books and records and financial statements as they were incurred. We duly issued a Form 1099 to the recipient of the payments, based upon the advice of our counsel. According to Steven Lubman (who served as our Vice President at that time), in mid-March 2001, he became aware of a document in a criminal proceeding unrelated to us in which the payments were described as kickbacks. This caused management to seek reconfirmation of the legal advice previously given. Legal counsel advised us by letter on or about March 22, 2001, that, since the payments had been described in a document in the unrelated criminal action as kickbacks, disclosure of the document should be made to our auditors, which was done. Such counsel stated in the letter that no conclusion had been reached that such payments were kickbacks. On April 19, 2001, we disclosed in a Form 10-QSB that the questionable payments had been made.
 
 
2
 
 
In addition, after receipt of the March 22 letter, the Board determined to investigate the payments and ask for the return of the payments. The Company requested that the $3 million be repaid, and we received $1 million.
 
In May 2001, another law firm,  Mintz Levin Cohn Ferris Glovsky and Popeo, P.C., was engaged by the Company to assist in an investigation concerning the payments and to recommend policies to prevent any similar future payments. Due in part to the previously disclosed resignation of our outside counsel and such counsel's refusal to be interviewed as part of the investigation, we were unable to confirm what legal advice was rendered as to the making of such payments. The investigation did not uncover any additional payments similar to the previously disclosed "questionable payments".
 
By letters dated October 9, 2001 and January 17, 2002, we were contacted by the SEC regarding the potentially questionable payments, and were requested to voluntarily furnish various documents.  By letters dated October 23, 2001 and November 28, 2001, we voluntarily responded and provided the SEC with such documents. On March 13, 2002, we provided a supplemental response to the SEC.  We have not had any contact with, or received any letters from, the SEC concerning this matter since March 2002.
  
In November 2001, NASDAQ  informed  us  that it had determined that the Company's securities would be delisted  based on public interest concerns related to the potentially questionable payments and additionally for  the  failure  of certain of our officers  and  directors  to submit to an interview by NASDAQ regarding these payments.
 
The legal counsel which advised the Company as to the legality of the questionable payments no longer has any relationship to the Company. Ira Levy and Steven Lubman were the sole officers and directors of the Company who were asked and refused, based on the advice of counsel, to submit to the NASDAQ interviews. They are currently officers and directors of the Company.
 
In May 2002, Surge and Ira Levy, our chief executive 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 Mr. Levy owns one share of the outstanding common stock. Mr. Levy has assigned his rights regarding his one share to Surge. Surge Limited started doing business in July 2002. The Company has opened this office and hired direct sales people in order to effectively handle the transfer business from United States customers purchasing and manufacturing in Asia after they do the design in America. This office has strengthened its global capabilities and service to its customer base.
 
We are a supplier of electronic products and components. These products include capacitors, which are electrical energy storage devices, and discrete components, such as semiconductor 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 that we sell are typically utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, telecomm, audio, cellular telephones, computers, consumer electronics, garage door openers, household appliances, power supplies and security equipment. The products that we sell 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.  The products that we sell are manufactured predominantly in Asia by approximately sixteen independent manufacturers. We do not have any binding long-term supply, distribution or franchise agreements with our manufacturers. We act as the exclusive sales agent utilizing independent sales representative organizations in North America to sell and market the products for one of such manufacturers pursuant to an oral agreement.  As the exclusive sales agent for this manufacturer, we are solely responsible for marketing and selling its products in North America. When we act as a sales agent, the supplier who sold the product to the customer that we introduced to such supplier will pay us a commission. The amount of the commission is determined on a sale by sale basis depending on the profit margin of the product. Such commissions have not been material to date.
 
In order for us 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 clients, our ability to retain sales and other 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 managing growth, including monitoring an expanded level of operations and controlling costs, and the availability of adequate financing.
 
Industry Background
 
The United States electronics distribution industry is composed of manufacturers, national and international distributors, as well as regional and local distributors. Electronics distributors market numerous products, including active components (such as transistors, microprocessors, integrated circuits and semiconductors), passive components (such as capacitors and audibles), and electro mechanical, interconnect (such as connectors and wire) and computer products. Surge focuses its efforts on the sale of capacitors, discrete components, and audible products.
 
 
3
 
 
The electronics industry has been characterized by intense price cutting and rapid technological changes and development, which could materially adversely affect our future operating results. In addition, the industry has been affected historically by general economic downturns, which have had an adverse economic effect upon manufacturers and end-users of  the products that we sell, as well as distributors. Furthermore, the life-cycle of existing electronic products and the timing of new product development and introduction can affect the demand for electronic components, including the products that we sell. Accordingly, any downturn in the electronics industry in general could adversely affect our business and results of operations.  There are forces of change affecting the wholesale distribution industry, including the electronics industry. The industry is experiencing a strong move by U.S. manufacturers to design products in the United States, but then shift manufacturing and purchasing to Asia to benefit from this low cost labor region using their own factory or a subcontractor. Surge has responded to this trend by setting up a Hong Kong corporation, Surge Components, Limited, and hiring sales staff to better position the Company in the Asian markets.
 
Products
 
Surge supplies a wide variety of electronic components (some of which bear our private "Surge" label) which can be broadly divided into two categories—capacitors and discrete components. For Fiscal 2011 and Fiscal 2010, capacitors accounted for approximately 50% and 50% of Surge's sales respectively of which approximately 75% was Lelon capacitors (discussed below). Discrete components accounted for Surge's remaining sales in Fiscal 2011 and Fiscal 2010. Capacitors and discrete components can be categorized based on various factors, including function, construction, fabrication and capacity.
 
We sell, under the name of the manufacturer, Lelon Electronics, aluminum electrolytic capacitors, which are capacitors that store and release energy into a circuit incrementally and are used in various applications, including computers, appliances such as refrigerators and washer/dryers, and telecommunications devices. Our sales of products under the Lelon Electronics name accounted for approximately 40% of our total sales (and approximately 75% of our capacitor sales as noted above) in Fiscal 2011.
 
The principal products sold by Surge under the Surge name (except with respect to capacitors, which the Company also sells under the Lelon Electronics name as noted above) or by Challenge are set forth below.
 
Capacitors
 
A capacitor is an electrical energy storage device used in the electronics industry for varied applications, principally as elements of resonant circuits, coupling and bypass applications, blockage of DC current, frequency determining and timing elements, filters and delay-line components. All products are available in traditional leaded as well as surface mount (chip) packages. The product line of capacitors we sell includes:
 
Aluminum Electrolytic Capacitors- These capacitors, which are Surge's principal product, are storage devices used in power applications to store and release energy as the electronic circuitry demands. They are commonly used in power supplies and can be found in a wide range of consumer electronics products. Our supplier is one of the largest facilities for these products in Taiwan and China. These facilities are fully certified for the International Quality Standard ISO 9001 and QS9000, and TS16949, which means that it meets the strictest requirements established by the automotive industry and adopted throughout the world to ensure that the facility's manufacturing processes, equipment and associated quality control systems will satisfy specific customer requirements. This system is also intended and designed to facilitate clear and thorough record keeping of all quality control and testing information and to ensure clear communication from one department to another about the information (i.e., quality control, production or engineering). This certification permits us to monitor quality control/manufacturing process information and to respond to any customer questions.
 
Ceramic Capacitors- These capacitors are the least expensive, and are widely used in the electronics industry. They are commonly used to bypass or filter semiconductors in resonant circuits and are found predominantly in a wide range of low cost products including computer, telecom, appliances, games and toys.
 
Mylar Film Capacitors- These capacitors are frequently used for noise suppression and filtering. They are commonly used in telecommunication and computer products. Surge's suppliers in China have facilities fully certified for all of the above mentioned certifications.
 
Discrete Components- Discrete components, such as semiconductor rectifiers, transistors and diodes, are packaged individually to perform a single or limited function, in contrast to integrated circuits, such as microprocessors and other "chips", which contain from only a few diodes to as many as several million diodes and other elements in a single package, and are usually designed to perform complex tasks. Surge almost exclusively distributes discrete, low power semiconductor components rather than integrated circuits.
 
The product line of discrete components we sell includes:
 
Rectifiers- Low power semiconductor rectifiers are devices that convert alternating current, or AC power, into one directional current, or DC power, by permitting current to flow in one direction only. They tend to be found in most electrical apparatuses, especially those drawing power from an AC wall outlet.
 
 
4
 
 
Surge offers a wide variety of rectifiers, including:
 
- Schottky barrier rectifiers;
 
- super-fast rectifiers;
 
- ultra-fast/high efficiency rectifiers;
 
- fast recovery rectifiers, the time within which the current recovers from spikes of voltage or current;
 
- fast recovery glass passivated rectifiers, a chip coated with a glass material to protect the component from thermal stress in a circuit;

- silicon rectifiers, which utilize silicon rectifying cells designed to withstand large currents and high voltages;
 
- soft recovery/fast switching rectifiers;
 
- high voltage rectifiers;
 
- bridge rectifiers, which connect multiple circuits in parallel;
 
- self packaged surface mount rectifiers, chip style without leads and used in miniaturization; and
 
- auto rectifiers.
 
All products are available in traditional leaded as well as surface mount (chip) packages. Surge's rectifier suppliers all have the afore mentioned certifications, giving us an opportunity to market the products that we sell  to the automotive industry.
 
Transistors- These products send a signal to the circuit for transmission of waves. They are commonly used in applications involving the processing or amplification of electric current and electric signals, including data, television, sound and power. All products are available in traditional leaded as well as surface mount (chip) packages. Surge sells many types of ISO 9002 transistors, including:
 
- small signal transistors, designed for lower levels of current; and
 
- power transistors, designed for large currents to safely dissipate large amounts of power.
 
Diodes- Diodes are two-lead or surface mount components that allow electric current to flow in only one direction. They are used in a variety of electronic applications, including signal processing and direction of current.
 
All products are available in traditional leaded as well as surface mount (chip) packages. Diodes sold include:
 
- zener diodes;
 
- high speed switching diodes; and
 
- rectifiers, the most popular type of diode.
 
Circuit Protection Devices- Our circuit protection devices include transient voltage suppressors and metal oxide varistors, which protect circuits against switching, lightning surges and other uncontrolled power surges and/or interruptions in circuits. Transient voltage suppressors, which offer a higher level of protection for the circuit, are required in telecommunication products and are typically higher priced products than the metal oxide varistors, which are more economically priced and are used in consumer products. All products are available in traditional leaded as well as surface mount (chip) packages.
 
Audible Components- These include audible transducers, Piezo buzzers, speakers, and microphones, which produce an audible sound for, and are used in back-up power supplies for computers, alarms, appliances, smoke detectors, automobiles, telephones and other products which produce sounds. Challenge has initiated marketing relationships with certain Asian manufacturers of audible components to sell these products worldwide. All products are available in traditional leaded as well as surface mount (chip) packages.
 
New Products- We periodically introduce new products, which are intended to complement our existing product lines. These products are ones that are commonly used in the same circuit designs as other of the products that we sell and will further provide a one- stop-shop for the customer. Some of these products are common items used in all applications and others are niche items with a focus towards a particular application. These new products include fuses, printed circuit boards and switches. All products are available in traditional leaded as well as surface mount (chip) versions.
 
 
5
 
 
Inventory
 
In order to adequately service our customers' needs, we believe that it is necessary to maintain large inventories, which makes us more susceptible to price and technology changes. At any given time, we attempt to maintain a one-to-two month inventory on certain products in high demand for customers and at least one month for other products. Our inventory currently contains more than 100 million component units consisting of more than 3,000 different part numbers. The products that we sell range in sales price from less than one cent for a commercial diode to more than $2.00 for high power capacitors and semiconductors. As of November 30, 2011, we maintained inventory valued at $2,802,327.
 
Because of the experience of our management, Ira Levy and Steven Lubman, we believe that we know the best prices to buy the products we sell at and as a result we generally waive rights to manufacturers' inventory protection agreements (including price protection and inventory return rights), and thereby bear the risk of increases in the prices charged by our manufacturers and decreases in the prices of products held in our inventory or covered by purchase commitments. If prices of components, which we hold in inventory decline, or if new technology is developed that displaces products that we sell, our business could be materially adversely affected.
 
Challenge has obtained and is seeking to obtain product rights to certain brand name product lines and to establish direct relationships with those manufacturers for the audible products and fans. In late 1999 Challenge began to develop a new product division of speakers, fans and buzzers manufactured in Asia sold under the Challenge name, broadening our marketing of the products we sell.
 
  Product Availability
 
Surge obtains substantially all of its products from manufacturers in Asia, while Challenge historically purchases its products both domestically and from Asia. However, in Fiscal 2011 and Fiscal 2010, Challenge purchased approximately 87% and 87%, respectively, of its products overseas as a result of Challenge's introduction of new product lines. Of the total goods purchased by Surge and Challenge in Fiscal 2011, those foreign manufactured products were supplied from manufacturers in Taiwan (49%), Hong Kong (19%), elsewhere in Asia (24%) and overseas outside of Asia (less than 1%). Surge purchases its products from approximately sixteen different manufacturers.
 
Most of the facilities that manufacture products for Surge have obtained International Quality Standard ISO 9002 and other certifications. We typically purchase the products that we sell  in United States currency in order to minimize the risk of currency fluctuations. In most cases, Surge utilizes two or more alternative sources of supply for each of its products with one primary and one complementary supplier for each product. Surge's relationships with many of its suppliers date back to the commencement of our import operations in 1983. We have established payment terms with our manufacturers of between 30 and 60 day open account terms.
 
We do not have any written long-term supply, distribution or franchise agreements with any of our manufacturers.  We act as the sales agent in North America for  one of our manufacturers, pursuant to an oral agreement. While we believe that we have established close working relationships with our principal manufacturers, our success depends, in large part, on maintaining these relationships and developing new supplier relationships for our existing and future product lines. Because of the lack of long- term contracts, we may not be able to maintain these relationships.
 
For Fiscal 2011and Fiscal 2010, one of Surge's vendors, Lelon Electronics, accounted for approximately 46% and 52% of Surge's consolidated purchases. The loss of or a significant disruption in the relationship with Lelon Electronics, which is our major supplier,  could have a material adverse effect on our business and results of operations until a suitable replacement could be obtained.
 
The Company has no formal or written agreement with Lelon Electronics regarding the supply of inventory for the Company’s customers.  The Company purchases products under both the Company’s name and Lelon’s brand name for the Company’s inventory in order to supply the Company’s customers.  For the majority of purchases from Lelon Electronics, the Company takes title to the products, houses them in the Company’s warehouse and sells directly to the Company’s customers.  There is no right of return on the products purchased from Lelon and the Company accepts all credit risk with regards to sales of these products.
 
The components business has, from time to time, experienced periods of extreme shortages in product supply, generally as the result of demand exceeding available supply. When these shortages occur, suppliers tend to either increase prices or reduce the number of units sold to customers. We believe that because of our inventory and our relationships with our manufacturers, we have been able to mitigate the effect of any of these shortages in components. However, should there be shortages in the future, such shortages could have both a beneficial or an adverse effect upon our business. Conversely, due to poor market demand, there could be an excess of components in the market, causing stronger competition and an erosion of prices.
 
 
6
 
 
Marketing and Sales
 
Surge's sales efforts are directed towards Original Equipment Manufacturer (OEM) customers in numerous industries where the products that we sell have wide application. Surge currently employs twelve sales and marketing personnel, including two of its executive officers, who are responsible for certain key customer relationships. Our executive officers also devote a significant amount of time to developing and maintaining continuing relations with our key customers.
 
 We use independent sales representatives or organizations, which often specialize in specific products and areas and have specific knowledge of and contacts in particular markets. As of November 30, 2011, we had representation agreements with approximately 30 sales representative organizations. Sales representative organizations, which are generally paid a 5% commission on net sales, are generally responsible in their respective geographic markets for identifying customers and soliciting customer orders. Pursuant to arrangements with our independent sales representatives, they are permitted to represent other electronics manufacturers, but are generally prohibited from carrying a line of products competitive with the products that we sell. These arrangements can be terminated on written notice by either party or if breached by either party. These organizations normally employ between one and twelve sales representatives. The individual sales representatives employed by the sales organizations generally possess an expertise which enhances the scope of our marketing and sales efforts. This permits us to avoid the significant costs associated with creating a direct marketing network. We have had relationships with certain sales organizations since 1988 and continue to engage new sales organizations as needed. We believe that additional sales organizations and representatives are available to us, if required.
 
We engage independent sales representative organizations in various regions throughout the world for marketing to OEM customers and distributors. We have initiated a formal national distribution program to attract more distributors to promote the products that we sell. We have a National Distribution Manager to develop and manage this program. We expect this market segment to contribute significantly to our sales growth over time.
 
Many OEMs require their suppliers to have a local presence and Surge's network of independent sales representatives are responsive to these needs. Surge formed a Hong Kong corporation, Surge Components, Limited and hired a regional sales manager to service the Hong Kong/Greater China region customers.
 
Other marketing efforts include generation and distribution of catalogs and brochures of the products we sell and attendance at trade shows. We have produced an exhibit for display at electronics trade shows throughout the year. The products that we sell have been exhibited at the electronic distribution show in Las Vegas, and we will continue our commitment and focus on the distribution segment of the industry by our visibility at the Electronic Distributor Trade Show.
 
Customers
 
The products that we sell are sold to distributors and OEMs in such diverse industries as the automotive, computer, communications, cellular telephones, consumer electronics, garage door openers, security equipment, audio equipment, telecomm products, computer related products, power supply products, utility meters and household appliances industries. We request our distributors to provide point of sales reporting, which enables us to gain knowledge of the breakdown of industries into which the products that we sell are sold. The Company had two customers, Future and TTI, who each accounted for 11% of net sales for the year ended November 30, 2011, respectively. For Fiscal 2010, Honeywell  accounted for 11% and TTI accounted for 13% of Surge's consolidated net sales. Our discrete components are often sold to the same clients as our capacitors. These OEM customers typically accept samples for evaluation and, if approved, we work towards procuring the next orders for these items.
 
 Typically, we do not maintain contracts with our customers and generally sell products pursuant to customer purchase orders. Although our customer base has increased, the loss of our largest customers as well as, to a lesser extent, the loss of any other material customer, could have a materially adverse effect on our operations during the short-term until we are able to generate replacement business, although we may not be able to obtain such replacement business. Because of our contracts and good working relationships with our distributors, we offer the OEMs, when purchasing through distributors, extended payment terms, just-in- time deliveries and one-stop shopping for many types of electronic products.
 
Competition
 
We conduct business in the highly competitive electronic components industry. We expect this industry to remain competitive. We face intense competition in both our selling efforts and purchasing efforts from the many companies that manufacture or distribute electronic components. Our principal competitors in the sale of capacitors include Nichicon, Panasonic, Illinois Capacitor, NIC, AVX, Murata, Epcos, United Chemicon, Rubycon, Vishay and Kemet. Our principal competitors in the sale of discrete components include Vishay, General Semiconductor Division, General Instrument Corp., OnSemi, Inc., Microsemi Corp., Diodes, Inc. and Littlefuse, and Copper Bussman Division. Our principal competition in the audible business include AVX, Murata, Panasonic, Projects Unlimited, International Components Corp. and Star Micronics. Many of these companies are well established with substantial expertise, and have much greater assets and greater financial, marketing, personnel, and other resources than we do. Many larger competing suppliers also carry product lines which we do not carry. Generally, large semiconductor manufacturers and distributors do not focus their direct selling efforts on small to medium sized OEMs and distributors, which constitute many of our customers. As our customers become larger, and as the market becomes more competitive, our competitors may find it beneficial to focus direct selling efforts on those customers, which could result in our facing increased competition, the loss of customers or pressure on our profit margins. We are finding increased competition from manufacturers located in Asia due to the increased globalization nature of the business. There can be no assurance that we will be able to continue to compete effectively with existing or potential competitors. Other factors that will affect our success in these markets include our continued ability to attract additional experienced marketing, sales and management talent, and our ability to expand our support, training and field service capabilities.
 
 
7
 
 
Customer Service
 
We have customer service employees whose time is dedicated largely to responding to customer inquiries such as price quote requests, delivery status of new or existing purchase orders, changes of existing order dates, quantities, dates, etc. We intend to increase our customer service capabilities, as necessary.
 
Foreign Trade Regulation
 
Most products sold by Surge are manufactured in Asia, including such countries as Taiwan, South Korea, Hong Kong, India, Japan and China. The purchase of goods manufactured in foreign countries is subject to a number of risks, including economic disruptions, transportation delays and interruptions, foreign exchange rate fluctuations, impositions of tariffs and import and export controls, and changes in governmental policies, any of which could have a material adverse effect on our business and results of operations. Potential concerns may include drastic devaluation of currencies, loss of supplies and increased competition within the region.
 
From time to time, protectionist pressures have influenced United States trade policy concerning the imposition of significant duties or other trade restrictions upon foreign products. We cannot predict whether additional United States customs quotas, duties, taxes or other charges or restrictions will be imposed upon the importation of foreign components in the future or what effect such actions could have on our business, financial condition or results of operations.
 
 Our ability to remain competitive with respect to the pricing of imported components could be adversely affected by increases in tariffs or duties, changes in trade treaties, strikes in air or sea transportation, and possible future United States legislation with respect to pricing and import quotas on products from foreign countries. Our ability to remain competitive could also be affected by other governmental actions related to, among other things, anti-dumping legislation and international currency fluctuations. While we do not believe that any of these factors adversely impact our business at the present time, there can be no assurance that these factors will not materially adversely affect us in the future. Any significant disruption in the delivery of merchandise from our suppliers, substantially all of whom are foreign, could have a materially adverse impact on our business and results of operations.
 
Government Regulation
 
Various laws and regulations relating to safe working conditions, including the Occupational Safety and Health Act, are applicable to our company. We believe we are in substantial compliance with all material federal, state and local laws and regulations regarding safe working conditions. We believe that the cost of compliance with such governmental regulations is not material.
 
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations. To the Company’s knowledge, none of our employees or other agents have engaged in such practices.
 
Environmental and Regulatory Compliance
 
We are subject to various environmental laws and regulations relating to the protection of the environment, including those governing the handling and management of certain chemicals used in electronic components.
 
We are subject to legislation, effective July 2006, eliminating lead in certain of the products the Company sells. As a result of the legislation, the Company had a one-time write down of its inventory of approximately $500,000. The Company is able to currently obtain products which comply with this law.
 
We do not believe that compliance with these laws and regulations will have a material adverse effect on our capital expenditures, earnings, or competitive position.
 
 
8
 
 
Patents, Trademarks and Proprietary Information
 
With respect to the products that we sell, we have no patents, trademarks or copyrights registered in the United States Patent and Trademark Office or in any state. Additionally to the best of our knowledge the manufacturers of the products that we sell do not have patents, trademarks or copyrights registered in the United States Patent and Trademark Officer or in any state. We rely on the know-how, experience and capabilities of our management personnel. Although we believe that the products do not and will not infringe patents or trademarks, or violate proprietary rights of others, it is possible that infringement of existing or future patents, trademarks or proprietary rights of others may occur. In the event that the products that we sell infringe proprietary rights of others, these products may have to be modified or redesigned by the manufacturer of these products. However, there  can be no assurance that any infringing products will be able to be modified or redesigned in a way that does not infringe on the proprietary rights of others, which could have a material adverse effect upon our operations. In addition, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. Moreover, if the products we sell infringe patents, trademarks or proprietary rights of others, we could, under certain circumstances, become liable for damages, which also could have a material adverse effect on our business.
 
Backlog
 
As of November 30, 2011, our backlog was approximately $5,014,000, as compared with $5,969,000 at November 30, 2010. Substantially all backlog is expected to be shipped by us within 90 to 180 days. Year to year comparisons of backlog are not necessarily indicative of future operating results.
 
Employees
 
As of November 30, 2011, Surge and Challenge employed 24 persons, two of whom are employed in executive capacities, six are engaged in sales, two in engineering, three in purchasing, two in administrative capacities, three in customer service, two in accounting and four in warehousing.  None of our employees are covered by a collective bargaining agreement, and we consider our relationship with our employees to be good.

 
9
 
 

Item 1A. Risk Factors
 
An investment in the Company’s Common Stock involves a high degree of risk. An investor should carefully consider the risks described below as well as other information contained in this registration statement. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our Common Stock could decline, and an investor may lose all or part of his or her investment.
 
We did not file with the Securities and Exchange Commission a Form 10-K for the years ended November 30, 2004 through November 30, 2008 or a Form 10-Q for the quarters ended February 28, 2004 through August 31, 2009. Preparing and filing such reports would require significant financial and human resources, which could materially impair our ability to conduct our business.  
 
We did not file with the SEC any annual or quarterly reports for the periods ended February 28, 2004 through August 31, 2009. Preparing and filing such annual and quarterly reports for these periods would require us to commit significant financial and human resources to provide such financial statements which, because we are a small company with limited resources, could materially impair our ability to conduct our business.
 
Risks Related to our Business
 
We only have one long term agreement with our suppliers and we depend on a limited number of suppliers
 
We only have one long term agreement with our suppliers (Lelon Electronics), which agreement is terminable by either party upon notice to the other party. We also act as the exclusive sales agent in North America for Lelon Electronics. While we believe that we have established close working relationships with our principal suppliers, our success depends, in large part, on maintaining these relationships and developing new supplier relationships for our existing and future product lines. There is no assurance that will be able to maintain these relationships. While we believe that there are alternative semiconductor and capacitor suppliers whose replacement products may be acceptable to our customers, the loss of, or a significant disruption in the relationship with, one or more of our major suppliers would likely have a material adverse effect on our business and results of operations.
 
We need to maintain large inventories in order to succeed and as a result, price fluctuations could harm us.
 
In order to adequately service our customers, we believe that it is necessary to maintain a large inventory of products. Accordingly, we attempt to maintain a one-to-two month inventory of those products we offer which are in high demand. As a result of our strategic inventory purchasing policies, under which we order products to obtain preferential pricing, we generally waive the right to manufacturers' inventory protection agreements (including price protection and inventory return rights). As a result, we bear the risk of increases in the prices charged by our manufacturers and decreases in the prices of products held in our inventory or covered by purchase commitments. If prices of components which we hold in inventory decline or if new technology is developed that displaces products which we sell, our business could be materially adversely affected.
 
We depend on certain customers.
 
For Fiscal 2011 approximately 22% of our net sales were derived from sales to two customers.  Although our customer base has increased, the loss of our largest customers as well as, to a lesser extent, the loss of any other principal customer, would be expected to have a materially adverse effect on our operations during the short-term until we are able to generate replacement business, although we may not be able to obtain such replacement business.
 
We may not be able to compete against large competitors who have better resources.
 
We face intense competition, in both our selling efforts and purchasing efforts, from the many companies that manufacture or distribute electronic components and semiconductors. Our principal competitors in the sale of capacitors include Nichicon, Panasonic, Illinois Capacitor, NIC, AVX, Murata, Epcos, United Chemicon, Rubycon, Vishay and Kemet, General Semiconductor Division, General Instrument Corp., OnSemi, Inc., Microsemi Corp., Diodes, Inc. and Littlefuse, and Copper Bussman Division. Many of these companies are well established with substantial expertise, and have much greater assets and greater financial, marketing, personnel, and other resources than we do. Many larger competing suppliers also carry product lines which we do not carry. Generally, large semiconductor manufacturers and distributors do not focus their direct selling efforts on small to medium sized OEMs and distributors, which constitute most of our customers. As our customers become larger, however, our competitors may find it beneficial to focus direct selling efforts on those customers, which could result in our facing increased competition, the loss of customers or pressure on our profit margins. There can be no assurance that we will be able to continue to compete effectively with existing or potential competitors.

 
10
 
 
 
We will suffer if there is a shortage of components.
 
The components business has, from time to time, experienced periods of extreme shortages in product supply, generally as the result of demand exceeding available supply. When these shortages occur, suppliers tend to either increase prices or reduce the number of units sold to customers. We believe that because of our large inventory and our relationships with our manufacturers, we have not been adversely affected by shortages in certain discrete semiconductor components. However, in the future shortages may have an adverse effect upon our business.

Our success depends on key personnel whose continued service is not guaranteed.
 
Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel, particularly Ira Levy and Steven Lubman, our chief executive officer and vice president, respectively, who have extensive industry knowledge and relationships and exercises substantial influence over our operations. The loss of services of one or both of these individuals, or our inability to attract and retain highly qualified personnel, could adversely affect our business, and weaken our relationships with suppliers, business partners, and industry personnel, which could adversely affect our financial condition, results of operations, cash flow and trading price of our common stock.
 
Adverse effects of trade regulation and foreign economic conditions.
 
Approximately 93% of the total goods which we purchased in Fiscal 2011 were manufactured in foreign countries, with the majority purchased from Taiwan-based companies manufacturing in Taiwan (49%), Hong Kong (19%), elsewhere in Asia (24%) and outside of Asia (less than 1%). These purchases subject us to a number of risks, including economic disruptions, transportation delays and interruptions, foreign exchange rate fluctuations, imposition of tariffs and import and export controls and changes in governmental policies, any of which could have a materially adverse effect on our business and results of operations. Potential concerns may include drastic devaluation of currencies, loss of supplies and increased competition within the region.
 
The ability to remain competitive with respect to the pricing of imported components could be adversely affected by increases in tariffs or duties, changes in trade treaties, strikes in air or sea transportation, and possible future United States legislation with respect to pricing and import quotas on products from foreign countries. For example, it is possible that political or economic developments in China, or with respect to the United States' relationship with China, could have an adverse effect on our business. Our ability to remain competitive could also be affected by other governmental actions related to, among other things, anti-dumping legislation and international currency fluctuations. While we do not believe that any of these factors have adversely impacted our business in the past, there can be no assurance that these factors will not materially adversely affect us in the future.
 
Electronics industry cyclicality may adversely affect our operations.
 
The electronics industry has been affected historically by general economic downturns, which have had an adverse economic effect upon manufacturers and end-users of capacitors and semiconductors. In addition, the life-cycle of existing electronic products and the timing of new product developments and introductions can affect demand for semiconductor components. Any downturns in the electronics distribution industry could adversely affect our business and results of operations.
 
Absence of patents, trademarks and proprietary information.
 
We have no patents, trademarks or copyrights registered in the United States Patent and Trademark Office or in any state. We rely on the know-how, experience and capabilities of our management personnel. Therefore, without trademark and copyright protection, we have no protection from other parties attempting to offer similar services.  Although we believe that the  products that we sell do not and will not infringe patents or trademarks, or violate proprietary rights of others, it is possible that infringement of existing or future patents, trademarks or proprietary rights of others may occur. In the event that the products that we sell infringe proprietary rights of others, the manufactures of the products that we sell  may be required to modify the design of the products that we sell, change the name of these  products and/or obtain a license. There can be no assurance that the manufactures will be able to modify or redesign the products in a way that does not infringe on the proprietary rights of others.  Our failure to do any of the foregoing could have a material adverse effect upon our operations. In addition, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. Moreover, if the products that we sell infringe patents, trademarks or proprietary rights of others, we could, under certain circumstances, become liable for damages, which also could have a material adverse effect on our business.
  
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
 
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. To our knowledge, none of our employees or other agents have engaged in such practices. However, if our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
 
 
11
 
   
Risks Related to our Common Stock
 
Our Common Stock is quoted on the OTCQB, which may limit the liquidity and price of our Common Stock more than if our Common Stock were listed on the Nasdaq Stock Market or another national exchange.

Our securities are currently quoted on the OTCQB, an inter-dealer electronic quotation and trading system or equity securities. Quotation of our securities on the OTCQB may limit the liquidity and price of our securities more than if our securities were listed on The Nasdaq Stock Market or another national exchange. Some investors may perceive our securities to be less attractive because they are traded in the over-the-counter market. In addition, as an OTCQB listed company, we do not attract the extensive analyst coverage that accompanies companies listed on national exchanges. Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities traded on the OTCQB. These factors may have an adverse impact on the trading and price of our Common Stock.
 
The market price of our common stock may fluctuate significantly in response to the following factors, most of which are beyond our control:
 
 
•
variations in our quarterly operating results;
 
 
•
changes in general economic conditions;
 
 
•
changes in market valuations of similar companies;
 
 
•
announcements by us or our competitors of significant new contracts, acquisitions, strategic partnerships or joint ventures, or capital commitments;
   
 
•
loss of a major supplier or  customer; and
 
 
•
the addition or loss of key managerial and collaborative personnel.
 
Any such fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, stockholders may be unable to sell their shares, or may be forced to sell them at a loss.
 
The application of the “penny stock” rules could adversely affect the market price of our common shares and increase an investor’s transaction costs to sell those shares.
 
The SEC has adopted rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.  For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
 
 
•
that a broker or dealer approve a person’s account for transactions in penny stocks; and
 
 
•
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
   
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
 
 
•
obtain financial information and investment experience objectives of the person; and
 
 
•
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
 
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
 
 
•
sets forth the basis on which the broker or dealer made the suitability determination; and
 
 
•
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
 
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

 
12
 
 

As an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward looking statements does not apply to us.
 
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
 
The market price for our common stock is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float which could lead to wide fluctuations in our share price.  Investors may be unable to sell their common stock at or above your purchase price, which may result in substantial losses to investors.
 
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common stock is sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our shares of common stock are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to the prevailing market price for our common stcok at any time, including whether our common stock will sustain its current market price, or the effect that the sale or the availability shares for sale at any time will have on the prevailing market price.
 
We will incur increased costs as a result of being a public company, which could affect our profitability and operating results.
 
We are obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended.  In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the new rules subsequently implemented by the SEC and the Public Company Accounting Oversight Board have imposed various new requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of our more time-consuming and costly. We expect to spend between $150,000 and $200,000 in legal and accounting expenses annually to comply with our reporting obligations and Sarbanes-Oxley. These costs could affect profitability and our results of operations.
 
We have not paid dividends on our common stock in the past and do not expect to pay dividends for the foreseeable future.  Any return on investment may be limited to the value of our common stock.
 
No cash dividends have been paid on the Company’s common stock. We expect that any income received from operations will be devoted to our future operations and growth. The Company does not expect to pay cash dividends on its common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as the Company’s board of directors may consider relevant. If the Company does not pay dividends, the Company’s common stock may be less valuable because a return on an investor’s investment will only occur if the Company’s stock price appreciates.
 
The rights of the holders of common stock have been impaired by the issuance of preferred stock and may be further impaired by the potential future issuance of preferred stock.
 
We are authorized to issue up to 5,000,000 shares of blank check preferred stock of which 260,000 shares have been designated as Non-Voting Redeemable Convertible Series A Preferred Stock, of which no shares are issued and outstanding, 200,000 shares   have been designated Voting Redeemable Convertible Series B Preferred Stock, of which no shares are issued and outstanding, and 100,000 shares have been designated Non-Voting Redeemable Convertible Series C Preferred Stock (“Series C Preferred Stock”), of which 23,700 shares are issued and outstanding. Holders of the Series C Preferred Stock are entitled to receive, upon liquidation, payment of $5.00 per share of Series C Preferred Stock prior to any payment to common shareholders. Holders of Series C Preferred Stock are entitled to dividends, if and when declared by the board of directors, at the rate of $0.50 per share per annum, prior to payment of dividends to common shareholders.
 
Furthermore, our board of directors has the right, without stockholder approval, to issue additional preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock, which could be issued with the right to more than one vote per share, and could be utilized as a method of discouraging, delaying or preventing a change of control. The possible negative impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.

 
13
 

We have a staggered board of directors, which could delay or prevent a change of control that may favor shareholders.
 
Our Board of Directors is divided into three classes and our Board members are elected for terms that are staggered. This could discourage the efforts by others to obtain control of the Company. The possible negative impact on takeover attempts could adversely affect the price of our common stock.
 
Item 1B.
Unresolved Staff Comments
 
Not applicable.
 
Item 2.
Properties.
 
Our executive offices and warehouse facilities are located at 95 Jefryn Boulevard, Deer Park, New York, 11729.  The Lessor is Great American Realty of Jefryn Blvd., LLC ("Great American"), an entity owned equally by Ira Levy, Surge's president, Steven Lubman, Surge's vice president and one of its former directors, Mark Siegel. Our lease is through September 31, 2020 and our monthly rent is $13,242. Our monthly rent will increase over the 10 year term, reaching $15,516 in the final year. We occupy approximately 23,250 square feet of office space and warehouse space.  Each lease was negotiated in an arm's length transaction and the rental rate is typical for the type and location of Surge's and Challenge's facilities.

In June 2010, the Company entered into a lease to rent office space in Hong Kong for two years. Annual rental payments are approximately $20,000.
 
Item 3.
Legal Proceedings.
 
There are no legal proceedings to which the Company or any of its property is the subject.
 
Item 4.
Mine Safety Disclosure.
 
Not applicable.


 


 
14
 
 
PART II
 
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Shares of our common stock are quoted on the OTCQB market maintained by OTC Markets Group under the symbol “SPRS”. Trading in our common stock is limited.
 
For the periods indicated, the following table sets forth the high and low bid prices per share of our common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
 
Fiscal Quarter
 
High
   
Low
 
2011 First Quarter
 
$
1.15
   
$
0.40
 
2011Second Quarter
 
$
1.12
   
$
0.57.
 
2011 Third Quarter
 
$
0.88
   
$
0.68
 
2011 Fourth Quarter
 
$
0.81
   
$
0.65
 
2010 First Quarter
 
$
0.35
   
$
0.042
 
2010 Second Quarter
 
$
0.36
   
$
0.10
 
2010 Third Quarter    
 
$  
 0.50
   
$ 
            0.25
 
2010 Fourth Quarter
 
$
0.75
   
$
0.10
 
  
As of the date of the filing of this report, there are issued and outstanding 9,035,012 shares of Common Stock.
 
As of the date of the filing of this report, there are approximately 200 holders of record of our Common Stock.
 
We have not declared any cash dividends on our Common Stock since inception and do not anticipate paying such dividends in the foreseeable future. We plan to retain any future earnings for use in our business operations. Any decisions as to future payment of cash dividends will depend on our earnings and financial position and such other factors as the Board of Directors deems relevant.
 
Equity Compensation Plan Information
 
The following table provides information as of November 30, 2011 with respect to the shares of common stock that may be issued under our existing equity compensation plans:
 
Plan Category
 
Number of 
securities to be 
issued upon 
exercise of 
outstanding 
options, warrants 
and rights
   
Weighted-
average exercise
price
of outstanding
options,
warrants
and
rights
   
Number of 
securities 
remaining 
available for
 future issuance
 
Equity compensation plan approved by security holders (1)
   
685,000
     
0.36
     
815,000
 
                         
Equity compensation plan not yet approved by security holders
   
-
     
-
     
-
 
                         
Total
   
685,000 
             
815,000 
 
 
(1) Represents the Company's 2010 Incentive Stock Plan.
 
 
15
 
 
Recent Sales Of Unregistered Securities.

None.
 
Issuer Repurchases of Equity Securities

None.
 
Item 6.
Selected Financial Data

 
Not Applicable.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report 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." Also, these forward-looking statements represent our estimates and assumptions only as of the date of the filing of this registration statement. Except as required by law, we assume no obligation to update any forward-looking statements after the date of the filing of this registration statement.
 
Overview
 
We are a supplier of electronic products and components. These products include capacitors, which are electrical energy storage devices, and discrete components, such as semiconductor 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 that we sell are typically utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, cellular telephones, computers, consumer electronics, garage door openers, household appliances, power supplies and security equipment. The products that we sell 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.  The products that we sell  are manufactured predominantly in Asia by approximately sixteen independent manufacturers. We do not have any binding long-term supply agreements, with our suppliers. We act as the exclusive sales agent utilizing independent sales representative organizations in North America to sell and market the products for one such manufacturer pursuant to an oral agreement. When we act as a sales agent, the supplier who sold the product to the customer that we introduced to such supplier will pay us a commission. The amount of the commission is determined on a sale by sale basis depending on the profit margin of the product. Such commissions have not been material to date.
 
Challenge engages in the electronic components business. In 1999, Challenge began a division to sell audible components. Since 2002 this division has grown by 97% in net sales. 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.  As a result we are continually trying to add to the types of products that we sell. In 2002 we started to import products similar to our parent company Surge, and sold these under the Challenge name. It started with a line of transducers, then we added battery snaps, and coin cell holders.  Since 2002,  we have increased our imported private label product mix to include buzzers, speakers, microphones, resonators, 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. In 2005, we hired a design engineer on our staff that had thirty years experience with these types of products, who works with our suppliers on such redesigns. We continue to expand the line of products we sell, we now are selling alarms and chimes. We sell these products through independent representatives that make a 5-6% commission rate on the gross sale of the products we sell. We also are working with local, regional, and national distributors to sell these products to local accounts in every state.  We do not have contractual authority from our manufactures to modify any of the products that we distribute.

We are obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended.  In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the new rules subsequently implemented by the SEC and the Public Company Accounting Oversight Board have imposed various new requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of our more time-consuming and costly. We expect to spend between $150,000 and $200,000 in legal and accounting expenses annually to comply with our reporting obligations and Sarbanes-Oxley. These costs could affect profitability and our results of operations.
 
 
16
 
 
In 2002, the Company opened a Hong Kong office and hired direct sales people in order to effectively handle the transfer business from United States customers purchasing and manufacturing in Asia after they do the design in America. This office has strengthened its global capabilities and service to its customer base
 
The electronic components industry has changed, from one of strong demand to now one of moderate demand.  As Management previously stated, the high demand of 2011 has leveled off to a moderate demand for components in 2012.
 
In order for us 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 clients, our ability to retain sales and other 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 managing growth, including monitoring an expanded level of operations and controlling costs, and the availability of adequate financing.
 
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, revenue is recognized when product is shipped from the Company’s supplier. The Company acts as a sales agent for certain customers for 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.  A significant portion (approximately $500,000) of the total amount of the reserves relate to a product line for which demand dropped significantly as a result of a change in an environmental law several years ago.  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 $28,000.
 
The Company does not have price protection agreements with any of its vendors and assumes the risk of changes in the prices of its products.  The Company does not believe there to be a significant risk with regards to the lack of price protection agreements as many of its inventory items are purchased to fulfill purchase orders received.

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.

Results of Operations

Consolidated net sales for the fiscal year ended  November 30, 2011 increased by $1,594,358 or 7.5%, to $23,208,269 as compared to net sales of $21,613,911 for the fiscal year ended November 30, 2010.  We largely attribute the increase to expanded business relationships with existing customers. The Company also attributes the increase in growth with its franchised distributors.
 
 
17
 

Our gross profit for the fiscal year ended November 30, 2011 increased by $55,270, or 1%, as compared to the fiscal year ended  November 30, 2010.The increase in gross profit was due to the increase in net sales.  Gross margin as a percentage of net sales decreased to 28.5% for the fiscal year ended November 30, 2011 compared to 30.3% for the fiscal year  ended November 30, 2010. We attribute the decrease in gross margin as a percentage of net sales to rising costs of doing business, primarily material costs.  As our factories have passed cost increases on to us, we have only been able to pass the same on to some customers but  not all.

Selling and shipping expenses for the fiscal year ended  November 30, 2011 was $1,826,729, an increase of $13,258, or 1%, as compared to $1,813,471 for the fiscal year ended  November 30, 2010.The increase is directly related to the increase in sales for the Company. Specifically the increase is due to additional  sales commissions, selling expenses, such as travel and freight out expense.

General and administrative expenses for the fiscal year ended November 30, 2011 was $3,209,914, an increase of $299,139, or 10%, as compared to $2,910,775 for the fiscal year ended November 30, 2010. The increase is due to additional compensation to our employees,  increased costs of insurance, issuance of options, additional costs to the Company becoming a reporting company with the SEC. Also the Company is no longer subleasing rental space and as a result rental income is no longer offsetting rent expense.

Investment income for the fiscal year ended  November 30, 2011 was $1,951, compared to $4,340 for the fiscal year ended  November 30, 2010. We attribute the decrease of $2,389, or 55%, to lower interest rates in our money market accounts in 2011.

Interest expense for the fiscal year ended November 30, 2011 was $61,253, compared to $117,973 for the fiscal year ended November 30, 2010.  We attribute the decrease of $56,720 to the decrease in borrowing from our lender. Fees relating to our line of credit are reflected as part of interest expense.

Income tax benefit for the fiscal year ended  November 30, 2011 was $1,433,794, compared to $82,672 in expense for the fiscal year ended  November 30, 2010. The difference is a result of an increase in federal corporate taxes incurred due to net operating loss limitations with the IRS tax code offset by management reevaluating their estimate on the deferred income tax valuation. Due to the Company sustaining profits for the last few years, management has determined that it is more likely than not that the Company will realize the deferred tax assets. Management reduced the valuation allowance as of November 30, 2011 by $1,468,916. This amount increased the income of the Company.   This 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, net income for the fiscal year ended November 30, 2011 was $2,857,724, compared to the net income of $1,496,088 for the fiscal year ended November 30, 2010.

Liquidity and Capital Resources

As of November 30, 2011 we had cash of $1,905,455, and working capital of $6,073,968. We believe that our working capital levels and available financing are adequate to meet our operating requirements during the next twelve months.

During the fiscal year ended November 30, 2011, we had net cash flow from operating activities of $1,040,808, as compared to net cash flow from operating activities of $530,624 for the fiscal year ended  November 30, 2010. The increase in cash flow from operating activities resulted from increase in the 2011 net income, as partially offset by recording deferred tax asset, increase in accounts receivable, inventory, decrease in accounts payable  and accrued expenses.

We had net cash flow used in investing activities of $18,684 for the fiscal year ended November 30, 2011, as compared to net cash flow used in investing activities of $19,860 for the fiscal year ended  November 30, 2010.   The Company invested relatively the same amount of money into new computers for both years.

We had net cash flow from financing activities of $0 for the fiscal year ended November 30, 2011, as compared to net cash flow used by  financing activities of $767,771 for the fiscal year ended  November 30, 2010.   The decrease was the result of the decrease in net borrowings in 2011 from our lender.

As a result of the foregoing, the Company had a net increase in cash of $1,022,124 for the fiscal year ended  November 30, 2011, as compared to a net decrease in cash of $257,007 for the fiscal year ended  November 30, 2010.

In July 2002, the Company obtained a financing commitment with an asset-based lender totaling $1,000,000 (the “Credit Line”). Borrowings under the Credit Line accrue interest at the greater of the prime rate plus two percent (2.0%) or 6.75%. The Company was required to make monthly interest only payments. The Company could repay all or a portion of the line of credit at any time. In addition, the Company was obligated to pay one-quarter of one percent (0.25%) annually as an unused line fee for the difference between $1,000,000 and the average daily balance of the Credit Line. The Credit Line was collateralized by substantially all the Company’s assets and contains various financial covenants pertaining to the maintenance of working capital and tangible net worth.

In June 2011, the Company replaced its existing credit line with a line of credit with a new bank totaling $1,000,000. Borrowings under the line accrue interest at 2.56% over the LIBOR rate and is due in June 2012. The line is collateralized by all the Company’s assets and includes working capital and tangible net worth covenants. At November 30, 2011, the Company was in compliance with the financial covenants. At November 30, 2011, the Company had no borrowings on the credit line.
 
 
18
 

The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of November 30, 2011:
 
         
Payments due
           
          0 – 12     13 – 36     37 – 60  
More than
 
Contractual Obligations
 
Total
   
Months
   
Months
   
Months
 
60 Months
 
                                   
Long-term debt
  $ -     $ --     $ --     $ --   $ --  
Operating leases
  $ 1,535,258       171,103       328,503       341,774     693,878  
Employment agreements
  $ 300,000       300,000       --       --     --  
                                       
Total obligations
  $ 1,835,258     $ 471,103     $ 328,503     $ 341,774   $ 693,878  

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. In addition, the interest on the Company's line of credit is based upon the libor rate. Any significant increase in the libor rate could significantly impact our future operating results.
 
Off Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements.
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
 
Not Applicable
 
Item 8.     Financial Statements and Supplementary Information
 
Our financial statements, together with the independent registered public accounting firm's report of Seligson & Giannattasio, LLP, begin on page F-1, immediately after the signature page.

Item 9.  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None .
 
 
19
 
 
Item 9A.
Controls and Procedures.
                             
Evaluation of Disclosure Controls and Procedures.

We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of November 30, 2011 we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in our reports under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified reporting the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report of Internal Control over Financial Reporting.
 
We are responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule 13a-15.  With the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of November 30, 2011 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, management concluded that our internal control over financial reporting was effective as of November 30, 2011, based on those criteria.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
 
  Changes in Internal Controls.
 
During the quarter ended November 30, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.
Other Information
 
None.
 
 
20
 
 
PART III
 
Item 10.
Directors, Executive Officers, And Corporate Governance.
 
Our board of directors is classified into three classes, with the term of office of one class expiring each year. The term of Class A directors expires at the Company’s annual meeting of shareholders to be held in 2013, the term of Class B directors expires at the Company’s annual meeting of shareholders to be held in 2012, and the term of office of Class C directors expires at the Company’s annual meeting of shareholders to be held in 2014. Our executive officers and directors, and their ages, positions and offices with us are as follows:
 
Name
 
Age
 
Position and Offices with Surge
Ira Levy
 
55
 
Chief Executive Officer, Chief Financial Officer, President and Class A Director
Steven J. Lubman
 
57
 
Vice President, Secretary and Class A Director
Alan Plafker*
 
53
 
Class B Director, Member of Compensation Committee
David Siegel
 
86
 
Class B Director
Lawrence Chariton*
 
54
 
Class C Director, Member of Compensation Committee
Gary Jacobs*
  
54
  
Class C Director, Member of Compensation Committee
 
* Independent director

Ira Levy has served as President, Chief Executive Officer and a director of Surge Components since its inception in November 1981, and as Chief Financial Officer since March 2010. From  1976  to  1981, Mr. Levy was employed by  Capar  Components Corp., an importer  and  supplier  of  capacitor and  resistor products.
 
Steven  J.  Lubman has served as Surge Components’ Vice President, Secretary and a director since our inception  in November 1981.  From 1975 to 1981, Mr. Lubman was employed by Capar Components, Inc.
 
Alan Plafker has served as a director since June 2001. Since July 2000, Mr. Plafker has been the President and Chief Executive Officer of Member Brokerage Service LLC, a credit union service organization owned by Melrose Credit Union. Mr. Plafker has over 20 years of management experience in the insurance and credit union industries.
 
David Siegel has served as a director since 1983, as well as Chairman of the Board from 1983 to February 2000. Mr. Siegel also serves on the board of directors of Micronetics, Inc. (NASDAQ:NOIZ), a publicly traded company that manufactures microwave and radio frequency (RF) components.  David Siegel is the father-in-law of Ira Levy.
 
Lawrence Chariton has served as a director since August 2001. For the last 31 years, Mr. Chariton has worked as a Sales Manager for Linda Shop, a retail jewelry business, and now does the same for Great American Jewelry, and is involved in charitable organizations benefiting the State of Israel. Mr. Chariton also is a director of New Island Hospital in Bethpage, Long Island. Mr. Chariton graduated from Hofstra University in 1979 with a Bachelor's Degree in accounting.
 
Gary M. Jacobs has served as a director since July 2003. He currently serves as a consultant to several companies, providing advisory services in the areas of turn-around and financial and operational efficiencies. Mr. Jacobs served as the Chief Financial Officer of Chem Rx from June 2008 until March 2011. From May 2005 to June 2008, Mr. Jacobs was the Chief Financial Officer and Chief Operating Officer of Gold Force International, Ltd., a supplier of gold, silver and pearl jewelry to U.S. retail chains, and Karat Platinum LLC, a developer of an alternative to platinum. From July 2003 to April 2005, Mr. Jacobs served as President of The Innovative Companies, LLC, a supplier of natural stone.  From October 2001 to February 2003, Mr. Jacobs served as Executive Vice President of Operations and Corporate Secretary of The Hain Celestial Group, Inc., a food and personal care products company. Mr. Jacobs also served as Executive Vice President of Finance, Chief Financial Officer and Treasurer of The Hain Celestial Group, Inc. from September 1998 to October 2001. Prior to that, Mr. Jacobs was the Chief Financial Officer of Graham Field Health Products, Inc., a manufacturing and distribution company. Mr. Jacobs was employed for 13 years as a member of the audit staff of Ernst & Young LLP, where he attained the position of senior manager.  He is a certified public accountant and holds a Bachelor’s of Business Administration in Accounting from Adelphi University.
 
The Company believes that each of its directors has the experience, qualifications, attributes and skills that enable them to make a positive contribution to our board for the following reasons:
 
Both Mr. Levy and Mr. Lubman have been in the electronic components business for over 30 years and have a vast knowledge of this business. Mr. Levy’s and Mr. Lubman’s experience in and knowledge of the electronics components business led to the conclusion that Mr. Levy and Mr. Lubman should serve on the Company’s board given the Company’s business and structure.  Their knowledge of our business enables them to bring keen insight to the board.
 
 
21
 
 
Alan Plafker has been an executive in the insurance industry for over 20 years and is knowledgeable in financial matters, including reviewing financial statements. Mr. Plafker’s experience in the insurance industry and knowledge of financial matters led to the conclusion that he should serve on the Company’s board, given the Company’s business and structure.
 
David Siegel has served on the boards of  other public companies and is very familiar with the required public filings that a public company must make and as a result he is able to easily communicate with the company’s advisors, including their attorneys. Mr. Siegel’s experience on the board of directors of other public companies and his ability to communicate with the Company’s advisers led to the conclusion that he should serve on the Company’s board, given the Company’s business and structure.
 
Lawrence Chariton experience as a sales manager of a jewelry store gives him experience in running a small business like ours. Mr. Chariton’s experience running a small business led to the conclusion that he should serve on the Company’s board, given the Company’s business and structure.
 
Gary Jacobs’s experience as a certified public accountant and Chief Financial Officer makes him extremely qualified to review and discuss the Company’s financial results and to make recommendations regarding the Company’s financial position. Mr. Jacobs’s experience as a certified public accountant and Chief Financial Officer led to the conclusion that he should serve on the Company’s board, given the Company’s business and structure.
 
Board Leadership Structure and Role in Risk Oversight
 
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles.  Mr. Levy has served as our Chairman since November 1981. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.
 
Our board of directors is primarily responsible for overseeing our risk management processes on behalf of our board of directors.  The board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The board of directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach. 
 
  Audit Committee
 
The board of directors acts as the Company’s audit committee. The Company’s board of directors has determined that Gary Jacobs is the audit committee financial expert. Mr. Jacobs is an independent director as that term is defined under the Nasdaq Marketplace Rules.
 
Section 16(a) of the Exchange Act
 
Section 16(a) of the Securities Exchange Act of 1934 requires that our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and persons owning more than ten percent of such securities are required by Commission regulation to file with the Commission and furnish the Company with copies of all reports required under Section 16
(a) of the Exchange Act. To our knowledge, based solely upon our review of the copies of such reports furnished to us, during the fiscal years ended November 30, 2003 through November 30, 2011, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with, except that Forms 4 were not timely filed for Ira Levy (three transactions in 2009), Steven Lubman (one transaction in 2009), Lawrence Chariton (one transaction in 2010), Alan Plafker (one transaction in 2010), David Siegel (one transaction in 2010) and Gary Jacobs (one transaction in 2010), none of which have been subsequently filed.
 
Code of Ethics

The Company has not adopted a Code of Ethics and intends to adopt a Code of Ethics in the near future.
 
 
22
 
 
Changes in Nominating Procedures
 
None.
 
Item 11.
Executive Compensation.
 
The following table sets forth information regarding compensation paid to our principal executive officer and any other executive officer whose total annual salary and bonus for the years ended November 30, 2011and November 30, 2010 exceeded $100,000
 
                 
Option
       
Name and Position
Year
 
Salary
   
Bonus
   
Awards($)
   
Total
 
                           
 Ira Levy
2011
  $ 225,000     $ 200,000           $ 425,000  
 President CEO and CFO
2010
  $ 225,000     $ 187,011       11,010 (1)   $ 423,021  
                                   
 Steven J. Lubman
2011
  $ 225,000     $ 200,000             $ 425,000  
 Vice President and Secretary
2010
  $ 225,000     $ 187,000       11,010 (1)   $ 423,021  
 
(1)  
Represents 250,000 options with an exercise price of $0.25 issued on May 6, 2010. The options vest one year after issuance and expire in May 2015. Please see Note F (3) to the financial statements.

Employment Agreements
 
The Company has entered into employment agreements (the “ Levy Agreement ” and the “ Lubman Agreement ”, individually, and collectively, the “ Employment Agreements ”) with Ira Levy and Steven Lubman (the “ Executives ”), respectively, with terms through July 30, 2012(renewable on each July 30th for an additional one year period), which provides the Executives with a base salary of $225,000 (“ Base Salary ”).
 
The Company’s compensation committee may award Messrs. Levy and Lubman with bonuses.   Pursuant to the employment agreements, Messrs. Levy and Lubman are prohibited from engaging in activities which are competitive with those of the Company during the employment and for one year following termination.   The agreements further provide that in the event of a change of control, as defined, or a change in ownership of at least 25% of the issued and outstanding stock of the Company, and such issuance was not approved by either officer, or if they are not elected to the Board of Directors of the Company and/or are not elected as an officer of the Company, then such officer may elect to terminate his employment agreement. If he elects to terminate the agreement, he will receive 2.99 times his annual compensation (or such other amount then permitted under the Internal Revenue Code without an excess penalty), in addition to the remainder of his compensation under his existing employment agreement.  In addition, if the Company makes or receives a “firm commitment” for a public offering of Common Shares, each officer will receive a warrant to purchase, at a nominal value, up to 9.5% of the Company’s common stock, provided they do not voluntarily terminate employment.
 
 The Employment Agreements provide for the following payments upon each of the following circumstances in which the Executives’ employment could end:
 
(a)  
Payment upon termination due to disability – if either of the Employment Agreements is terminated by the Company by reason of any physical or mental illness so that the Executives are unable to perform the services required by them pursuant to the Employment Agreements for a continuous period of 4 months, or for an aggregate of 6 months during any consecutive 12 month period, then the Company shall pay to the Executives his Base Salary then in effect along with all other fringe benefits for a period of 1 year following the date of such termination.
(b)
  Payment upon termination due to death – if either of the Employment Agreements is automatically terminated upon the death of the Executives, the Company shall pay to the Executive’s estate his Base Salary then in effect for a period of 1 year following the date of such termination.
(c)  
Payment upon termination for “cause” – the Company is not obligated to make any further payments to the Executives upon their termination for “cause.” The term “cause” means any event that the Executives are guilty of (i) reckless disregard to perform his duties as set forth in each Executive’s respective Agreement, (ii) willful malfeasance, or (iii) any act of dishonesty by the Executives with respect to the Company.
(d)  
Payment upon termination without “cause” –
(i)  
if the Company terminates the Levy Agreement without cause, then the Company (i) is obligated to pay Mr. Levy any and all Base Salary and bonus amounts payable to Mr. Levy for the remainder of the term, and (ii) shall continue for the remainder of the term to permit Mr. Levy to receive or participate in all fringe benefits available to him pursuant to the Levy Agreement; provided, however, that any fringe benefits which Mr. Levy receives will be reduced by any payments or fringe benefits Mr. Levy receives during the remainder of the term from any other source of employment which is unaffiliated with the Company.
 
 
23
 
 
(ii)  
If the Company terminates the Lubman Agreement without cause, the Company (i) is obligated to pay Mr. Lubman any and all Base Salary and bonus amounts payable to Mr. Lubman for the remainder of the term,   and (ii) permit him to receive or participate in all fringe benefits available to him pursuant to the Lubman Agreement; provided, however, that any fringe benefits which Mr. Lubman receives will be reduced by any payments or fringe benefits Mr. Lubman receives during the remainder of the term from any other source of employment which is unaffiliated with the Company.
(e)  
Payment upon a “change of control” - if either of the Executives elects to terminate his employment in the event of a change of control, the Company shall pay the Executives, in addition to the remainder of their annual compensation, a “parachute payment” as said term is defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “ Code ”) in an amount equal to 2.99 times the respective Executive’s annual compensation, including the Base Salary, bonus compensation and other remuneration and fringe benefits, if any. A “change in control” occurs when the Executives are not elected to the Board of Directors of the Company, and/or is not elected as an officer of the Company and/or there has been a change in the ownership following the Company’s 1996 public offering of at least 25% of the issued and outstanding stock of the Company, and such issuance was not approved by the Executives.  No change in control, as defined in the Employment Agreements, has occurred.
 
Director Compensation for Year Ending November 30, 2011
 
The following table summarizes the compensation for our non-employee board of directors for the fiscal year ended November 30, 2011. All compensation paid to our employee directors is included under the summary compensation table above.
 
Name
Fees Earned or Paid in Cash ($)
Stock Awards ($)
Option Awards ($)
All Other Compensation ($)
Total ($)
Alan Plafker
2,400
-
-
-
2,400
David Siegel
2,400
-
-
-
2,400
Lawrence Chariton
2,400
-
-
-
2,400
Gary Jacobs
2,400
-
-
-
2,400
 
 
 
24
 
 
Outstanding Equity Awards at November 30, 2011
 
Name
 
Number of securities underlying options (#)
   
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
   
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
   
Option
Exercise
Price
($)
 
Option
Expiration
Date
 
Number of
Shares or
Units of
Stock that
have not Vested
(#)
   
Market
Value of
Shares of
Units of
Stock that
Have not Vested
($)
   
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or
Other
Rights that
have not
Vested (#)
   
Equity Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or other
Rights that
have not
Vested
($)
 
Ira Levy
   
-
     
250,000
(1)
   
-
     
0.25
 
May 2015
   
-
     
-
     
-
     
-
 
Steven Lubman
   
-
     
250,000
(1)
   
-
     
0.25
 
May 2015
   
-
     
-
     
-
     
-
 
 
(1)  
The options were issued on May 6, 2010 and vest one year after issuance.
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management.
 
The following table sets forth as of February 13, 2012, the number of shares of Common Stock held of record or beneficially (i) by each person who held of record, or was known by the Company to own beneficially, more than five percent of the outstanding shares of Common Stock, (ii) by each director and (iii) by all officers and directors as a group:
 
             
   
 
Amount and Nature
   
Percentage of
Surge Common
 
Name and address of
 
of Surge Common Stock
   
Stock Benefi-
 
Beneficial Owner (1)
 
Beneficially Owned
   
cally Owned (2)
 
             
Ira Levy
   
941,368
(3)
   
10.42
%
                 
Steven J. Lubman
   
800,000
(4)
   
8.85
%
                 
Lawrence Chariton
   
137,000
(5)
   
1.52
%
                 
Alan Plafker
   
37,916
(5)
   
*
 
                 
David Siegel
   
92,000
(5)
   
1.01
% 
                 
Gary Jacobs
   
37,000
(5)
   
*
 
                 
All directors and executive officers as a group (6 persons)
   
2,045,284
     
22.63
%
                 
Michael Tofias  
               
325 North End Avenue, Apt. 25B
   
1,781,676
     
19.72
%
New  York, NY 10282
               
 
* Less than 1%

(1) Except as otherwise indicated, the address of each beneficial owner is c/o Surge Components, Inc., 95 East Jefryn Boulevard, Deer Park, NY 11729.
 
(2) Applicable percentage ownership is based on 9,035,012 shares of Common Stock outstanding as of February 13, 2012, together with securities exercisable or convertible into shares of Common Stock within 60 days of February 13, 2012 for each stockholder.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Shares of Common Stock that are currently exercisable or exercisable within 60 days of February 13,2012 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 (3) Includes 250,000 shares issuable upon exercise of options with an exercise price of $0.25, because the options are exercisable within 60 days.
 
(4) Includes 250,000 shares issuable upon exercise of options with an exercise price of $0.25, because the options are  exercisable within 60 days. 
 
(5) Includes 25,000 shares issuable upon exercise of options with an exercise price of $0.25, because the options are exercisable within 60 days.
 
 
25
 
 
The following table sets forth as of February 13, 2012, the number of shares of Series C Preferred Stock held of record or beneficially (i) by each person who held of record, or was known by the Company to own beneficially, more than five percent of the outstanding shares of Common Stock, (ii) by each director and (iii) by all officers and directors as a group:
 
Name of beneficial holder
 
Number of shares
   
% Beneficially Owned
 
All directors and officers as a group
   
0
     
0
 
Gabriel Cerrone
   
10,000
     
30.58
%
Stonehenge Asset Fund, LLC (1)
   
7,500
     
22.94
%
Glenn Chwatt
   
3,000
     
9.17
%
Summit Capital Associates (1)
   
2,000
     
6.12
%
 
(1) The stockholder has no affiliation with the Company. The Company requested information from the stockholder regarding the natural person who has voting and dispositive power over the shares of the Company held by the stockholder, and has been unable to obtain such information because the Series C Preferred Stockholders have not responded to the Company’s request for information
 
As of February 13, 2012, there are 23,700 shares of Series C Preferred Stock issued and outstanding.
 
Item 13.
Certain Relationships And Related Transactions, and Director Independence.

Certain Relationships and Related Transactions

Surge and Challenge, each lease their current executive offices from, Great American Realty of Jefryn Blvd., LLC, an entity owned equally by Ira Levy, Surge’s Chief Executive Officer, President and Secretary and Steven Lubman, our vice president and one other individual who is not an executive officer or director of the Company.   Our lease is through September 2020 and our annual minimum rent payments were approximately $215,000 and  $156,000 for fiscal 2011 and 2010, respectively.
 
In May 2002, Surge and Ira levy, an officer of Surge 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 Mr. Levy owns 1 share of the outstanding common stock. No payments have been made to Levy in connection with this share ownership. Mr. Levy 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.  During fiscal 2011 and fiscal 2010, Surge Limited’s revenues were $4,800,000 and $4,400,000 respectively.
 
Director Independence
 
Lawrence Chariton, Alan Plafker, and Gary Jacobs are independent directors as that term is defined under the Nasdaq Marketplace Rules.

Item 14.
Principal Accounting Fees And Services
 
Audit Fees

Audit Fees represent the aggregate fees for professional services for the audit of our annual financial statements and review of financial statements included in our quarterly reports on Form 10-Q or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.   For the years ended November 30, 2011 and 2010, we paid Seligson & Giannattasio, LLP  $99,000 and  $99,000, respectively.

Audit-Related Fees

For the years ended November 30, 2011 and 2010, we paid Seligson & Giannattasio, LLP $0 and $0, respectively, for audit-related services.

Tax Fees

For the years ended November 30, 2011 and 2010, we paid Seligson & Giannattasio, LLP $8,000 and $8,000, respectively, for tax related services.

All Other Fees
 
For the years ended November 30, 2011 and 2010, we paid Seligson & Giannattasio, LLP $0 and $0, respectively, for all other services.
 
The board of directors on an annual basis reviews audit and non-audit services performed by the independent registered public accounting firm. All audit and non-audit services are pre-approved by the board of directors, which considers, among other things, the possible effect of the performance of such services on the auditors' independence. The board of directors has considered the role of Seligson & Giannattasio, LLP in providing services to us for the fiscal year ended November 30, 2011 and has concluded that such services are compatible with Seligson & Giannattasio, LLP’s independence as the Company's  independent registered public accounting firm
 
 
26
 
 
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules.
         
The following documents are filed as a part of this report or incorporated herein by reference:
 
1.  Our Consolidated Financial Statements are listed on page F-1 of this Annual Report.
 
2. Exhibits:
 
 The following documents are included as exhibits to this Annual Report:

Exhibit Number
 
Description
     
3.1
 
Articles of Incorporation of Surge Components, Inc. (filed as exhibit to 8-K filed on September 16, 2010 and incorporated herein by reference)
     
3.2
 
By-Laws of Surge Components, Inc. (filed as exhibit to 8-K filed on September 16, 2010 and incorporated herein by reference)
 
10.1
 
Lease between Surge Components and Great American Realty of 95 Jefryn BLVD., LLC (filed as exhibit to Amendment No. 1 to Form 10 filed on August 20, 2010 and incorporated herein by reference)
     
10.2
 
Lease between Challenge Electronics and Great American Realty of 95 Jefryn BLVD., LLC (filed as exhibit to Amendment No. 1 to Form 10 filed on August 20, 2010 and incorporated herein by reference)
     
10.3
 
Employment Agreement between Surge Components, Inc. and Ira Levy (filed as exhibit to Amendment No. 1 to Form 10 filed on August 20, 2010 and incorporated herein by reference)
     
10.4
 
Employment Agreement between Surge Components Inc. and Steven Lubman (filed as exhibit to Amendment No. 1 to Form 10 filed on August 20, 2010 and incorporated herein by reference)
     
10.5
 
Tenancy Agreement between Surge Components, Inc. and Sam Cheong Stove Parts Co. Ltd (filed as exhibit to Amendment No. 3 to Form 10 filed on January 11, 2011 and incorporated herein by reference)
     
10.6
 
Declaration of Trust (filed as exhibit to Amendment No. 1 to Form 10 filed on August 20, 2010 and incorporated herein by reference)
     
10.7
 
2010 Incentive Stock Plan (filed as exhibit to Amendment No. 2 to Form 10 filed on November 4, 2010 and incorporated herein by reference)
     
10.8
 
Lease Agreement, dated October 1, 2010, between Great American Realty of Jefryn Boulevard, LLC and Surge Components, Inc. (filed as exhibit to Amendment No. 2 to Form 10 filed on November 4, 2010 and incorporated herein by reference)
     
10.9
 
Lease Agreement, dated October 1, 2010, between Great American Realty of Jefryn Boulevard, LLC and Challenge Electronics, Inc. (filed as exhibit to Amendment No. 2 to Form 10 filed on November 4, 2010 and incorporated herein by reference)
 
10.10
 
Agreement, dated March 18, 1999 between Surge Components, Inc. and Future Electronics Incorporated (filed as exhibit to Amendment No. 3 to Form 10 filed on January 11, 2011 and incorporated herein by reference)
     
10.11
 
Addendum A, dated March 18, 1999, between Surge Components, Inc. and Future Electronics (filed as exhibit to Amendment No. 3 to Form 10 filed on January 11, 2011 and incorporated herein by reference)
     
10.12
 
Agreement, dated October 21, 2009, between Challenge Electronics, Inc. and Cam RPC Electronics (filed as exhibit to Amendment No. 3 to Form 10 filed on January 11, 2011 and incorporated herein by reference)
     
 
 
27
 
 
10.13
 
Agreement, dated October 21, 2009, between Challenge Electronics, Inc. and Nu-Way Electronics (filed as exhibit to Amendment No. 3 to Form 10 filed on January 11, 2011 and incorporated herein by reference)
     
10.14
 
Agreement, dated October 19, 2009 between Challenge Electronics, Inc. and Aesco Electronics (filed as exhibit to Amendment No. 3 to Form 10 filed on January 11, 2011 and incorporated herein by reference)
     
10.15
 
Agreement, dated May 5, 2009, between Challenge Electronics, Inc. and TLC Electronics, Inc. (filed as exhibit to Amendment No. 3 to Form 10 filed on January 11, 2011 and incorporated herein by reference)
     
10.16
 
Agreement, dated December 15, 2005, between Surge Components, Inc. and TTI, Inc. (filed as exhibit to Amendment No. 3 to Form 10 filed on January 11, 2011 and incorporated herein by reference)
 
10.17
 
Sole Agent Agreement, dated January 1, 2007, between Surge Components, Inc. and Lelon Electronics

10.18
 
Master Distributor Agreement, dated February 7, 2011, between Surge Components, Inc. and Avnet, Inc.

10.19
 
First Amendment to Master Distributor Agreement, dated February 17, 2011, between Surge Components, Inc. and Avnet, Inc.

10.20
 
Promissory Note, dated June 16, 2011, by Surge Components, Inc. (filed as exhibit to Amendment No. 8 to Form 10 filed on February 10, 2012 and incorporated herein by reference)
     
10.21
 
Commercial Security Agreement, dated June 16, 2011, by and between Surge Components, Inc. and JPMorgan Chase Bank, N.A. (filed as exhibit to Amendment No. 8 to Form 10 filed on February 10, 2012 and incorporated herein by reference)
     
10.22
 
Commercial Security Agreement, dated June 16, 2011, by Surge Components, Inc. (filed as exhibit to Amendment No. 8 to Form 10 filed on February 10, 2012 and incorporated herein by reference)
     
10.23
 
Business Loan Agreement, dated June 18, 2011, by and between Surge Components, Inc. and JPMorgan Chase Bank, N.A. (filed as exhibit to Amendment No. 8 to Form 10 filed on February 10, 2012 and incorporated herein by reference)

21.1
 
Subsidiaries (filed as exhibit to Amendment No. 1 to Form 10 filed on August 20, 2010 and incorporated herein by reference)

31
 
Certification of principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32
 
Certification of 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
 
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
 
 
28
 
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
 
       
 
By:
/s/ Ira Levy
 
   
Ira Levy
 
   
Chief Executive Officer and Chief Financial Officer (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer)
 
 Date: February 28, 2012
     


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
/s/ Ira Levy
       
Ira Levy
   
February 28, 2012
 
Chief Executive Officer and Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
       
         
/s/ Steven J. Lubman
       
Steven J. Lubman
   
February 28, 2012
 
Director
       
         
/s/ Alan Plafker
       
Alan Plafker
   
February 28, 2012
 
Director
       
         
 /s/ David Siegel
       
David Siegel
   
February 28, 2012
 
Director
       
         
/s/ Lawrence Chariton
       
Lawrence Chariton
   
February 28, 2012
 
Director
       
         
/s/ Gary M. Jacobs
       
Gary M. Jacobs
   
February 28, 2012
 
Director
       
 
 
29
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To The Board of Directors and Stockholders of
Surge Components, Inc.
 
We have audited the accompanying consolidated balance sheets of Surge Components, Inc. and subsidiaries as of November 30, 2011 and 2010 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the two year period ended November 30, 2011.  Surge Components, Inc. and subsidiaries management is responsible for the consolidated financial statements.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Surge Components, Inc. and subsidiaries as of November 30, 2011 and 2010 and the consolidated results of their operations and their consolidated cash flows for each of the years in the two year period ended  November 30, 2011 in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Seligson & Giannattasio, LLP
Seligson & Giannattasio, LLP
White Plains, New York
February 28, 2012

 
 
F-1
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
 
             
   
November 30,
    November 30,  
   
2011
   
2010
 
ASSETS
           
 
           
             
Current assets:
           
Cash
  $ 1,905,455     $ 883,331  
Restricted cash
    -       245,883  
Accounts receivable - net of allowance for
               
  doubtful accounts of $29,676 and $19,513
    4,149,068       4,117,049  
Inventory, net
    2,802,327       2,791,326  
Prepaid expenses and income taxes
    130,436       64,841  
Deferred income taxes
     293,783        --  
                 
Total current assets
    9,281,069       8,102,430  
                 
Fixed assets – net of accumulated depreciation and amortization of $2,069,538 and $2,163,816
    118,049       187,553  
                 
Deferred income taxes
    1,175,133       -  
Other assets
    6,376       1,643  
 
               
Total assets
  $ 10,580,627     $ 8,291,626  

See notes to consolidated financial statements

 
F-2
 
 

SURGE COMPONENTS, INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets
 
   
November 30,
   
November 30,
 
   
2011
   
2010
 
LIABILITIES AND SHAREHOLDERS' EQUITY
           
             
             
Current liabilities:
           
Loan payable
  $ -     $ -  
Accounts payable
    2,019,980       2,632,996  
Accrued expenses and taxes
    669,949       717,953  
Accrued Salaries
     517,172       508,713  
 
               
Total current liabilities
    3,207,101       3,859,662  
                 
Deferred rent
    16,743       2,466  
 
               
Total liabilities
    3,223,844       3,862,128  
 
               
Commitments and contingencies
               
                 
Shareholders' equity
               
Preferred stock - $.001 par value stock, 5,000,000 shares authorized:
               
Series A – 260,000 shares authorized,   none outstanding.
               
Series B – 200,000 shares authorized, none outstanding, non-voting, convertible, redeemable.
               
Series C – 100,000 shares authorized, 23,700 and 32,700 shares issued and outstanding, redeemable,  convertible, and a liquidation preference of $5 per share
    24       33  
Common stock - $.001 par value stock, 75,000,000 shares authorized, 9,035,012 and 8,922,512 shares issued and outstanding
    9,035       8,922  
                 
Additional paid-in capital
    22,995,384       22,911,827  
Accumulated deficit
    (15,647,660 )     (18,491,284 )
 
               
Total shareholders' equity
     7,356,783       4,429,498  
 
               
Total liabilities and shareholders' equity
  $ 10,580,627     $ 8,291,626  

See notes to consolidated financial statements.

 
F-3
 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

 
    Year Ended November 30,  
    2011     2010  
 
           
             
Net sales
  $ 23,208,269     $ 21,613,911  
                 
Cost of goods sold
    16,600,206       15,061,118  
                 
Gross profit
    6,608,063       6,552,793  
 
               
Operating expenses:
               
Selling and shipping
    1,826,729       1,813,471  
General and administrative
    3,209,914       2,910,775  
Depreciation expense
    88,188        136,154  
 
               
Total operating expenses
    5,124,831       4,860,400  
 
               
Income before other income (expense) and income taxes
     1,483,232        1,692,393  
 
               
 
               
Other income (expense):
               
Investment income
    1,951       4,340  
Interest expense
    (61,253 )     (117,973 )
                 
Other income (expenses)
    (59,302 )      (113,633 )
 
               
Income before income taxes
    1,423,930       1,578,760  
                 
Income (benefit)taxes
     (1,433,794 )      82,672  
                 
Net income
  $ 2,857,724     $ 1,496,088  
                 
Dividends on preferred stock
    14,100        16,350  
Net income available to common shareholders
  $ 2,843,624     $ 1,479,738  
 
               
Net income per share available to
               
 common shareholders:
               
                 
Basic
  $ .32     $ .17  
Diluted
  $ .30     $ .16  
                 
Weighted Shares Outstanding:
               
                 
Basic
    9,002,957       8,901,865  
                 
Diluted
    9,652,096       9,304,813  

See notes to consolidated financial statements .
 
 
F-4
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

Years ended November 30, 2011 and 2010
                                                                       
                          Additional              
                                         
  Series C Preferred     Common     Paid-In    
Accumulated
       
                                       
  Shares     Amount     Shares     Amount     Capital    
Deficit
    Total  
 
                                         
                                           
Balance – November 30, 2009
    32,700       33       8,874,512       8,874       22,888,135       (19,971,022 )     2,926,020  
                                                         
Preferred stock dividends
    --       --       --       --       --       (16,350 )     (16,350 )
                                                         
Stock issued as compensation
    --       --       48,000       48       8,592       --       8,640  
                                                         
Issuance of options
    --       --       --       --       15,100       --       15,100  
                                                         
Net Income
    --       --       --       --       --       1,496,088       1,496,088  
                                                         
 
                                                       
Balance – November 30, 2010
    32,700       33       8,922,512       8,922       22,911,827       (18,491,284 )     4,429,498  
                                                         
Preferred stock dividends
    --       --       --       --       --       (14,100 )     (14,100 )
                                                         
                                                         
Issuance of options
    --       --       --       --       83,661       --       83,661  
                                                         
Repurchased and issued shares
    (9,000 )     (9 )     112,500       113       (104 )     --       --  
                                                         
Net income
    --       --       --        --        --       2,857,724       2,857,724  
                                                         
 
                                                       
Balance – November 30, 2011
    23,700     $ 24       9,035,012       9,035     $ 22,995,384     $ (15,647,660 )   $ 7,356,783  
 
See notes to consolidated financial statements.

 
F-5
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
 
           
  Year Ended  
    November 30,  
 
 
2011
   
2010
 
 
           
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 2,857,724     $ 1,496,088  
Adjustments to reconcile net income
               
  to net cash provided by operating
               
  activities:
               
Depreciation and amortization
    88,188       136,154  
Stock compensation expense
    83,661       23,740  
Changes in allowance for doubtful accounts
    10,163       --  
Deferred income taxes
    (1,468,916 )     --  
                 
CHANGES IN OPERATING ASSETS AND LIABILITIES:
               
Accounts receivable
    (42,182 )     (1,569,836 )
Inventory
    (11,001 )     (1,172,063 )
Prepaid expenses and taxes
    (65,595 )     (2,631 )
Other assets
    241,150       1,953  
Accounts payable
    (613,016 )     962,113  
Deferred rent
    14,277       (20,550 )
Accrued expenses
    (53,645 )     675,656  
                 
                 
 
               
NET CASH FLOWS FROM OPERATING ACTIVITIES
    1,040,808       530,624  
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisition of fixed assets
    (18,684 )     (19,860 )
 
               
NET CASH FLOWS USED IN INVESTING ACTIVITIES
    (18,684 )      (19,860 )
      
See notes to consolidated financial statements.

 
F-6
 


SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements Of Cash Flows
(CONTINUED)

 
        
  Year Ended
   
November 30,
 
 
2011
   
2010
 
 
           
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net borrowings from line of credit
    -       (766,467 )
Net borrowings from note payable
    -       (1,304 )
 
               
NET CASH FLOWS USED IN FINANCING ACTIVITIES
    -        (767,771 )
 
               
NET CHANGE IN CASH
    1,022,124       (257,007 )
                 
CASH AT BEGINNING OF YEAR
     883,331       1,140,338  
 
               
CASH AT END OF YEAR
  $ 1,905,455     $ 883,331  
 
               
                 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
                 
                 
Income taxes paid
  $ 87,577     $ 9,527  
 
               
Interest paid
  $ 61,253     $ 117,973  
 
               
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
  Accrued dividends on preferred stock
  $ 14,100     $ 16,350  

See notes to consolidated financial statements.
 
 
F-7
 


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 the 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.

(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 amounts 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 no written arrangements with its suppliers. The Company purchases the merchandise from the supplier and has the supplier directly ship to the customer through a freight forwarder.  Title passes to customer upon the merchandise being received by a freight forwarder. Direct shipments were approximately $3,826,000 and $2,889,000 for the years ended November 30, 2011 and 2010 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 $348,768 and $212,502 for the years ended November 30, 2011 and 2010, respectively.

The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.
 
 
F-8
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company and its subsidiaries currently have agreements with several distributors.    Some of these agreements allow for the return of up to 10% of certain product sales for the previous 6 month period.  The Company does not recognize this portion of the revenues, or the related costs of the sale, until the right of return has expired.    There are no provisions for the granting of price concessions in any of the agreements.  Revenues under these distribution agreements were approximately $4,648,000 and $4,105,000 for the years November 30, 2011 and 2010, 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 November 30, 2011 approximated $703,000. The Company, at November 30, 2011, has a reserve against slow moving and obsolete inventory of $927,364. From time to time the Company’s products are subject to legislation from various authorities on environmental matters. Legislation was enacted, effective July 2006, eliminating lead in certain of the Company’s products. The Company has provided a reserve for these products which is reflected as slow moving. The Company is able to currently obtain products which comply with this law.
 
(5) Depreciation and Amortization :

Fixed assets are recorded at cost.  Depreciation is generally 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.

 
F-9
 

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 balances in two financial institutions.  The balances are each insured by the Federal Deposit Insurance Corporation up to $250,000 through December 31, 2013. At November 30, 2011 and November 30, 2010, the Company's uninsured cash balances totaled approximately $1,121,000 and $690,000, 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.

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

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2008, and state tax examinations for years before fiscal years ending November 30, 2007. Management does not believe there will be any material changes in our unrecognized tax positions over the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of ASC 740, there was no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the year ended November 30, 2011 and 2010.

 
F-10
 
 
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 :
 
Cash balances and the carrying amount of the 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.
 
 
F-11
 

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 $11,955 and $13,808  for the year ended November 30, 2011and 2010, respectively.

(13) Earnings Per Share

Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. The difference between reported basic and diluted weighted-average common shares results from the assumption that all dilutive stock options and convertible preferred stock exercised into common stock. Total potentially dilutive shares excluded from diluted weighted shares outstanding at November 30, 2011 and 2010 totaled 272,861 and 524,053, respectively.

(14) Stock Based Compensation to Employees

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

Stock Based Compensation to Other than Employees

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

(15) Recent Accounting Standards:
 
Comprehensive Income  — In June 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe our adoption of the new guidance in the first quarter of fiscal 2013 will have an impact on our consolidated financial position, results of operations or cash flows.
 
  Fair Value Measurement  — In April 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe our adoption of the new guidance in the first quarter of fiscal 2013 will have an impact on our consolidated financial position, results of operations or cash flows.
 
 
F-12
 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 
NOTE C - FIXED ASSETS

Fixed assets consist of the following:
 
   
November 30,
   
November 30,
 
   
2011
   
2010
 
             
Furniture and Fixtures
  $ 350,563     $ 349,930  
Leasehold Improvements
    906,449       898,942  
Computer Equipment
    930,575       1,102,497  
Less-Accumulated Depreciation
    (2,069,538 )     (2,163,816 )
Net Fixed Assets
  $ 118,049     $ 187,553  

Depreciation and amortization expense for the year ended November 30, 2011 and 2010 was $88,188 and $136,154, respectively.

NOTE D -  ACCRUED EXPENSES
Accrued expenses consist of the following:

   
November 30,
   
November 30,
 
   
2 0 11
   
2010
 
             
Commissions
  $ 211,789     $ 259,714  
Preferred Stock Dividends
    165,007       150,907  
Interest
    102,399       102,399  
Other accrued expenses
    190,754       204,933  
                 
    $ 669,949     $ 717,953  
 
In March 2000, the Company completed a $7,000,000 private placement.  The entire note balance was converted into common stock in July 2001 pursuant to the automatic conversion provisions of the notes.  The interest accrued on the notes required approval by the holder in order to convert to common stock.  The accrued interest in the Company’s disclosures relate to the portion of the interest which was not converted.  No additional interest accrues on these amounts and none of this interest was repaid during any of the periods presented.
 
NOTE E – RETIREMENT PLAN

In June 1997, the Company adopted a qualified 401(k) 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 through salary reduction. The Company makes a matching contribution of twenty percent (20%) of each employee’s contribution for each dollar of employee deferral 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 $770,000 at November 30, 2011. Pension expense for the year ended November 30, 2011 and 2010 was $10,115 and $5,229, respectively.
 
 
F-13
 


SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 
NOTE F – 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”). None of the Series A preferred stock is outstanding as of November 30, 2011.

In November 2000, the Company authorized 200,000 shares of preferred stock as Voting Redeemable Convertible Series B Preferred Stock (“Series B Preferred”). None of the  Series B Preferred Stock is outstanding as of November 30, 2011.

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 the Company’s 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.  Dividends aggregating $165,007 have not been declared or paid for the semiannual periods ended December 31, 2001 through the semiannual payment due June 30, 2011.  The Company has accrued these dividends.  The December 31, 2011 dividend of $5,925 has not been declared or paid.

In April 2002, in connection with a Mutual Release, Settlement, Standstill and Non-Disparagement Agreement and 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 stock plus accrued dividends for $50,000.

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

At November 30, 2011 there are 23,700 shares of Series C Preferred stock issued and outstanding.
 
[2] 1995 Employee Stock Option Plan :

In January 1996, the Company adopted, and in February 1996 the shareholders ratified, the 1995 Employee Stock Option Plan (“Option Plan”).  The plan provides for the grant of options to qualified employees of the Company, independent contractors, consultants and other individuals to purchase an aggregate of 350,000 common shares.  In March 1998, the Option Plan was amended to increase the number of aggregate Common Shares available under the plan to 850,000.

The Option Plan has expired. The remaining 53,000 options outstanding expired in July 2010.
 
 
F-14
 

 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE F – SHAREHOLDERS’ EQUITY (Continued)
 
[3] 2010 Incentive Stock Plan

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

Stock option incentive plan activity is summarized as follows:
 
         
Weighted Average
 
   
Shares
   
Exercise Price
 
             
Options issued in May 2010
   
600,000
   
$
0.25
 
Options issued in February 2011
   
85,000 
   
 $
1.15 
 
Options outstanding November 30, 2011
   
685,000
   
$
0.36
 
                 
Options exercisable November 30, 2011
   
600,000
   
$
0.25
 
 
Stock Compensation

The fair values of stock options are estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions during 2010: expected volatility of 60% (based on stock volatility of public company industry peers); average risk-free interest rate of 2.31% (the five year treasury note rate on the date of the grant); initial expected life of 5 years (based on the term of the options); no expected dividend yield; and amortized over the vesting period for a year.
 
The intrinsic value of the exercisable options at November 30, 2011 totaled $294,000.  At November 30, 2011 the weighted average remaining life of the stock options is 4.21 years.  At November 30, 2011, there was $52,294 of total unrecognized compensation cost related to the stock options granted under the plan.  This cost is expected to be recognized over a weighted average period of 1.25 years.

On February 25, 2011, the Company granted stock options to employees to purchase 85,000 shares of the Company’s common stock at an exercise price of $1.15, the value of the common stock on the date of the grant.  These options vest over a three year period and expire in ten years.  The fair values of these stock options are estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected volatility of 60% (based on stock volatility of public company industry peers); average risk-free interest rate of 3.42 (the ten year treasury note rate on the date of the grant); initial expected life of 10 years (based on the term of the options); no expected dividend yield; and amortized over the vesting period. During the year ended November 30, 2011, the Company recorded stock based compensation totaling $17,433 as a result of these stock option grants.

The weighted average grant date fair value of the stock options granted during the year ended November 30, 2011 was $0.82.  During the year ended November 30, 2011, the Company recorded stock based compensation totaling $66,228 as a result of these stock option grants.

 
F-15
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE F – SHAREHOLDERS’ EQUITY (Continued)
 
[4] Authorized Repurchase :
 
In November 2002, the Board of Directors authorized the repurchase of up to 1,000,000 Common Shares at a price between $.04 and $.045. The Company has not repurchased any shares to date pursuant to such authority.

[5] Compensation of Directors

In May 2010, the Company issued 12,000 shares of its common stock to each non-officer director as compensation for services on the Board of Directors. These shares were valued at $0.18 per share, the closing price of the common stock on the over-the-counter market. In addition, the directors receive $200 each month for their services on the Board of Directors. In May 2010, options were granted to each non-officer director to purchase 25,000 shares of common stock at an exercise price of $0.25.  (See Note F[3] for disclosure on the valuation and terms of these options).
 
NOTE G – 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:
 
   
November 30,
   
November 30,
 
   
2011
   
2010
 
Deferred Tax Assets
           
    Net Operating income
  $ 5,345,554     $ 6,150,931  
    Allowance for Bad debts
    7,793       7,793  
    Inventory
    498,220       498,220  
    Deferred Rent
    985       985  
    Depreciation
    183,646       183,646  
    Total deferred tax assets
    6,036,198       6,841,575  
    Valuation allowance
    (4,567,282 )     (6,841,575 )
                 
        Deferred Tax Assets
  $ 1,468,916     $ -  

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. 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.
 
 
F-16
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 
NOTE G – INCOME TAXES(CONTINUED)
 
The valuation allowance decreased by approximately $2,274,000 and $682,000 during the years ended November 30, 2011 and the year ended November 30, 2010, respectively.

The Company's income tax expense consists of the following:
 
   
Years Ended
   
November 30,
   
2011
   
2010
 
             
Current:
           
Federal
 
$
24,717
   
$
53,710
 
States
   
       10,405
     
28,962
 
                 
     
        35,122
     
82,672
 
Deferred:
               
Federal
   
(1,161,913)
     
--
 
States
   
                        (307,003)
     
        --
 
                 
     
(1,468,916)
     
             --
 
                 
Provision for income taxes
 
$
(1,433,794)
   
$
82,672
 
 
The Company files a consolidated income tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of approximately $13,384,000 for federal and state purposes, which expire through 2020. The utilization of this operating loss carryforward  may be limited based upon changes in ownership as defined in the Internal Revenue Code.
 
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:

 
   
Years Ended
   
November 30,
   
2011
   
2010
           
U.S. Federal income
         
  tax statutory rate
   
34
%
   
34
%
Valuation allowance
   
(143
)%
   
(34
)%
State income taxes
   
5
%
   
5
%
Other
   
4%
     
-
 
Effective tax rate
   
100
%
   
5
%
 
 
F-17
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 
NOTE H– 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 $215,000 for the Fiscal 2011, 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 2010, the Company entered into a lease to rent office space in Hong Kong for two years. Annual minimum rental payments are approximately $20,000.

The future minimum rental commitments at November 30, 2011:
 
Year Ending
     
November 30,
     
2012
    171,103  
2013
    162,625  
2014
    165,878  
2015
    169,195  
2016
    172,579  
2017 & thereafter
    693,878  
         
    $ 1,535,258  

Net rental expense for the year ended November 30, 2011 and 2010 were $247,877 and $209,465 respectively, of which $215,000 was paid to the Related Company.

 
F-18
 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 
NOTE I – EMPLOYMENT AND OTHER AGREEMENTS
 
The Company has employment agreements, with terms through July 30, 2012 (renewable on each July 30 th for an additional one year period) with two officers/stockholders of the Company, which provides each with a base salary of $225,000, subject to certain increases as defined, per annum, plus fringe benefits and bonuses.  The Compensation Committee of the Company’s Board of Directors determines the bonuses.  Bonuses have been accrued to the two officers for the year ended November 30, 2011 totaling $400,000.  The agreement also contains provisions prohibiting the officers from engaging in activities, which are competitive with those of the Company during employment and for one year following termination.  The agreements further provide that in the event of a change of control, as defined, or a change in ownership of at least 25% of the issued and outstanding stock of the Company, and such issuance was not approved by either officer, or if they are not elected to the Board of Directors of the Company and/or are not elected as an officer of the Company, then the non-approving officer may elect to terminate his employment agreement. If he elects to terminate the agreement, he will receive 2.99 times his annual compensation (or such other amount then permitted under the Internal Revenue Code without an excess penalty), in addition to the remainder of his compensation under his existing employment contract.  In addition, if the Company makes or receives a “firm commitment” for a public offering of Common Shares, each officer will receive a warrant to purchase, at a nominal value, up to 9.5% of the Company’s common stock, provided they do not voluntarily terminate employment.
 
NOTE J– MAJOR CUSTOMERS
 
The Company had two customers who each accounted for 11% of net sales for the year ended November 30, 2011 and two customers who accounted for 13% and 11% of net sales for the year ended November 30, 2010.  The Company had one customer who accounted for 24% and 22% of accounts receivable at November 30, 2011 and November 30, 2010, respectively.

NOTE K- MAJOR SUPPLIERS

During the year ended November 30, 2011 and 2010 there was one foreign supplier accounting for 46% and 52% of total inventory purchased.

The Company purchases a significant portion of its products overseas.  For the year ended November 30, 2011, the Company purchased 49% from Taiwan, 19% from Hong Kong, 24% from elsewhere in Asia and less than 1% overseas outside of Asia.

NOTE L - EXPORT SALES

The Company’s export sales approximated:
 
   
Year Ended November 30,
 
   
2011
   
2010
 
Canada
    2,927,760       1,671,816  
China
    4,324,694       5,336,289  
Other Asian Countries
    1,924,174       1,186,070  
Europe
    131,840       168,567  

Revenues are attributed to countries based on location of customer. 
 
F-19
 


SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


NOTE M – LINE OF CREDIT

In July 2002, the Company obtained a financing commitment with an asset-based lender totaling $1,000,000 (the “Credit Line”). Borrowings under the Credit Line accrue interest at the greater of the prime rate plus two percent (2.0%) or 6.75%. The Company was required to make monthly interest only payments. The Company could repay all or a portion of the line of credit at any time. In addition, the Company was obligated to pay one-quarter of one percent (1/4 of 1%) annually as an unused line fee for the difference between $1,000,000 and the average daily balance of the Credit Line. The Credit Line was collateralized by substantially all the Company’s assets and contains various financial covenants pertaining to the maintenance of working capital and tangible net worth.

In December 2003, the Company entered into a Security Agreement with the lender establishing a restricted cash collateral account totaling $200,000. The balance on the account including interest accrued is $0 and $245,883 at November 30, 2011 and November 30, 2010, respectively.

In June 2011, the Company replaced its existing credit line with a line of credit with a new bank totaling $1,000,000.  Borrowings under the line accrue interest at 2.56% over the LIBOR rate and is due in June 2012.  The line is collateralized by all the Company’s assets and includes working capital and tangible net worth covenants.  At November 30, 2011, the Company was in compliance with the financial covenants.  As of November 30, 2011,  the outstanding balance on the line of credit was zero.
 


 
 
 
 
 
 
 
 
F-20
Exhibit 10.17
 
SCI   Surge Components, Inc.

SOLE AGENT AGREEMENT
 


Surge Components, Inc. and Lelon Electronics agree to work together, with Lelon as the manufacturer supplier, and Surge as Lelon's  sole agent in North America, responsible for the sales and marketing. This agreement will   govern  the   relationship  and   the   cooperation  between   the   two companies in this strategic partnership

THIS AGREEMENT is made and entered into as of January 1, 2007, by and between Surge Components, Inc., a New York corporation (also referred to as "SCI") and:
 
Lelon   Electronics   Corp.   (also referred to as "Supplier")
 
In their mutual best interest, and in consideration of the mutual covenants hereinafter set forth, SCI and the Lelon agree as follows:

1.   Duration   of   Agreement :--This Agreement shall remain in force unless terminated in accordance with paragraph thirteen.
 
2.    Territory: --Lelon  hereby appoints and designates SCI as their  sole  and exclusive sales agent in the territory described in schedule A.
 
3.   Products:--SCI is authorized to offer for sale all the products and services of   the Supplier,  on  terms   and  conditions,  and  in  accordance  with  the  general   sales   policies established from time-to-time by the Supplier and the Supplier will furnish complete and up-to­ date  information  on  the  product  line  to  SCI  but  retains the exclusive  right  to  define  such products and services.
 
4.   Competitive   Products: --SCI and Lelon agree that, Lelon will not sell to   any person, firm, corporation or entity which are competitive  with the products and services being sold by Surge. For the products and services that Lelon is able to offer, Lelon is the only supplier for SCI. In case that SCI needs to have more than one supplier for the products and services that Lelon can offer, SCI needs to provide the reasons to Lelon and get Lelon's agreement  before placing any order to the new supplier.
 
5.   Independent   Entity: --lt is  agreed that Surge will conduct all of its business in its own name as an independent contractor, and will provide competent sales staff who will apply their best efforts  to provide  sales coverage  for Lelon.  In connection with the performance  of this Agreement, the entire management and direction of the Surge's operations, including the sales organization, shall at all times be under the exclusive control and management of Surge.
 
 
 
- 1 -
 
 
6.   Operating   Procedure   and   Communications: -- Surge agrees that it will, at all times, use its best efforts to promote the business and welfare of Lelon.

a.  Surge's duties in connection with the promotion of business for Lelon shall include but are not restricted to: active solicitation of orders, application engineering, assistance on proposal preparation, field service, liaison engineering, assistance with contract negotiations, contract administration, prompt follow-up of and reporting on sales leads, conscientious  and active promotion of Lelon products, and complete disclosure to Lelon of information pertinent to Lelon within the territory.
 
b. Lelon agrees to furnish Surge with copies of all correspondence and sales leads and other information pertaining to sales and prospective sales within the Surge's assigned territory promptly upon their origination.
 
7.   Confidentiality: --Both parties to this agreement acknowledge that it is in a confidential relationship in respect to proprietary items, trade secrets, processes, inventions, operational procedures including manufacturing and marketing secrets, customer names, selling prices, or any and all other information obtained by this association. Both parties, and their servants, employees and associates, shall not disclose during the term of this Agreement, nor at any time thereafter, any prices, trade secrets, processes,  inventions, proprietary information, operational procedures, or other information which may have been revealed to each other, its servants, employees and associates, during the term of this Agreement.
 
8.       Sales   Promotion: --lt  is contemplated  that Lelon may from time-to-time  engage  in sales promotion and advertising on behalf of its product line in conjunction with sales activities of Surge.  In connection with such efforts, Lelon will supply reasonable quantities of promotional, advertising material without cost to the Surge.
 
9.   Training: --Lelon recognizes the importance of adequate training on its products, their applications and how they are sold.  Accordingly,  Lelon will from time-to-time prepare training materials and provide training programs  for Surge.   Surge agrees to make every reasonable effort to assure active participation of all appropriate personnel in its organization in the use of such materials and attendance at Lelon training events.
 
10.    Prices: --SCI   reserves   the   exclusive   right  to   establish   all   prices,   discounts specifications, terms and conditions governing the sale of Lelon's products and services.   SCI further reserves the right to change any and all such prices and other terms of sales at any time.
 
11.    Acceptance   of   Orders: -    It is understood  that Lelon hereby grants to Surge the authority to solicit and obtain orders for transmittal to Lelon.  Surge has express  authorization to accept orders on behalf of Lelon and to enter into written or oral contracts or agreements of any nature on behalf of Lelon, subject to final acceptance by Lelon.
 
12.   Effective   Date: --This  Agreement  shall  become  effective  when  executed  by  the Surge and a duly authorized officer of Lelon as of the date first above written
 
13.   Termination: --This Agreement shall terminate automatically upon the occurrence of any breach of the Agreement by SCI or by the Lelon. Otherwise, termination may occur by the will of either party, with written notice, which notice must be confirmed received by the receiving party. This notice will provide a winddown of affairs  over a 6 month period, unless mutually agreed by both parties to end sooner.  Upon termination, Lelon agrees to honor and carry out the completion of all open and existing orders which they have accepted as of the termination date.
 
 
 
- 2 -
 
 
14.   Non   Compete- -If and upon termination, except if Surge breaches the terms of this agreement, Lelon agrees to not compete with Surge for a period of 2 years. This means that Lelon will not directly or indirectly approach, sell to, or in ayway try to take the customers and the business from these customers, that Surge has been doing with these customers at the time of termination, and for a period of 2 years.
 
15.   lndemnification- -Lelon will maintain product liability insurance to protect against any claims regarding poor quality. Lelon will name Surge as additional insured on this policy. In any and all claims brought by customers as a result of poor quality, or that the parts aren't meeting Lelon's published spec,  Lelon will hold Surge harmless, and indemnify Surge against all claims, requiring financial compensation for damages incurred, including recall, rework, and or bodily harm, loss of reputation, loss of business.

16.   Lelon   Direct   Business   in   North   America -
 
 
a.
When Lelon from time to time has interest to become the supplier for certain specific North American based customers, Lelon will communicate this interest to Surge. If Surge is unwilling to do it or Surge is unable to do this work successfully within a reasonable period of time, then Lelon will be free to select another agent to help them at the identified customer.
 
 
b.
Whether a customer will be a Surge customer or a Lelon direct customer in North America will be based on which company did the approval work. If Lelon got the approvals, then it would be a Lelon direct customer unless Lelon would like Surge to do service work.
 
 
c.
Except Lelon direct customers, if Lelon receives any inquiry from North America directly, Lelon will immediately refer it to Surge.
 
 
d.
When Lelon is invited to bid a project and finds the end customer of the project is in North America, Lelon will advise Surge of this project if the end customer is not a Lelon direct customer. If Surge didn't contact the end customer before, Lelon can bid the project directly. If Surge contacted the end customer before, Surge will bid it directly or advise Lelon on how to bid it.
 
 
e.
When a design-in of a model was gotten from a customer by Surge and the mass production is taken place at a customer handled by Lelon, Lelon will provide a reasonable percent of sales amount of the designed-in items at the Lelon-handled customer to Surge as approval commission. The price for calculating the sales amount is based on the selling price to the customer with the delivery term of FOB Taiwan/Hong Kong/Taiwan. The rate of approval commission is subject to change case by case.
 
 
f.
Surge needs to provide the details of the approval or design-in when claiming approval commission.
 
 
g.
The approval commission on a design-in of a model will be stopped when the model is phased out at the Lelon-handled customer.
 
 
 
- 3 -
 
 
17.  Free Samples-Lelon will provide reasonable samples with free of charge to Surge for customers' evaluation. Surge needs to track the sample status and report to Lelon monthly.

18.   Technical Support-Lelon will support and provide Surge will technical support  as needed to assist Surge in obtaining approval by the customer, of the Lelon brand parts.

19.   Late Deliveries-If Lelon is late on delivery, and the customer requires some parts to be shipped by air, Lelon will bear the cost of these air freight charges. Surge will always work with the customer to minimize the amount of product that may need to be shipped by air.
 
20.     Applicable     Laws: --  This  Agreement   shall  be  governed  by  and  construed   in accordance with the laws of the Hong Kong. The parties irrevocably submit to the non-exclusive jurisdiction of the Hong Kong courts in respect of any legal action or proceedings relating to and arising out of the Agreement.

21.     Assignability:--Surge  and Lelon acknowledge that this agreement is not subject to assignment or delegation, either voluntarily or by operation of law, except with the prior written consent and agreement of both parties.

22.     Entire   Agreement: --This  instrument  contains  the  entire  agreement  between  the parties hereto in connection with the appointment of Surge as sole and exclusive sales agent of Lelon in the assigned  territory.   The Agreement  cancels  and supersedes  any and all other previous arrangements between the Lelon and SCI.  It is understood by both parties hereto that this agreement constitutes a contract between the Lelon and SCI, and shall not be transferable.
 
IN WITNESS WHEREOF, the parties hereto have agreed to the terms and conditions herein, and set their hands as of the day and year first above written.
 
SURGE COMPONENTS, INC.                                                                          LELON ELECTRONICS  
           
           
By: 
/s/ Ira Levy
  By:
/s/ T.C. Wu
 
 
Name: Ira Levy
   
Name: T.C. Wu
 
 
Title: President
   
Title: President
 

Date: Jan. 1, 2007
 
 
- 4 -
 
 
SCHEDULE A
 
 
PRODUCTS:  ALL
 
CLASS OF CUSTOMER:  OEM INDUSTRIAL DISTRIBUTOR
 
       
       
TERRITORY:    HOUSE ACCOUNTS:  
       
       
RATE OF COMMISSION:
     
       
       
       
       
 

 
 
 
 
 
 
 
 
 
- 5 -
Exhibit 10.18
 
 
MASTER DISTRIBUTOR AGREEMENT
 
 
This Agreement is effective as of February 7, 2011 (“Effective Date”), by and between Surge Components, Inc. (“Supplier”) having offices at 95 E. Jefryn Blvd., Deer Park, NY  11729 and Avnet, Inc., having offices at 2211 S. 47 th Street, Phoenix, AZ  85034 (“Distributor”).

1. 
PRODUCTS
The term “Product” or “Products” as used herein shall mean the all items listed on Supplier’s distribution price book or similar lists.

2. 
APPOINTMENT/TERRITORY
 
Supplier hereby appoints Distributor and Distributor hereby accepts the appointment, as the nonexclusive distributor for the Products within the following described territory:  Americas (the “Territory”) and at all locations identified in Exhibit B.  The terms and conditions of this Agreement shall automatically extend to any Affiliate of Distributor which may now exist or hereafter be formed or acquired by Distributor. Distributor may trade under this Agreement through its Affiliates or through a third party representative appointed by Distributor. For the purposes of this Agreement, “Affiliate” shall   mean any person, partnership, joint venture, company, corporation or other form of enterprise, domestic or foreign, including but not limited to subsidiaries that directly or indirectly are controlled by, or are under common control with the Distributor.

3. 
TERM
This Agreement shall be effective as of the Effective Date and shall continue thereafter until terminated as provided in clause 18 below.

4. 
DUTIES OF DISTRIBUTOR
 
(a)
Distributor shall use all reasonable commercial efforts commensurate with its overall business to promote the sale of the Products within the Territory.
 
(b)
Distributor shall maintain a reasonable inventory of Products in order to satisfy Distributor's anticipated sales thereof.
 
(c)
Distributor shall send to Supplier, within thirty (30) working days after the end of each month, a sales activities report including the names of purchasers, quantities of Products purchased and dollar/euro amounts invoiced to the said purchasers.

5. 
OBLIGATIONS OF SUPPLIER
 
(a)
Supplier shall consistently keep Distributor informed on a timely basis of changes and innovations in performance, serviceability, uses, and applications of all Products.
 
(b)
Supplier, at its expense, shall provide training for personnel designated by Distributor in marketing and servicing Products.  Such training shall be held at the times and locations as mutually agreed by the parties.
 
(c)
Supplier, at its expense, shall periodically provide Distributor with reasonably sufficient quantities of its advertising and promotional materials, pricing information and technical data related to the Products.
 
(d)   Upon request, Supplier will provide the following information in a manner acceptable to Distributor:
 
(i)
An open status report listing accepted orders not yet shipped, indicating the part number, quantity, order date, purchase order number, and acknowledged shipment date for each such order;
 
(ii)
Order Acknowledgement;
 
(iii)
Change Order Acknowledgement;
 
(iv)
Product Lead-Time;
 
(v)
Monthly Backlog Status;
 
(vi)
Shipping Notices;
 
(vii)
Part RoHS Information/Updates;
 
(viii)
Export Control Information / ECCN; and
 
(ix)
Environmental data as may be required under applicable laws and regulations.
 
(e)
Supplier will provide an acceptable sample recovery program.
 
 
1
 
 
6. 
PRICE/PRICE CHANGE
 
(a)
The prices to be paid by Distributor for Products ordered pursuant to this Agreement are set forth in Exhibit A. The Prices quoted are for the Products delivered FOB (Supplier's location within the United States closest to the delivery point specified in Distributor's purchase order or closest Point of entry to the delivery point specified in the Distributors purchase order  located within the region of order placement, whichever is closet to the point of order placement), as that term is defined in the Incoterms 2000.
 
(b)
The prices contained in Exhibit A, on supplier's electronic price list, or similar document, are subject to change by Supplier at any time.  Such change shall not become effective as to Distributor unless Supplier gives at least thirty (30) days written notice thereof.
 
(c)
In the event that the Supplier decreases the price of any Product in Suppliers price book, Distributor will be entitled to a credit equal to the difference between the net price paid by Distributor, less any prior credits granted by Supplier, and the new decreased price for the Product multiplied by the quantity of such Product in Distributor's inventory or in transit on the effective date of the reduction.
 
(i)
Distributor shall submit to Supplier, not later than sixty (60) working days after receiving notice of such price decrease, a Product inventory report as of the effective date, together with a debit memo reflecting the credit described in clause 6(c) above.
 
(ii)
Supplier shall be deemed to have verified the Product inventory report and debit memo unless Supplier contests the same in writing within sixty (60) days after receiving such report and memo.  Uncontested debit memos shall be credited to Distributor's account as of the effective date of such price decrease.
 
(d)
Products shipped on or after the effective date of any price decrease will be shipped and invoiced at the price in effect at the time of shipment.
 
(e)
Products shipped after the effective date of any price increase will be shipped and invoiced at the price in effect at the time of order placement.
 
(f)
Upon Suppliers prior approval, Distributor shall be permitted to sell Product to customers on a meet-competition basis where Distributor’s current costs are not competitive enough for Distributor to secure the orders.  Distributor shall be entitled to ship from its inventory a defined quantity of a specific Product to a specific customer at or below Distributor’s cost and issue a debit memo to Supplier for the difference between Distributor’s cost of the Product (less any prior credits issued by Supplier) and Distributor’s sales price multiplied by the quantity of such Product shipped to the specific customer.  In order to claim such credit, Distributor shall submit to Supplier within thirty (30) business days after the end of Distributor’s fiscal month a debit memo in conjunction with Distributor’s monthly POS and inventory reports.  Credits will be applied to Distributor’s account receivable with Supplier.
 
7. 
TAXES
Distributor shall not be liable for taxes with respect to any order other than any sales tax which Supplier is required by law to collect from Distributor.

8. 
PAYMENT
Payment terms for Products purchased hereunder shall be 2% 10 th and 25 th or net sixty (60) days from date of invoice or shipment.  Distributor has the right of offset against Supplier for programs, promotions, special pricing, rebates, and for any Distributor returns as described in clause 12.

9. 
WARRANTY OF TITLE
Supplier warrants the title to all Products sold to Distributor and warrants that such Products are not subject to security interests, liens, or other encumbrances.

10. 
SHIPMENT/RISK OF LOSS
Supplier agrees to deliver Products ordered by Distributor to the location and within the time specified in Distributor's purchase order pursuant to the delivery term in clause 6(a).  Supplier agrees to pay premium freight when its delivery will miss the acknowledged ship date.  Distributor may designate the carrier to be used, and, in absence of such specification by Distributor, Supplier shall select a carrier in its reasonable discretion.   For the avoidance of any doubt, under no circumstance shall Avnet be the importer of record for this engagement.

11. 
ORDER CHANGES
 
(a)
Distributor may cancel any order having a clerical error within five (5) days of placing such order.  Distributor may change or cancel orders or reschedule shipment dates for any Products ordered, provided that it notifies Supplier at least ten (10) days prior to the latest confirmed ship date.
 
 
2
 
 
 
(b)
Supplier shall use best commercial efforts to acknowledge Distributor’s orders in writing or via EDI within one (1) working day of receipt but in no event longer than three (3) working days of receipt.  Order acknowledgments shall contain Supplier’s promised ship date.
 
(c)
Should Supplier’s promised ship date change, Supplier shall notify Distributor in writing or via EDI five (5) business days in advance of the change.  Should Distributor’s customer cancel its order with Distributor due to a change to Supplier’s promised ship date, or latest confirmed ship date, Distributor may cancel its order to Supplier without penalty.
 
(d)
Distributor considers “On-Time-Delivery” to be two (2) days early, and zero (0) days late with respect to Supplier’s first scheduled delivery date. In cases where Distributor's required dock date precedes Supplier's most current acknowledgment, and where Supplier can improve the shipment response, Supplier will ship accordingly without notifying Distributor.  Distributor has the option to cancel any orders that does not meet its On-Time-Delivery criteria.
 
(e)
Time is of the essence.
 
12. 
SCRAP ALLOWANCE/PRODUCT RETURN
 
(a)
Distributor will receive a quarterly deferred cash payment scrap allowance equal to five percent (5%)of Supplier’s gross sales to Distributor for the previous six (6) month period, minus all credits.  This scrap allowance will be applied, in Distributor’s discretion, to the following: (1) the scrapping of Products to obtain optimal mix as determined by Distributor, (2) accumulation of unused scrap allowance to apply to future Product mix issues, and (3) application of unused scrap allowance to Distributor’s Profit & Loss statement.
 
(b)
Notwithstanding clause 12(a) above, Distributor has sixty (60) days after the initial twelve (12) month period that any “New Product” is in its inventory to return such "New Product" to Supplier for credit.  Such credit shall be equal to Distributor's purchase price for such “New Product” less any prior credits.  For purposes of this clause, a “New Product” is a Product that is newly introduced by Supplier to the market.
 
(c)
Notwithstanding clause 12(a) above, Distributor has sixty (60) days after the initial twelve (12) month period that its “Initial Stocking Order” is in its inventory to return any of its “Initial Stocking Order” to Supplier for credit.  Such credit shall be equal to Distributor's purchase price therefore less any prior credits.  For purposes of this clause 12, the “Initial Stocking Order” is the first purchase orders placed by Distributor under this Agreement.
 
(d)
If Supplier sells any portion of their product line/offering to another party, it shall give Distributor advanced notice thereof and shall within thirty (30) days of such notice issue a returned materials authorization (“RMA”) entitling Distributor to return, at its option, any and all of such affected inventory, regardless of whether such line/offering, or portion thereof, is sold to another Supplier of Distributor.  Supplier shall pay all freight charges associated with return of affected Products.
 
13. 
WARRANTY
 
(a)
Supplier guarantees Distributor that the design, construction and quality of the Products shall comply in all respects with all requirements of any statutory regulation, order, contract or any other instrument having the force of law, which may be in operation at the time when the Products are supplied.
 
(b)
Supplier warrants the Products in accordance with the manufacturer’s standard warranty as set forth in Exhibit C or the warranty it extends direct to Distributor’s customers, whichever is greater.  In no event shall the manufacturer’s warranty be less than what is publicly posted on manufacturer’s website, which may change from time to time.  Distributor is authorized to pass this warranty through to Distributor's customers and to end users.  The warranty period as set forth in this Warranty Section shall begin to run with respect to Distributor’s customers and any end user upon delivery of the Product to the end user.  Any Product to be returned under the terms of the warranty may be shipped to Supplier either by Distributor or directly by Distributor’s customers or end users. Supplier shall indemnify the Distributor for damages resulting from a breach of warranty.  Both this clause 13 and Exhibit C are deemed non-confidential and Distributor may reveal the contents of either to its customers.
 
(c)
Supplier warrants that the Products provided to the Distributor by the Supplier as new and unused.
 
(d)
Delivery of any Product by Supplier to Distributor shall constitute a certification by Supplier that the Product conforms to the manufacturer's specifications.
 
14. 
DEFECTIVE PRODUCTS
Notwithstanding any other provision of this Agreement or of any Exhibit hereto, Distributor may return for full credit of Distributor’s cost of the Product (including, without limitation, cost of assembling, disassembling, transportation, and labor), less any prior credits issued by Supplier, any and all Products found to be defective upon delivery, or within a reasonable time thereafter; provided, however, that any such defective Products are returned to Supplier, freight collect, within ninety (90) days of the Distributor’s discovery of the defect.
 
 
3
 

15. 
DISCONTINUED PRODUCTS
Supplier may discontinue the manufacture and/or sale of any Product.  In the event of any such discontinuance, Supplier shall give Distributor at least one hundred eighty (180) days advance written notice thereof.  Supplier shall allow Distributor to place final orders for the Products, in acceptable and sufficient amounts, within six (6) months from the date of the notice for standard Products and twelve (12) months from the date of the notice for non-standard Products (“Final Order Period”). Distributor may schedule delivery dates up to six (6) months from the expiration date of the Final Order Period. The product discontinuance notice shall include, as a minimum: (a) the effective date for placing last purchase orders, and (b) the affected Supplier part numbers. Distributor may, in its sole discretion, within sixty (60) days after receipt of such notice, notify Supplier in writing of Distributor's intention to return any or all Products in its inventory, which have been discontinued.  Distributor shall receive full credit for all such Products so returned.  Any such credit shall be in the amount of the actual net invoice price paid by Distributor for the discontinued Products less any prior credits.  Freight charges shall be paid by Supplier.  Supplier grants Distributor the right to life time buys of Products upon request.

16. 
ENGINEERING CHANGES/RECLASSIFICATION
Supplier shall give Distributor at least one hundred and eighty (180) days advance written notice of engineering changes or any reclassification of standard Products.  For Products designed and manufactured to Distributor’s customer’s specifications, Supplier shall not implement engineering changes or reclassification without Distributor’s prior written consent. If these changes or reclassifications, in Distributor's sole judgment, will adversely impact Distributor's ability to sell the affected Products in its inventory, then Supplier shall cooperate with Distributor to sell such affected inventory.  If, after the aforementioned efforts (but in no event later than one hundred twenty (120) days after the first public announcement of such change or reclassification or the first shipment of the changed or reclassified Product, whichever occurs first), any of the affected Products still remains in Distributor's inventory, Supplier agrees at Distributor's election to (a) replace it with upgraded Products, or (b) repurchase any or all of the affected inventory at Distributor's actual net invoice cost less any prior credits.  Supplier shall pay all freight charges associated with return of affected Products and/or shipment of upgraded Products to Distributor.
 
17. 
SPARE PARTS & TECHNICAL SUPPORT
Supplier shall provide spare parts and technical support for the Products sold under this Agreement for a period of no less than five (5) years after shipment of the last Products to Distributor.  Such spare parts and technical support shall be made available to Distributor at a non-discriminatory price based upon the pricing in effect at the time such spare parts or technical support are ordered.

18. 
TERMINATION
 
(a)
Either party upon giving the other party at least sixty (60) days prior written notice may terminate this Agreement at any time, without cause.  Such termination shall be effective on the date stated in the said notice.
 
(b)
Either party may terminate this Agreement immediately for cause in the event the other party:
 
(i)
Becomes insolvent, or
 
(ii)
Admits in writing its inability to pay its debts as they mature, or
 
(iii)
Ceases to function as a going concern or to conduct its operations in the normal course of business, or
 
(iv)
Assigns or transfers, either voluntarily or by operation of law, any or all of its rights or obligations under this Agreement without having obtained the prior written consent of the other party; or
 
(v)
A petition by or against it is filed under any bankruptcy or insolvency law; or
 
(vi)
Fails to perform any of its obligations under this Agreement so as to be in default hereunder and fails to cure such default within thirty (30) days after written notice thereof.
 
(c)
In the event of termination of this Agreement, Supplier shall repurchase, at Distributor's election, any or all unsold Products in Distributor's inventory or in transit on the effective date of termination, along with any or all technical and promotional material designed to promote the sale of the Products.  The repurchase price for such unsold Products and other material shall be the actual net invoice price paid by Distributor less any prior credits.
 
(d)
In the event Supplier terminates for its convenience or for any reason other than those listed in clause 18(b), or Distributor terminates for cause, then all freight charges associated with such repurchase of Products under this clause 18 shall be paid by Supplier.  In the event Distributor terminates for its convenience or for any other reason other than those listed in clause 18(b), or Supplier terminates for cause, then such freight charges shall be paid by Distributor.
 
 
4
 
 
 
(e)
All Products to be repurchased must be in unused, factory-shipped condition and must be returned in smallest original cartons or the equivalent.
 
(f)
After termination of this Agreement, Supplier agrees to sell to Distributor any Products which Distributor is contractually obligated to furnish to a customer and which Distributor does not have in its inventory, provided that Distributor orders such Products within ten (l0) days after the effective date of termination.
 
(g)
In the event that Distributor terminates this Agreement without cause, Distributor agrees to pay a fifteen percent (15%) restocking fee not to exceed $20,000.  In the event of termination of this Agreement by Supplier for any reason, Distributor shall not be liable for such restocking fee.
 
19. 
CONFIDENTIALITY
If either party receives from the other party written information marked “Confidential” and/or “Proprietary,” the receiving party agrees not to use such information except in the performance of this Agreement, and to treat such information in the same manner as it treats its own confidential information.  The obligation to keep information confidential shall not apply to any such information that has been disclosed in publicly available sources; is, through no fault of the party receiving the confidential information, hereafter disclosed in a publicly available source; is in the rightful possession of the party receiving the confidential information without an obligation of confidentiality; or is required to be disclosed by operation of law.  Except as otherwise provided herein, the obligation not to disclose shall be for a period of one (1) year after the disclosure of the Confidential Information.

20. 
INTELLECTUAL PROPERTY INDEMNIFICATION.
 
(a)
Supplier warrants   that   any and all Product purchased hereunder, and the manufacture, sale or use thereof, do not and will not violate or infringe upon any patent, copyright, trademark, trade secret or other intellectual property right of any third party.
 
(b)
Supplier will indemnify, defend, and hold Distributor, its successors, assigns, customers and end-users harmless against all losses, damages, costs and expenses (including reasonable attorneys’ fees and costs of establishing rights to indemnification and any settlement) based on any claims, demands, suits, proceedings and actions (“Claims”) in connection with any alleged infringement of any patent, copyright, trademark, trade secret or other intellectual property right of a third party, including any Claims that the Product, or the process, design, or methodology used to manufacture the Product, infringes any third party patent, copyright, trademark, trade secret or other intellectual property rights.
 
(c)
Distributor will provide Supplier with written notice of any such Claims, grant full authority to Supplier to defend and settle such Claims, and upon Supplier’s request, provide reasonable assistance and information, at Supplier’s cost and expense.
 
(d)
If a Product becomes the subject of a Claim or Distributor is enjoined from selling or using a Product, Supplier will:
 
i.
procure for Distributor the right to sell and use the Product;
 
ii.
provide Distributor with replacement or modified Product that is non-infringing; or
 
iii.
if Supplier is unable to provide the remedies above, refund the full purchase price for such Product.
 
(e)
Clause 20 is deemed non-confidential and Distributor may reveal the content of this clause to its customers.

21. 
GENERAL INDEMNIFICATION
 
(a)
Supplier will indemnify, defend and hold Distributor harmless of and from any and all liabilities, losses and damages (including costs, expenses and attorneys' fees, and costs of establishing rights to indemnification) resulting from any claim of any Distributor’s customers or any third party (including employees of Distributor or Supplier), for any claim including:
 
i.
death or personal injury;
 
ii.
breach  by Supplier of any warranty, representation, or covenant under this Agreement;
 
iii.
breach of contract;
 
iv.
non-compliance with requirements hereunder or applicable laws, regulations, directives, or ordinances; or
 
v.
damage to property arising out of, or in any way connected with, the Products or the sales, distribution, use or operation thereof.
 
(b)
The indemnification obligations in clause 21(a) shall not apply to the extent such liabilities, losses and damages are caused solely by:
 
i.
the negligence or willful misconduct of Distributor, or its employees, directors, representatives, or agents;
 
ii.
Distributor’s breach of this Agreement; or
 
iii .
Distributor’s failure to observe any applicable statutory requirements;
 
In such event, Distributor will indemnify Supplier for such liabilities, losses and damages.
 
 
5
 
 
22. 
USE OF TRADEMARKS/TRADENAMES
During the term of this Agreement, Distributor is authorized to use Supplier's trademarks, trade names and logos in connection with Distributor’s sale, advertisement and promotion of Products.  Distributor shall have the right to pass on this right of usage to its re-seller customers.  Upon termination of this Agreement and sale or other disposition of any Products remaining in inventory, Distributor shall cease to use any of such marks, names or logos and shall, within a reasonable time, remove any reference to Supplier from its advertising and promotional material. Upon request and upon prior written approval, Supplier may use the AVNET name, in connection with its promotional/ marketing activities.

23.
WEBLINKING
Supplier and Distributor grant to each other a non-exclusive, royalty free license to create a bipolar link(s) between their respective web sites and to use the corporate logo(s) or trademark(s) as specifically authorized by each party.  Copies of the both party’s logo and authorized trademark(s) can be obtained from their respective marketing departments and may not be altered or changed by either party, or its employees or agents, without prior written permission from an authorized representative of the other.

24. 
CO-OP FUNDS
Supplier and Distributor shall participate in mutually agreed upon marketing and promotional activities.  Supplier agrees to reserve one percent (1%) of the net sales to Distributor,  for such purposes.  After a project has joint approval and funds have been expended by the designated party, the other party shall remit to the designated party their portion of the cooperative marketing expense as outlined in each specific instance within thirty (30) days of receipt of supporting documentation.

25. 
SUPPLIER QUALITY HANDBOOK
Supplier agrees to use reasonable efforts to attain the goals established in the Avnet Supplier Quality Handbook, as may be amended from time to time, which is incorporate herein by reference.  Supplier agrees to work with Distributor to establish improvement plans and performance milestones in those areas when Supplier falls under the published goal.

26. 
INTERNATIONAL SALES OF INTEGRATED SOLUTIONS
 
a)
Distributor is authorized to sell and/or ship Integrated Solutions containing the Products outside the Territory under the following conditions:
 
(i)
The Product is combined with third party components to create a unique solution or mechanism (“Integrated Solution”);
 
(ii)
Products are sold and/or shipped in compliance with all export laws and regulations; and
 
(ii)
The sale and/or shipment is reported to Supplier as part of Distributor’s normal reporting.
 
b)
Distributor is also authorized to sell Products to customers, or the customer’s contract manufacturers, outside the Territory, where such Products are designed into Distributor’s customer’s products by Distributor’s personnel. .

27. 
GOVERNMENTAL LAWS, REGULATIONS AND CONTRACT CONDITIONS
 
a)
If Distributor’s customers elect to sell Supplier’s Products (including supplies, software, documentations or services) to the U.S. Government or to a prime contractor selling to the U.S. Government, the Products are “commercial items” as that term is defined at 48 C.F.R. 2.101.  Supplier will comply with provisions of FAR 52.244-6, Subcontracts for Commercial Items and Commercial Components.  Should U.S. Government End Users acquire Products that consist of “commercial computer software” and “commercial computer software documentation” as such terms are used in 48 C.F.R. 12.212, their rights will be consistent with those rights set forth in 48 C.F.R. 12.212 which generally limits their rights to the licenses customarily provided by Supplier to the public. Supplier will also comply with the provisions of DFARS 252.211.7003
 
b)
Specialty Metals . Supplier will also provide the information necessary to assist Distributor with analysis of DFARS 252.225-7014 (Alt 1), Preference for Domestic Specialty Metals (Berry Amendment) and other applicable federal statutes.
 
c)
Supplier will make a good faith effort to determine whether forced or indentured child labor was used to mine, produce or manufacture any Products furnished under this Agreement.  Supplier may be required to certify that it is not aware of any such use of child labor.
 
 
6
 
 
28. 
ORIGINAL MANUFACTURE PARTS
Supplier represents and warrants that it is either the original equipment Supplier (“OEM”), original component Supplier (“OCM”) or a franchised or authorized distributor of the OEM/OCM for the Products.  Supplier further warrants that OEM/OCM traceable certificates of origin and compliance are available upon request.  If Supplier is not the OEM/OCM or a franchised or authorized distributor of the OEM/OCM, it confirms by acceptance of orders hereunder that the Products have been procured from the OEM/OCM or a franchised or authorized distributor of the OEM/OCM.

29. 
GLOBAL SUPPLY CHAIN SECURITY COMPLIANCE
Supplier warrants and represents to Distributor as follows:
 
a)
if eligible for Customs-Trade Partnership Against Terrorism (“C-TPAT”), or other comparable customs certification programs, Supplier will be certified and validated and Supplier will  provide Distributor with its Status Verification Interface (SVI) number(s), or other program identification information, to confirm the foregoing representation prior to shipment;
 
b)
if not eligible for C-TPAT, or other comparable customs certification programs, Supplier fully understands the requirements for C-TPAT certification and will make all commercially reasonable efforts to comply to this certification program and assist Distributor with maintaining their certification with this compliance request.  Supplier will provide evidence of such compliance, including security certifications and results of internal security audits as Distributor may reasonably require;
 
c)
if Supplier’s status under this Section changes, Supplier will give prompt written notice to Distributor; and,
 
d)
Supplier will comply with any pre-arranged visit Distributor’s auditors may make to verify if Supplier’s procedures are in accordance with the criteria set forth by C-TPAT or other comparable customs compliance program.

30.
DATA PROTECTION
Supplier shall collect, process and transfer all personal data in connection with this Agreement in accordance with the applicable privacy laws  and regulations.

31. 
PHANTOM INVENTORY
 
For any calendar quarter, Distributor may, in its sole discretion, elect to quantify and receive a credit for the value of “phantom” inventory based on Distributor’s price authorization credits or other special pricing granted by Supplier to meet competitive circumstances (“DPA Credits”).  Phantom inventory value will be calculated by multiplying Distributor’s average inventory value for the quarter by a fraction the numerator of which is the aggregate DPA Credits issued during the quarter and the denominator of which is the aggregate, undiscounted Distributor cost of Product sold during the corresponding quarter..  The Parties agree that as of the Effective Date of this Agreement, this Section 31 does not apply.  In the event Supplier increases its use of DPA, Distributor reserves the right to initiate this provision with thirty (30) days prior written notice to Supplier.

32. 
GENERAL
 
(a)
Independent Contractors .  Supplier and Distributor are independent contractors and each is engaged in the operation of its own business and neither will be considered the agent of the other for any purpose whatsoever.  Nothing contained in this Agreement will be construed to establish a relationship that would allow either party to make representations or warranties on behalf of the other except as expressly set forth herein.
 
(b)
Assignment .  This Agreement may not be assigned in whole or in part by either party without the prior written consent of the other, which shall not be unreasonably withheld, provided that Distributor may assign this Agreement wholly or partly to any Affiliate.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns.
 
(c)
Notices .  Any notice provided for or permitted in this Agreement will be deemed to have been given when mailed postage prepaid by certified mail or registered mail, return receipt requested, to the party to be notified, at the address set forth below:
 
 
Supplier : 
Distributor:  
       
  Surge Components, Inc.   Avnet, Inc.  
 
95 E. Jefryn Blvd.    
2211 S. 47 th Street  
  Deer Park, NY  11729 Phoenix, AZ  85034  
  _______________________ ­­­­­­­­­­­­­­ Attn:  Vice President, Global Contracts  
                                         
 
7
 
 
 
(d)
Entire Agreement .  This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements relating thereto, written or oral, between the parties.  Amendments to this Agreement must be in writing, signed by duly authorized officers of the parties.
 
(e)
No Implied Waivers .  The failure of either party to require performance by the other party of any provision hereof shall not affect the right of such party to require performance at any time thereafter, nor shall the waiver of either party of a breach of any provision hereof be taken or held to be a waiver of a provision itself.
 
(f)
Governing Law/Jurisdiction   This Agreement shall be governed by, construed, interpreted, and enforced in accordance with the laws of the State of Arizona, other than the conflicts of laws principles thereof.  The UN Convention on Contracts for the International Sale of Goods (CISG) shall not apply.  The state or federal courts of Arizona shall have jurisdiction and venue over all controversies arising out of, or relating to, this Agreement.
 
(g)
Statutory Conformance .  With respect to the Products ordered under this Agreement, Supplier warrants and agrees that it has complied with all applicable laws, regulations, codes, rules, or ordinances governing the manufacture, sales and use of the Products, including but not limited to:  (i) the Fair Labor Standards Act of 1938, as amended; (ii) Social Security and Workers Compensation laws, if work is performed on Distributor's premises; (iii) Equal Opportunity clause in Section 202 of Executive Order 11246, as the same may be amended; (iv) Section 503 of the Rehabilitation Act of 1973; (v) The Vietnam Veterans Readjustment Assistance Act of 1974; (vi) all applicable environmental protection laws, regulations, codes, rules or ordinances; and (vii) all other applicable federal, state and local laws, codes and requirements.
 
(h)
Ozone Depleting Substances .  Distributor reserves the right to reject Products containing or manufactured with substances identified as a Class I or Class II ozone depleting substances by the U.S. Environmental Protection Agency pursuant to Title VI of the Clean Air Act Amendments of 1990, and any amendments thereto.
 
(i)
Severability .  Any provision of this Agreement which is prohibited or unenforceable in a jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof in that jurisdiction or affecting the validity or unenforceability of such provision in any other jurisdiction.
 
(j)
Survivorship .  All obligations and duties hereunder which shall by their nature extend beyond the expiration or termination of this Agreement, shall survive and remain in effect beyond any expiration or termination hereof.
 
(k)
Force Majeure .  Neither party shall be liable for failure to fulfill its obligations under this Agreement or any purchase order issued hereunder or for delays in delivery due to causes beyond its reasonable control, including, but not limited to, acts of God, acts or omissions of the other party, man-made or natural disasters, material shortages, strikes, delays in transportation or inability to obtain labor or materials through its regular sources.  The time for performance of any such obligation shall be extended for the time period lost by reason of the delay.
 
(l)
Favored Nations .  Notwithstanding any other provision contained herein, if Supplier shall sell any Products to any other Distributor in the Territory at a price for the same or a lesser quantity which is lower than the prices set forth on Exhibit “A” (as changed from time to time), the Distributor shall simultaneously be given the benefit of such lower purchase price.  For the purposes of this clause 32(l), a distributor is a person, firm, company or corporation that acquires Products from Supplier, inventories the same, and transfers those Products to customers or end users.
 
(m)
Conflicting Terms .  The parties agree that the terms and conditions of this Agreement shall prevail, notwithstanding contrary or additional terms, in any purchase order, sales acknowledgment, confirmation or any other document issued by either party effecting the purchase and/or sale of Products.
 
(n)
Consents and Approvals .  Any consents or approvals required hereunder shall not be unreasonably withheld.
 
(o)
Headings .  The headings of clauses herein are inserted for convenience of reference only and shall be ignored in the construction or interpretation hereof.
 
(p)
U.S. Military Product Value-Added Testing .  Supplier hereby authorizes Distributor to perform, and/or to subcontract to independent test labs, value-added testing on Supplier's military integrated circuit products sold by Supplier as “JAN” products or are otherwise classified as conforming with JEDEC 108/109, U.S. MIL-STD-38510 and/or MIL-S-19500 specifications (“Military IC’s”).  Value-added testing shall be performed in accordance with Distributor's then applicable military value-added policy.  However, Distributor shall not materially amend its military value-added policy as applied to Supplier's Military IC's without the prior approval of Supplier.  Supplier shall warrant tested Military IC's in accordance with Supplier's standard warranty for Military IC’s which have not been subjected to value-added testing, and Distributor shall be authorized to pass through such warrant to its customers.
 
IN WITNESS WHEREOF , the parties hereto have duly executed this Agreement effective as of the date first above set forth.
 
Surge Components, Inc.         Avnet, Inc.  
           
           
By:
/s/ Ira Levy
  By:
/s/ Harley Feldberg
 
Name:
Ira Levy
 
Name: 
Harley Feldberg  
  (Typed or Printed)     (Typed or Printed)  
Title:
President
 
Title:
President, Avnet EM, Global  
           
Date: February 9, 2011   Date: February 17, 2011  

 
8
 
                                                                               
EXHIBIT A

PRODUCT LISTING

Products available for sale by Distributor are listed in the current Supplier price list.




 
 
 
 
 
 
 
 
 
 
 
 
 
9
 
 
 
EXHIBIT B

AVNET, INC.
SCHEDULE OF AUTHORIZED ELECTRONICS MARKETING LOCATIONS
Revised: November 2, 2008

The following list of divisions, groups, and subsidiaries (direct and indirect) of Avnet, Inc. are authorized Electronics Marketing selling locations under the Agreement, and the “Territory” shall be the geographies associated with each location.

AMERICAS:

Americas Distribution Center :  Avnet, Inc.
Avnet Electronics Marketing, an operating group of Avnet, Inc. (all locations in the Americas)

SUBSIDIARIES
Brazil & Argentina - Avnet do Brasil LTDA
Canada - Avnet International (Canada) Ltd. (all Avnet Electronics Marketing Locations)
Mexico - Avnet de Mexico, S.A. de C.V.
Mexico - MI Technology Products de Mexico, S. de R.L. de C.V.
Puerto Rico - Avnet de Puerto Rico, Inc.
 
 
10
 

EXHIBIT C

WARRANTY






PLEASE INCLUDE STANDARD WARRANTY

OR

INCLUDE THE FOLLOWING SENTENCE:

“MANUFACTURER’S STANDARD WARRANTY CAN BE FOUND ON ITS WEBSITE,
AND IS SUBJECT TO CHANGE FROM TIME TO TIME”

Needs to be completed.
 
 
 
 
 
11


Exhibit 10.19

 
FIRST AMENDMENT TO THE
MASTER DISTRIBUTION AGREEMENT
BETWEEN
SURGE COMPONENTS, INC. AND AVNET, INC.

This First Amendment to the Master Distributor Agreement (the “First Amendment”) is made by and between Surge Components, Inc. (“Supplier”) and Avnet, Inc (“Distributor”)

WHERAS , the parties entered into the above Agreement effective February 7, 2011 (the “Agreement”).

NOW THEREFORE , the parties mutually agree to amend the Agreement as follows.  All other terms not modified by this Amendment shall remain in full force and effect.

1.  
Section 12 (Scrap Allowance).   The parties agree that for the calculation of gross sales to Distributor as it applies to Distributor’s scrap allowance percentage, gross sales to BRK Brands, Inc. (“BRK”) shall not be included.
2.  
Section 24 (Co-op Funds).   The parties agree that for the calculation of net sales to Distributor as it applies to the determination of Co-op Funds for marketing and promotional activities, gross sales to BRK shall not be included.


AGREED AND ACCEPTED:
 
Surge Components, Inc.         Avnet, Inc.  
           
           
By:
/s/ Ira Levy
  By:
/s/ Harley Feldberg
 
Name:
Ira Levy
 
Name: 
Harley Feldberg  
Title:
President
 
Title:
President, Avnet EM, Global  
Date: 2/9/2011   Date: 2/17/2011  

Exhibit 31

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Ira Levy, certify that:

1. I have reviewed this annual report on Form 10-K 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: February 28, 2012
 
 
By:
/s/ Ira Levy
 
   
Ira Levy
 
   
Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
 
       
Exhibit 32

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 Annual Report of Surge Components, Inc. (the “Company”) on Form 10-K for the year November 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ira Levy, Chief Executive Officer and Chief 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.

       
Dated: February 28, 2012
By:
/s/ Ira Levy
 
   
Ira Levy
 
   
Chief Executive Officer and Chief Financial Officer
 
   
(Principal Executive Officer and Principal Financial Officer)