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, 2012
   
[   ]
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:

Common Stock, Par Value $0.001
  (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 Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [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, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

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, 2012, 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 $3.9 million.   

The Registrant’s common stock outstanding as of February 13, 2013, was 9,060,012 shares of common stock.

 
 
 
SURGE COMPONENTS, INC.

TABLE OF CONTENTS
 
PART I
   
     
 1
7
11
11
11
11
     
PART II
   
     
12
13
13
16
16
16
17
17
     
PART III
   
     
18
20
22
23
23
     
PART IV
   
     
24
     
25
     
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.
 
 
 
 
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. We completed an initial public offering of our securities in 1984 and a second offering in August 1996. Our principal executive offices are located at 95 East Jefryn Boulevard, Deer Park, New York 11729 and our telephone number is (631) 595-1818.
 
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 only have one binding long-term supply agreement with one of our manufacturers, Lelon Electronics. We have an agreement to 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, Lelon Electronics. 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.
 
Challenge is engaged in the electronic components business. In 1999, Challenge began a division to sell audible components. We have been able to increase the types of products that we sell because some of our suppliers introduced new products, and we also located other products from new suppliers.  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.  We have since 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. We have a design engineer on our staff with more than 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.
 
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.
 
 
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 has experienced 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. Due to rising transportation and employment costs in Asia, we have seen U.S. manufacturers start moving their manufacturing facilities to Mexico to reduce transportation costs and bring manufacturing much closer to home. At this time, however, none of our customers has moved their manufacturing facilities to Mexico.
 
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 2012 and Fiscal 2011, 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 2012 and Fiscal 2011. 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 but not limited to, computers, appliances, automotive, lighting, telecommunications devices and various consumer products. 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 2012.
 
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 has 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 they meet 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. All products are available in traditional leaded as well as surface mount (chip) packages. Surge's rectifier suppliers all have the aforementioned 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
 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:
  
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.
 
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, 2012, we maintained inventory valued at $2,788,958.
 
Because of the experience of our management, including Ira Levy and Steven Lubman, we believe that we know the best prices to buy the products we sell 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.
 
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 2012 and Fiscal 2011, Challenge purchased approximately 90% 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 2012, those foreign manufactured products were supplied from manufacturers in Taiwan (49%), Hong Kong (18%), elsewhere in Asia (25%) 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 only have one agreement   with a supplier Lelon Electronics   which is terminable by either party upon notice to the other party. We have an agreement to act as the sales agent in North America for one of our manufacturers, Lelon Electronics.    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 2012 and Fiscal 2011, one of Surge's vendors, Lelon Electronics, accounted for approximately 45% and 46% 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 a 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. Currently, demand in the industry is flat regarding product availability for customers in most market segments.

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 nine 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, 2012, 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 customers 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 intend to continue our commitment and focus on the distribution segment of the industry by our visibility at the Electronic Distributor Trade Show. In addition, we have updated our website to make it more informative and user friendly.  Our search engines have been improved so that customers can find us more easily and we have developed a new portal system to help with lead management and disbursement.
 
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. One of our customers, Honeywell, accounted for 10% of net sales for  Fiscal 2012. For Fiscal 2011, the Company had two customers, Future Electronics and TTI, Inc., who each accounted for 11% of 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.
 
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, in 2006, 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.
 
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, 2012, our backlog was approximately $5,301,000, as compared with $5,014,000 at November 30, 2011. 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, 2012, Surge and Challenge employed 27 persons, two of whom are employed in executive capacities, seven are engaged in sales, two in engineering, three in purchasing, two in administrative capacities, five 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.
 
 
Item 1A. Risk Factors
 
An investment in the  our 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  annual report on Form 10-K. 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.
 
Risks Related to our Business
 
We only have one agreement with our suppliers and we depend on a limited number of suppliers
 
We only have one 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.
 
Our operations would be adverse effected if we lose certain of our customers.
 
For Fiscal 2012 approximately 10% of our net sales were derived from sales to one customer.  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, 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.
 
 
Our business will be adversely affected 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 especially if we were to reduce inventory to cut costs and reduce risks of obsolescence.

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 exercise 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.
 
Our business is subject to risks  from trade regulation and foreign economic conditions.
 
Approximately 92% of the total goods which we purchased in Fiscal 2012 were manufactured in foreign countries, with the majority purchased from Taiwan (49%), Hong Kong (18%), elsewhere in Asia (25%) 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.
 
Our products are not protected by 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.
    
 
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 stock and increase an investor’s transaction costs to sell those shares.
 
Rule 3a51-1 of the Exchange Act defines “penny stock,”  in part, as any equity security that has a market price of less than $5.00 per share or 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 of the Exchange Act requires that a broker or dealer:
 
 
•
approve a person’s account for transactions in penny stocks; and
 
 
•
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 and 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:
 
 
•
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.
 
 
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, investors may consider us a speculative or risky investment due to the 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 stock 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.  Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting.  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.
 
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.
 
Unresolved Staff Comments
 
Not applicable.
 
Properties.
 
Our executive offices and warehouse facilities are located at 95 Jefryn Boulevard, Deer Park, New York, 11729.  We lease our facilities from 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 $13,507. 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.  The rental rate is typical for the type and location of Surge’s and Challenge’s facilities.

In June 2012, the Company entered into a lease to rent office space in Hong Kong for two years. Annual rental payments are approximately $23,077.
 
Legal Proceedings.
 
There are no legal proceedings to which the Company or any of its property is the subject.
 
Mine Safety Disclosures.
 
Not applicable.
 
 
PART II
 
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
 
2011 Second Quarter
 
$
1.12
   
$
0.57
 
2011 Third Quarter
 
$
0.88
   
$
0.68
 
2011 Fourth Quarter
 
$
0.81
   
$
0.65
 
2012 First Quarter
 
$
0.84
   
$
0.63
 
2012 Second Quarter
 
$
0.80
   
$
0.35
 
2012 Third Quarter    
 
$ 
 0.75
   
$
0.30
 
2012 Fourth Quarter
 
$
0.51
   
$
0.38
 
                 
  
As of the date of the filing of this report, there are issued and outstanding 9,060,012 shares of common stock.
 
As of the date of the filing of this report, there are approximately 225 holders of record of our common stock.
 
Dividends

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, 2012 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
(a)
   
Weighted-
average 
exercise
price
of 
outstanding
options,
warrants
and
rights
(b)
   
Number of 
securities 
remaining 
available for
 future 
issuance   under equity compensation plans (excluding securities reflected in column (a))
(c)
 
Equity compensation plan approved by security holders (1)
   
703,000
     
0.29
     
772.000
 
                         
Equity compensation plan not yet approved by security holders
   
-
     
-
     
-
 
                         
Total
   
703,000 
             
772,000
 
 
(1) Represents the Company's 2010 Incentive Stock Plan.
 
 
Recent Sales Of Unregistered Securities.

None.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.
 
Selected Financial Data

 
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-K.
 

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 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 a written 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. 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.
 
 
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. Due to this worldwide reduction in demand, the Company could feel the effects of potentially reduced demand for its products.
 
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, 2012 decreased by $884,105 or 4%, to $22,324,164 as compared to net sales of $23,208,269 for the fiscal year ended November 30, 2011.  We largely attribute the decrease to a decline in business with certain customers due to these customers having excess inventory as a result of not meeting their forecasts and over-ordering in prior periods.  Certain of our customers are currently experiencing declines in their business or are transitioning to new designs, which we believe also attributed to the decrease in our sales.
 
 
Our gross profit for the fiscal year ended November 30, 2012 increased by 237,606 to 6,845,669, or 3.6%, as compared to $6,608,063 for the fiscal year ended  November 30, 2011.  Gross margin as a percentage of net sales increased to 30.7% for the fiscal year ended November 30, 2012 compared to 28.5% for the fiscal year ended November 30, 2011. We attribute the increase in gross margin as a percentage of net sales to the fact that the Company reserved a large portion of inventory in fiscal 2011 resulting in a lower gross profit margin in 2011.

Selling and shipping expenses for the fiscal year ended November 30, 2012 was $2,140,575, an increase of $306,698, or 16.7%, as compared to $1,833,877 for the fiscal year ended  November 30, 2011. Specifically the increase is due to additional salaries for sales persons, commissions expenses, and selling expenses, such as travel and freight.

General and administrative expenses for the fiscal year ended November 30, 2012 was $3,191,178, a decrease of $59,432, or 1.8%, as compared to $3,250,610 for the fiscal year ended November 30, 2011. The decrease is due to the reduction in officer bonus accrual, bank charges and consulting expense and partially offset by the increase in salaries, professional fees and an increase in directors fees that took effect in March 2012.

Depreciation expense for the fiscal year ended November 30, 2012 was $56,700, a decrease of 32,977 or 37%, as compared to $89,677 for the fiscal year ended November 30, 2011.  The decrease is due to the leasehold improvements of $885,000 becoming fully amortized during the year ended November 30, 2011.

Investment income for the fiscal year ended November 30, 2012 was $2,744, compared to $1,951 for the fiscal year ended  November 30, 2011. We attribute the increase of $793, or 40%, to additional cash being placed in a money market account during the fiscal year ended November 30, 2012.

Interest expense for the fiscal year ended November 30, 2012 was $0, compared to $11,920 for the fiscal year ended November 30, 2011.  We attribute the decrease of $11,920 to the decrease in borrowing from our lender. The Company did not have any borrowings in the fiscal year ended November 30, 2012.

Income tax benefit for the fiscal year ended November 30, 2012 was $47,315, compared to $1,433,794 in expense for the fiscal year ended  November 30, 2011. The difference is a result of an increase in federal corporate taxes incurred due to net operating loss limitations of the tax code and management’s reevaluating their estimate on the deferred income tax valuation in 2011 to reflect a less than full valuation allowance. The Company reevaluates, at least annually, the estimate of the amount of the net operating losses that it will be able to utilize in future years. The change in this estimate has resulted in the changes in the deferred income taxes for the years ended November 30, 2012 and 2011. 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 a portion of the deferred tax assets. 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, 2012 was $1,507,275, compared to the net income of $2,857,724 for the fiscal year ended November 30, 2011. The primary reason for the decrease in net income is due to the impact of the reversal of the valuation allowance in Fiscal 2011.

Liquidity and Capital Resources

As of November 30, 2012 we had cash of $3,443,964, and working capital of $7,618,799. 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, 2012, we had net cash flow from operating activities of $1,551,539, as compared to net cash flow from operating activities of $1,040,808 for the fiscal year ended  November 30, 2011. The increase in cash flow from operating activities resulted from an increase in deferred income taxes and a decrease in income, accounts receivable, inventory, accounts payable and accrued expenses. Also, in 2011, the restricted cash for the asset based lender was relinquished due to the Company terminating the lender relationship.

We had net cash flow used in investing activities of $19,280 for the fiscal year ended November 30, 2012, as compared to net cash flow used in investing activities of $18,684 for the fiscal year ended  November 30, 2011. The Company invested relatively the same amount of money into new computers for both years.

We had net cash flows provided by financing activities of $6,250 for year ended November 30, 2012, as compared to net cash flow used in or provided by financing activities of $0 for the year ended November 30, 2011. The increase in cash flow from financing activities resulted from a non-executive board member exercising an option and acquiring 25,000 shares of common stock.

As a result of the foregoing, the Company had a net increase in cash of $1,538,509 for the fiscal year ended  November 30, 2012, as compared to a net increase in cash of $1,022,124 for the fiscal year ended  November 30, 2011.
 

In June 2011, the Company replaced its existing credit line with a line of credit with JP Morgan Chase Bank totaling $1,000,000. Borrowings under the line accrue interest at 2.56% over the LIBOR rate. While the credit line was to expire in September 2012, the bank agreed to extend the credit line until March 2013.   The line is collateralized by all the Company’s assets and includes working capital and tangible net worth covenants. At November 30, 2012, the Company was in compliance with the financial covenants. At November 30, 2012, the Company had no borrowings on the credit line.

The Company intends to maintain its current cash along with cash generated from operations to fund its current operations and to execute its plans, which may include potential merger and acquisition activities and investments to expand the Company’s core businesses. 

The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of November 30, 2012:
 
         
Payments due
           
         
0 – 12
   
13 – 36
   
37 – 60
 
More than
 
Contractual Obligations
 
Total
   
Months
   
Months
   
Months
 
60 Months
 
                                   
Long-term debt
 
$
-
   
$
--
   
$
--
   
$
--
 
$
--
 
Operating leases
 
$
1,361,073
     
174,163
     
335,073
     
348,902
   
502,935
 
Employment agreements
 
$
300,000
     
300,000
     
--
     
--
   
--
 
                                       
Total obligations
 
$
1,661,073
   
$
474,163
   
$
335,073
   
$
348,902
 
$
502,935
 

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.
 
Quantitative and Qualitative Disclosures About Market Risk.
 
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-K.  
 
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.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None .
 
 
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, 2012 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, 2012 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, 2012.  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, 2012, 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.
 
Other Information
 
None.
 
 
PART III
 
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 2015, 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
 
56
 
Chief Executive Officer, Chief Financial Officer, President and Class A Director
Steven J. Lubman
 
58
 
Vice President, Secretary and Class A Director
Alan Plafker*
 
54
 
Class B Director, Member of Compensation Committee, Nominating and Corporate Governance Committee and Audit Committee
David Siegel
 
87
 
Class B Director
Lawrence Chariton*
 
55
 
Class C Director, Member of Compensation Committee, Nominating and Corporate Governance Committee and Audit Committee
Gary Jacobs*
  
55
  
Class C Director, Member of Compensation Committee, Nominating and Corporate Governance Committee and Audit 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 served 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. Since 1981, 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 was also 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. 
 
 
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 audit committee consists of the following three members: Gary Jacobs, Alan Plafker and Lawrence Chariton.  Mr. Jacobs serves as the chairman of the audit committee. The Company’s board of directors has determined that Gary Jacobs is the audit committee financial expert and chairman of the committee. The audit committee members are “independent” as that term is defined under the Nasdaq Marketplace Rules.

  Nominating and Corporate Governance Committee
 
The nominating and corporate governance committee consists of the following three members: Gary Jacobs, Alan Plafker and Lawrence Chariton.  Mr. Jacobs serves as the chairman of the nominating and corporate governance committee.

Compensation Committee
 
The compensation committee consists of the following three members: Gary Jacobs, Alan Plafker and Lawrence Chariton.  Mr. Jacobs serves as the chairman of the compensation committee.  
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
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 year ended November 30, 2012, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with the exception of a late Form 4   for Alan Plafker.

Code of Ethics

We have adopted a corporate Code of Ethics. The text of our Code of Ethics, which applies to our employees, officers and directors, is posted in the “Corporate Governance” section of our website at www.surgecomponents.com. A copy of our Code of Conduct and Ethics is also available in print, free of charge, upon written request to 95 East Jefryn Boulevard, Deer Park, New York 11729, Attention: Ira Levy.
 
 
Changes in Nominating Procedures
 
None.
 
Executive Compensation.
 
The following table sets forth information regarding compensation paid to our executive officers for the years ended November 30, 2012 and November 30, 2011:
 
                   
 All Other
       
Name and Position
 
Year
 
Salary
   
Bonus
   
Compensation ($)
   
Total
 
                             
 Ira Levy
 
2012
 
$
225,000
   
$
100,000
   
  $62,068 (1)
   
$
387,068
 
 President CEO and CFO
 
2011
 
$
225,000
   
$
200,000
     
$56,881(1)
   
$
481,881
 
                                     
 Steven J. Lubman
 
2012
 
$
225,000
   
$
100,000
     
$54,233(1)
   
$
379,233
 
 Vice President and Secretary
 
2011
 
$
225,000
   
$
200,000
     
$49,046(1)
   
$
474,046
 
 
 
(1) Includes payments for medical insurance, automobile allowance and insurance and life insurance.

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, 2013(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.
 
 
  (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, 2012
 
The following table summarizes the compensation for our non-employee board of directors for the fiscal year ended November 30, 2012. 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
    13,200       -       -       -       13,200  
David Siegel
    13,200       -       -       -       13,200  
Lawrence Chariton
    13,200       -       -       -       13,200  
Gary Jacobs
    13,200       -       7,990       -       21,190  
 
 
 
Outstanding Equity Awards at November 30, 2012
 
Name
 
Number of securities underlying options (#)
   
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
   
Option
Exercise
Price
($)
 
Option
Expiration
Date
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 vested one year after issuance.
 
 
Security Ownership of Certain Beneficial Owners and Management.
 
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights.

The following table sets forth as of February 13, 2013, information regarding the beneficial ownership of our common stock by: (i) each person known by the Company to be the beneficial owner of than five percent of the outstanding shares of common stock, (ii) each of our directors and officers and (iii) all officers and directors, as a group:
 
   
Amount and Nature
   
Percentage of
 
   
of Common
   
Common
 
Name and address of
 
Stock Beneficially
   
Stock Beneficially
 
Beneficial Owner (1)
 
Owned
   
Owned (2)
 
             
Ira Levy
    941,368 (3)     10.39 %
                 
Steven J. Lubman
    805,000 (3)     8.89 %
                 
Lawrence Chariton
    137,000 (4)     1.51 %
                 
Alan Plafker
    27,000       *  
                 
David Siegel
    92,000 (4)     1.01 %
                 
Gary Jacobs
    87,000 (4)(5)     *  
                 
All directors and executive officers as a group (6 persons)
    2,089,368       23.04 %
                 
Michael Tofias
               
325 North End Avenue, Apt. 25B
               
New York, NY 10282
    1,753,576       19.36 %
 
* 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 9,060,012 shares of common stock outstanding as of February 13, 2013.
 
 (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 25,000 shares issuable upon exercise of options with an exercise price of $0.25, because the options are exercisable within 60 days.

(5) Includes 50,000 shares issuable upon exercise of options with an exercise price of $0.51, because the options are exercisable within 60 days.
 
 
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, our 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 $223,000 and  $215,000 for fiscal 2012 and 2011, respectively.
 
Director Independence
 
Lawrence Chariton, Alan Plafker, and Gary Jacobs are independent directors as that term is defined under the Nasdaq Marketplace Rules.

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, 2012 and 2011, we paid Seligson & Giannattasio, LLP $100,000 and  $99,000, respectively.

Audit-Related Fees

For the years ended November 30, 2012 and 2011, we paid Seligson & Giannattasio, LLP $0 and $0, respectively, for audit-related services.

Tax Fees

For the years ended November 30, 2012 and 2011, we paid Seligson & Giannattasio, LLP $8,000 and $8,000, respectively, for tax related services.

All Other Fees
 
For the years ended November 30, 2012 and 2011, we paid Seligson & Giannattasio, LLP $0 and $0, respectively, for all other services.
 
The audit committee 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 audit committee, which considers, among other things, the possible effect of the performance of such services on the auditors' independence. The audit committee has considered the role of Seligson & Giannattasio, LLP in providing services to us for the fiscal year ended November 30, 2012 and has concluded that such services are compatible with Seligson & Giannattasio, LLP’s independence as the Company's independent registered public accounting firm.
 
 
PART IV
 
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 Form 8-K filed on September 16, 2010 and incorporated herein by reference)
     
3.2
 
By-Laws of Surge Components, Inc. (filed as exhibit to Form 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)
     
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)
     
 
 
10.17
 
Sole Agent Agreement, dated January 1, 2007, between Surge Components, Inc. and Lelon Electronics (filed as exhibit to Form 10-K filed on February 28, 2012 and incorporated herein by reference)

10.18
 
Master Distributor Agreement, dated February 7, 2011, between Surge Components, Inc. and Avnet, Inc. (filed as exhibit to Form 10-K filed on February 28, 2012 and incorporated herein by reference)

10.19
 
First Amendment to Master Distributor Agreement, dated February 17, 2011, between Surge Components, Inc. and Avnet, Inc. (filed as exhibit to Form 10-K filed on February 28, 2012 and incorporated herein by reference)

10.20
 
Promissory Note, dated June 16, 2011, by Surge Components, Inc to JP Morgan Chase Bank (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)

 

 
 
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.
 
 
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, 2013
     


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, 2013
 
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, 2013
 
Director
       
         
/s/ Alan Plafker
       
Alan Plafker
   
February 28, 2013
 
Director
       
         
 /s/ David Siegel
       
David Siegel
   
February 28, 2013
 
Director
       
         
/s/ Lawrence Chariton
       
Lawrence Chariton
   
February 28, 2013
 
Director
       
         
/s/ Gary M. Jacobs
       
Gary M. Jacobs
   
February 28, 2013
 
Director
       
 
 
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, 2012 and 2011 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, 2012.  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, 2012 and 2011 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, 2012 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, 2013
 
 
PART I Financial Information
 
ITEM 1. FINANCIAL STATEMENTS.


SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
 
             
   
November 30,
   
November 30,
 
   
2012
   
2011
 
ASSETS
           
             
             
Current assets:
           
Cash
 
$
3,443,964
   
$
1,905,455
 
Accounts receivable - net of allowance for
               
  doubtful accounts of $34,676 and $29,676
   
3,962,034
     
4,149,068
 
Inventory, net
   
2,788,958
     
2,802,327
 
Prepaid expenses and income taxes
   
106,364
     
130,436
 
Deferred income taxes
   
 315,197
     
293,783
 
                 
Total current assets
   
10,616,517
     
9,281,069
 
                 
Fixed assets – net of accumulated depreciation and amortization of $2,126,238 and $2,069,538
   
80,629
     
118,049
 
                 
Deferred income taxes
   
1,260,788
     
1,175,133
 
Other assets
   
7,370
     
6,376
 
                 
Total assets
 
$
11,965,304
   
$
10,580,627
 

See notes to consolidated financial statements
 
 
F-2

SURGE COMPONENTS, INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets (Continued)
 
   
November 30,
   
November 30,
 
   
2012
   
2011
 
             
LIABILITIES AND SHAREHOLDERS' EQUITY
           
Current liabilities:
           
Loan payable
 
$
-
   
$
-
 
Accounts payable
   
1,921,631
     
2,019,980
 
Accrued expenses and taxes
   
600,903
     
669,949
 
Accrued salaries
   
475,184
     
517,172
 
                 
Total current liabilities
   
2,997,718
     
3,207,101
 
                 
Deferred rent
   
27,893
     
16,743
 
                 
Total liabilities
   
3,025,611
     
3,223,844
 
                 
Commitments and contingencies
               
                 
Shareholders' equity
               
Preferred stock - $.001 par value stock, 5,000,000 shares authorized:
               
Series A – 260,000 shares authorized, none outstanding,non-voting,convertible,redeemable.
               
Series B – 200,000 shares authorized, none outstanding, -voting, convertible, redeemable.
               
Series C –100,000 shares authorized, 23,700 and 23,700 shares issued and outstanding, redeemable,  convertible, and a liquidation preference of $5 per share
   
24
     
24
 
Common stock - $.001 par value stock, 75,000,000 shares authorized, 9,060,012 and 9,035,012 shares issued and outstanding
   
9,060
     
9,035
 
                 
Additional paid-in capital
   
23,082,844
     
22,995,384
 
Accumulated deficit
   
(14,152,235
)
   
(15,647,660
)
                 
Total shareholders' equity
   
8,939,693
     
7,356,783
 
                 
Total liabilities and shareholders' equity
 
$
11,965,304
   
$
10,580,627
 

See notes to consolidated financial statements.
 
 
F-3
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

 
   
Year Ended November 30,
 
   
2012
   
2011
 
             
             
Net sales
 
$
22,324,164
   
$
23,208,269
 
                 
Cost of goods sold
   
15,478,495
     
16,600,206
 
                 
Gross profit
   
6,845,669
     
6,608,063
 
                 
Operating expenses:
               
Selling and shipping
   
2,140,575
     
1,833,877
 
General and administrative
   
3,191,178
     
3,250,610
 
Depreciation expense
   
56,700
     
89,677
 
                 
Total operating expenses
   
5,388,453
     
5,174,164
 
                 
Income before other income (expense) and income taxes
   
1,457,216
     
 1,433,899
 
                 
                 
Other income (expense):
               
Investment income
   
2,744
     
1,951
 
Interest expense
   
-
     
(11,920
)
                 
Other income (expenses)
   
2,744
     
(9,969
)
                 
Income before income taxes
   
1,459,960
     
1,423,930
 
                 
Income (benefit)taxes
   
 (47,315
)
   
(1,433,794)
 
                 
Net income
 
$
1,507,275
   
$
2,857,724
 
                 
Dividends on preferred stock
   
11,850
     
 14,100
 
Net income available to common shareholders
 
$
1,495,425
   
$
2,843,624
 
                 
Net income per share available to
               
 common shareholders:
               
                 
Basic
 
$
.17
   
$
.32
 
Diluted
 
$
.15
   
$
.30
 
                 
Weighted Shares Outstanding:
               
                 
Basic
   
9,048,195
     
9,002,957
 
                 
Diluted
   
9,665,331
     
9,652,096
 

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

Consolidated Statements of Changes in Shareholders’ Equity

Years ended November 30, 2012 and 2011

                                                                       
                         
Additional
             
                                         
 
Series C Preferred
   
Common
   
Paid-In
   
Accumulated
       
                                       
 
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
                                           
                                           
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
)
                                                         
Repurchased and issued shares
   
(9,000)
     
(9)
     
112,500
     
113
     
(104)
     
--
     
-
 
                                                         
Issuance of options
   
--
     
--
     
--
     
--
     
83,661
     
--
     
83,661
 
                                                         
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
 
                                                         
Preferred stock dividends
   
--
     
--
     
--
     
--
     
--
     
(11,850
)
   
 (11,850
)
                                                         
Issuance of options
   
--
     
--
     
--
     
--
     
81,235
     
--
     
81,235
 
                                                         
Exercise of options
   
-
     
-
     
25,000
     
25
     
6,225
     
--
     
6,250
 
                                                         
Net income
   
--
     
--
     
--
     
 --
     
 --
     
1,507,275
     
1,507,275
 
                                                         
                                                         
Balance – November 30, 2012
   
23,700
   
$
24
     
9,060,012
    $
9,060
   
$
23,082,844
   
$
(14,152,235
)
 
$
8,939,693
 
 
See notes to consolidated financial statements.

 
F-5
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
 
           
 
Year Ended
 
   
November 30,
 
   
2012
   
2011
 
             
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
1,507,275
   
$
2,857,724
 
Adjustments to reconcile net income
               
  to net cash provided by operating
               
  activities:
               
Depreciation and amortization
   
56,700
     
88,188
 
Stock compensation expense
   
81,235
     
83,661
 
Changes in allowance for doubtful accounts
   
5,000
     
10,163
 
Deferred income taxes
   
(107,069
)
   
(1,468,916)
 
                 
CHANGES IN OPERATING ASSETS AND LIABILITIES:
               
Accounts receivable
   
182,034
     
(42,182
)
Inventory
   
13,369
     
(11,001
)
Prepaid expenses and income taxes
   
24,072
     
(65,595
)
Other assets
   
(994)
     
241,150
 
Accounts payable
   
(98,349
)
   
(613,016)
 
Deferred rent
   
11,150
     
14,277
 
Accrued expenses
   
(122,884
)
   
(53,645)
 
                 
                 
NET CASH FLOWS FROM OPERATING ACTIVITIES
   
1,551,539
     
1,040,808
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisition of fixed assets
   
(19,280
)
   
(18,684
)
                 
NET CASH FLOWS USED IN INVESTING ACTIVITIES
   
(19,280
)
   
 (18,684
)
      
See notes to consolidated financial statements.

 
F-6
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(CONTINUED)

 
        
 
Year Ended
   
November 30,
   
2012
   
2011
 
             
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
                 
Proceeds from exercising stock options
   
6,250
     
-
 
                 
NET CASH FLOWS USED IN FINANCING ACTIVITIES
   
6,250
     
-
 
                 
NET CHANGE IN CASH
   
1,538,509
     
1,022,124
 
                 
CASH AT BEGINNING OF YEAR
   
 1,905,455
     
883,331
 
                 
CASH AT END OF YEAR
 
$
3,443,964
   
$
1,905,455
 
                 
                 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
                 
                 
Income taxes paid
 
$
41,148
   
$
87,577
 
                 
Interest paid
 
$
-
   
$
61,253
 
                 
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
  Accrued dividends on preferred stock
 
$
11,850
   
$
14,100
 

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

Notes to Consolidated Financial Statements
 
NOTE A – ORGANIZATION, DESCRIPTION OF COMPANY'S BUSINESS AND BASIS OF PRESENTATION
 
Surge Components, Inc. (“Surge”) was incorporated in the State of New York and commenced operations on November 24, 1981 as an importer of electronic products, primarily capacitors and discrete semi-conductors selling to customers located principally throughout North America. On June 24, 1988, Surge formed Challenge/Surge Inc. (“Challenge”), a wholly-owned subsidiary to engage in the sale of electronic component products and sounding devices from established brand manufacturers to customers located principally throughout North America.
 
In May 2002, Surge and an officer of Surge founded and became sole owners of Surge Components, Limited (“Surge Limited”), a Hong Kong corporation. Under current Hong Kong law, Surge Limited is required to have at least two shareholders. Surge owns 999 shares of the outstanding common stock and the officer of Surge owns 1 share of the outstanding common stock. The officer of Surge has assigned his rights regarding his 1 share to Surge. Surge Limited started doing business in July 2002. Surge Limited operations have been consolidated with the Company.  Surge Limited is responsible for the sale of Surge’s products to customers located in Asia.

On August 31, 2010, the Company changed its corporate domicile by merging into a newly-formed corporation, Surge Components, Inc. (Nevada), which was formed in the State of Nevada for that purpose.  Surge Components Inc. is the surviving entity. The number of common stock shares authorized for issuance was increased to 75,000,000 shares.
 
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
[1] Principles of Consolidation :
 
The consolidated financial statements include the accounts of Surge, Challenge, and Surge Limited (collectively the “Company”).  All material intercompany balances and transactions have been eliminated in consolidation.

(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 a long term supply agreement with one of our 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 $3,105,000 and $3,826,000 for the years ended November 30, 2012 and 2011 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 $417,528 and $348,788 for the years ended November 30, 2012 and 2011 respectively.

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

Notes to Consolidated Financial Statements

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(3) Revenue Recognition (continued) :

The Company and its subsidiaries currently have agreements with several distributors.    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 $4,051,000 and $4,648,000 for the years ended November 30, 2012 and 2011 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, 2012 approximated $868,000. The Company, at November 30, 2012, has a reserve against slow moving and obsolete inventory of $580,496. From time to time the Company’s products are subject to legislation from various authorities on environmental matters.
 
(5) Depreciation and Amortization :

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

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

Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized.
 
 
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.   At November 30, 2012 and November 30, 2011, the Company's uninsured cash balances totaled approximately $1,341,304 and $1,121,000, 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. See Note G.

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 years ended November 30, 2012 and November 30, 2011.

 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
(8) Cash Equivalents :

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
 
(9) Use of Estimates :

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

(10) Marketing and promotional costs:

Marketing and promotional costs are expensed as incurred and have not been material to date. The Company has contractual arrangements with several of its distributors which provide for cooperative advertising rights to the distributor as a percentage of sales. Cooperative advertising is reflected as a reduction in revenues and has not been material to date.
 
(11) Fair Value of Financial Instruments :
 
The carrying amount of cash balances, accounts receivable, accounts payable and accrued expenses approximate their fair value based on the nature of those items. Estimated fair values of financial instruments are determined using available market information and appropriate valuation methodologies.  Considerable judgment is required to interpret the market data used to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.
 
 
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 $12,746 and $11,955 for the years ended November 30, 2012 and November 30, 2011 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, 2012 and 2011 totaled 329,502 and 272,861, 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.
 
(16) Reclassifications:

Certain amounts included in 2011 financial statements have been reclassified to conform to the 2012 presentation.
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 
NOTE C - FIXED ASSETS

Fixed assets consist of the following:
 
   
November 30,
   
November 30,
 
   
2012
   
2011
 
             
Furniture and Fixtures
 
$
321,099
   
$
350,563
 
Leasehold Improvements
   
909,014
     
906,449
 
Computer Equipment
   
976,754
     
930,575
 
Less-Accumulated Depreciation
   
(2,126,238
)
   
(2,069,538
)
Net Fixed Assets
 
$
80,629
   
$
118,049
 

Depreciation and amortization expense for the years ended November 30, 2012 and 2011 was $56,700 and $89,677, respectively.

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

   
November 30,
   
November 30,
 
   
2012
   
2011
 
             
Commissions
 
$
238,003
   
$
211,789
 
Preferred Stock Dividends
   
176,857
     
165,007
 
Interest
   
102,399
     
102,399
 
Other accrued expenses
   
83,644
     
190,754
 
                 
   
$
600,903
   
$
669,949
 
 
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) retirement plan for all full-time employees who are twenty-one years of age and have completed twelve months of service.  The plan allows total employee contributions of up to fifteen percent (15%) of the eligible employee’s salary 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 $898,000 at November 30, 2012. Pension expense for the years ended November 30, 2012 and 2011 was $9,143 and $10,115, respectively.
 
 
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, 2012.

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, 2012.

In November 2000, the Company authorized 100,000 shares of preferred stock as Non-Voting Redeemable Convertible Series C Preferred Stock (“Series C Preferred”). Each share of Series C Preferred is automatically convertible into 10 shares of our common stock upon shareholder approval.  If the Series C Preferred were converted into common stock on or before April 15, 2001, these shares were entitled to cumulative dividends at the rate of $.50 per share per annum commencing April 15, 2001 payable on June 30 and December 31 of each year.  In November 2000, 70,000 shares of the Series C Preferred were issued in payment of financial consulting services to its investment banker and a shareholder of the Company.  In April 2001, 8,000 shares of the Series C Preferred were repurchased and cancelled.  Dividends aggregating $176,857 have not been declared or paid for the semiannual periods ended December 31, 2001 through the semiannual payment due June 30, 2012.  The Company has accrued these dividends.  

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

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

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

At November 30, 2012 there are 23,700 shares of Series C Preferred issued and outstanding.
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE F – SHAREHOLDERS’ EQUITY (Continued)
 
[2] 2010 Incentive Stock Plan

In March 2010, the Company adopted, and in April 2010 the shareholders ratified, the 2010 Incentive Stock Plan (“Stock Plan”).  The plan provides for the grant of options to officers, employees, directors or consultants to the Company to purchase an aggregate of 1,500,000 common shares.
 
Stock option incentive plan activity for the year ended November 30, 2012 is summarized as follows:
 
         
Weighted
 
         
Average
 
   
Shares
   
Exercise Price
 
             
Options outstanding December 1, 2011
   
685,000
   
$
0.25
 
Options issued in the year ended November 30, 2012
   
50,000
   
$
0.51
 
Options exercised in the year ended November 30, 2012
   
(25,000
)
 
$
0.25
 
Options cancelled in the year ended November 30,2012
   
(7,000
)
 
$
1.15
 
Options outstanding at November 30, 2012
   
703,000
   
$
0.29
 
                 
Options exercisable at November 30, 2012
   
617,667
   
$
0.29
 

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.

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.

In July 2012, the Company granted a stock option to one non-officer director to purchase 50,000 shares of common stock at an exercise price of $0.51, the market price of the common stock on the date of the grant.  This option vested immediately and expires in five years.  The fair value of this stock option is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected volatility of 35% (based on stock volatility of public company industry peers); average risk-free interest rate of 0.67% (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) and no expected dividend yield.

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, 2012, the Company recorded stock based compensation totaling $23,244 as a result of these stock option grants.

The intrinsic value of the exercisable options at November 30, 2012 totaled $103,500.  At November 30, 2012 the weighted average remaining life of the stock options is 3.35 years.  At November 30, 2012, there was $29,050 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 .749 years.
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE F – SHAREHOLDERS’ EQUITY (Continued)
 
[3] 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.

[4] 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. Starting April 1, 2012, the amount directors each receive for their services on the Board of Directors was increased from $200 a month to $2,000 a month. 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. In July 2012, a stock option was granted to one non-officer director to purchase 50,000 shares of common stock at an exercise price of $0.51.  (See Note F[2] for disclosure on the valuation and terms of these options). In May 2012, one non-officer director exercised an option and acquired 25,000 shares of common stock for $6,250.
 
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,
 
   
2012
   
2011
 
Deferred Tax Assets
           
    Net operating loss
 
$
5,247,001
   
$
5,345,554
 
    Allowance for bad debts
   
11,853
     
7,793
 
    Inventory
   
442,366
     
498,220
 
    Deferred Rent
   
10,186
     
985
 
    Depreciation
   
187,302
     
183,646
 
    Total deferred tax assets
   
5,898,708
     
6,036,198
 
    Valuation allowance
   
(4,322,723
)
   
(4,567,282
)
                 
        Deferred Tax Assets
 
$
1,575,985
   
$
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.
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 
NOTE G – INCOME TAXES (CONTINUED)
 
The valuation allowance increased by approximately $107,000 during the year ended November 30, 2012. 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.

The Company's income tax expense consists of the following:
 
   
Years Ended
   
November 30,
2012
   
November 30,.
2011
 
             
Current:
           
Federal
 
$
26,416
   
$
24,717
 
States
   
33,338
     
10,405
 
                 
     
59,754
     
35,122
 
Deferred:
               
Federal
   
(84,700)
     
(1,161,913)
 
States
   
(22,369)
     
(307,003)
 
                 
     
(107,069)
     
(1,468,916)
 
                 
Provision for income taxes
 
$
(47,315)
   
$
(1,433,794)
 
 
The Company files a consolidated income tax return with its wholly-owned subsidiaries and has net operating loss carryforwards of approximately $13,000,000 for federal and state purposes, which expire through 2020. A reconciliation of the difference between the expected income tax rate using the statutory federal tax rate and the Company's effective rate is as follows:
 
   
Years Ended November 30,
 
   
2012
   
2011
 
U.S Federal Income tax statutory rate
   
34
%
   
34
%
Valuation allowance
   
(39)
%
   
(143)
%
State income taxes
   
2
%
   
5
%
Other
   
-
     
  4%
 
 Effective tax rate
   
(3)
%
   
(100)
%
 
 
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 $160,000 for the Fiscal 2012, 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 2012, the Company renewed a lease to rent office space in Hong Kong for one year. Annual minimum rental payments are approximately $23,000.

The future minimum rental commitments at November 30, 2012:
 
Year Ending
     
November 30,
     
2013
  $
174,163
 
2014
  $
165,878
 
2015
  $
169,195
 
2016
  $
172,579
 
2017
  $
176,323
 
2018 & thereafter
  $
502,935
 
         
   
$
1,361,073
 

Net rental expense for the years ended November 30, 2012 and 2011 were $257,181 and $247,877 respectively, of which $223,237 was paid to the Related Company.
 
 
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, 2013 (renewable on each July 30th for an additional one year period) with two officers 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 through November 30, 2012 totaling $200,000.  The agreements also contain 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 either officer 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 one customer who accounted for 10% of net sales for the year ended November 30, 2012 and two customers who each accounted for 11% of net sales for year ended November 30, 2011.  The Company had one customer who accounted for 19% and 24% of accounts receivable at November 30, 2012 and November 30, 2011, respectively.

NOTE K- MAJOR SUPPLIERS

During the years ended November 30, 2012 and 2011 there was one foreign supplier accounting for 45% and 46% of total inventory purchased.

The Company purchases a significant portion of its products overseas.  For the year ended November 30, 2012, the Company purchased 49% from Taiwan, 18% from Hong Kong, 25% 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,
 
   
2012
   
2011
 
Canada
   
2,648,725
     
2,927,760
 
China
   
4,244,844
     
4,324,694
 
Other Asian Countries
   
1,360,298
     
1,924,174
 
Europe
   
258,019
     
131,840
 

Revenues are attributed to countries based on location of customer. 
 
 
SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 
NOTE M – LINE OF CREDIT

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. While the credit line was to expire in September 2012, the bank agreed to extend the credit line until March 2013.  The line is collateralized by all the Company’s assets and includes working capital and tangible net worth covenants.  At November 30, 2012, the Company was in compliance with the financial covenants.  As of November 30, 2012, the outstanding balance on the line of credit was zero.
 
 
 
 
 
 

 
 
F-20
 
Exhibit 10.16
GRAPHIC
Surge Components, Inc.
Distributor Agreement


Agreement entered into, by and between,   Surge Components, Inc. , a New York  corporation having its principal place of business at 95 E. Jefryn Blvd., Deer Park, NY  11729 , and   TTI, Inc., a corporation having its principal place of business at  2441 North East Parkway, Fort Worth, TX, 76106.

     WHEREAS, Supplier is engaged in the supply of high quality electronic products including capacitors and discrete components, to both original equipment manufacturers who incorporate Supplier’s products into their finished goods and to distributors of Supplier’s product lines;
 
     WHEREAS, Supplier desires to appoint Distributor as Supplier’s non-exclusive distributor for such Products in the Territory hereinafter described; and
 
     WHEREAS, Distributor desires to be appointed Supplier’s non-exclusive Distributor upon the terms and conditions contained hereinafter.
 
     NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants herein contained, the parties hereto agree as follows:

1. 
Appointment of Distributor.   SUPPLIER appoints DISTRIBUTOR on a nonexclusive basis to serve during the term of this Agreement as an authorized distributor of the Products within the Territory, and DISTRIBUTOR accepts such appointment. In its capacity as a Distributor of the Products, Distributor shall purchase Products from Supplier for its own account and for resale to third parties and shall not represent itself as a distributor of the Products outside of the Territory, without the prior written consent of Supplier.
 
           Distributor further acknowledges and agrees that Distributor is not required to, nor has Distributor  paid any money, or tendered any valuable consideration not described herein, for the  right to act and serve as a distributor for Supplier.

Distributor hereby represents and acknowledges that Distributor has adequate financial resources to adequately serve as Supplier’s distributor in the Territory, and hereby further agrees and acknowledges that Supplier has relied upon such representation in its appointment of Distributor hereunder. Distributor hereby further acknowledges that Supplier’s reputation and the good will of its customers in the Territory is dependent upon the quality of services performed hereunder by Distributor, and that Supplier will suffer irreparable harm in the event Distributor fails to satisfactorily perform its obligations and duties as a distributor hereunder. SUPPLIER shall be free to distribute the products within the Territory either directly or through other distributors or dealers.

1.1  
Definition of “Products.”    The term “Products” shall mean all products offered for sale by SUPPLIER generally, as set forth and described in SUPPLIER’s then current Published Price List (Price List) as attached hereto as Exhibit A. (Products may be added to the Price List or deleted therefrom by SUPPLIER upon sixty (60) days prior written notice to DISTRIBUTOR). Additional Products may be added to this Agreement, including Products specified in SUPPLIER’s Price List but not approved for distributor stocking, by mutual agreement between the parties.

1.2  
  Definition of “Territory.”   The term “Territory” shall mean the geographic area(s) known as “the Americans”
 
 
 
1
 
 
 
2.  
Responsibilities of DISTRIBUTOR. DISTRIBUTOR shall use its best efforts commensurate with its overall business, and shall devote such management, manpower, and time as may be reasonably necessary to conduct a mutually agreed to program to sell and to promote the sale, lease or other distribution of the Products within the Territory. DISTRIBUTOR shall not be prevented in any way from selling within the Territory similar products or merchandise of other suppliers or manufacturers, provided that Distributor first obtains the prior written approval of Supplier. Without limiting the generality of the foregoing:

2.1  
Inventory.   DISTRIBUTOR shall use its best efforts commensurate with its overall business to maintain a representative inventory of Products in reasonably sufficient quantities to provide reasonably adequate and timely delivery to DISTRIBUTOR’s  customers.

2.2  
Sales, Marketing and Promotion. DISTRIBUTOR shall maintain a competent sales force to market the Products and shall, consistent with its own business judgment, advertise or otherwise promote the sale, lease or other distribution of the Products (including the establishment of promotional campaigns, advertising in trade journals and the like) within the Territory.
2.3  
Training Programs . DISTRIBUTOR and its employees shall participate, when and to the extent appropriate, in such training programs as may be offered by SUPPLIER, to the extent that such participation does not materially detract from the conduct of DISTRIBUTORS business.

2.4  
Reports . DISTRIBUTOR shall send to SUPPLIER, within thirty (30) days after the end of each calendar month, a written or electronic Point of Sale Report (“POS Reports”) indicating the quantities of all Products sold by Product type, including model number, and customer name, address and zip code and such other information pertaining solely to DISTRIBUTOR’s resale’s under this Agreement as SUPPLIER may reasonably request.
 
SUPPLIER recognizes and respects the Distributor’s proprietary rights and interest in the information contained in Distributor’s POS Reports. SUPPLIER agrees these reports and information contained therein (in whatever form submitted) are and remain the property of  the Distributor. SUPPLIER agrees to return or destroy the reports within sixty (60) days after  submittal (and on Distributor’s written request to certify in writing that they have all been  destroyed), and further agrees to use its best efforts to keep confidential and not to disclose to  any Third Party the information contained in the POS  Reports, and to restrict its availability  and use to only SUPPLIER’s employees with a genuine need to know. Supplier agrees these reports and to restrict its availability and  use to only SUPPLIER’s employees with a genuine need to know. It is not intended that this provision should restrict. SUPPLIER’s use of the POS information for market analysis or other information processing purposes or  commission payments, so long as the confidentiality of the information is assured.
 
SUPPLIER agrees that in the event of termination of this Agreement by either party, with or without cause, that upon written notice of said termination all POS Reports and information will be returned to DISTRIBUTOR or destroyed and upon DISTRIBUTOR’s written request, SUPPLIER shall furnish DISTRIBUTOR with written certification that said POS Reports and information have been returned to DISTRIBUTOR  or destroyed. The information in a Point-of-Sale Report shall not be used by any of the SUPPLIER’s personnel, agents or by any of the SUPPLIER’s other authorized DISTRIBUTOR’s to the detriment, or damage, of the DISTRIBUTOR or the DISTRIBUTOR’s sales of any products to any of its customers.
 
2.5 
Audit and Inspection.  Not more than twice annually, upon reasonable prior written notice, DISTRIBUTOR shall permit SUPPLIER, at SUPPLIER’s sole cost and expense, to (i) audit those records of DISTRIBUTOR which pertain solely and exclusively to purchases of Products under this Agreement for the previous twelve (12) months or from and after the last  such audit, whichever period is shorter and which are located at DISTRIBUTOR’s  principal place and branch locations of business, and (ii) perform an inventory of all Products  purchased hereunder by DISTRIBUTOR at each location; provided, however, that such  audit and inventory are carried out at reasonable times and in a manner that will not disrupt  or otherwise adversely impact the conduct of DISTRIUBTOR’s business.
 
2.6
Distributor Policies.   Distributor further agrees to promptly implement and maintain all of Supplier’s sales and distribution policies, as such policies may exist from time to time. In addition, Distributor hereby agrees to comply with and to strictly adhere to and follow any and all rules, regulations, policies, and procedures established by Supplier from time to time with respect to the marketing, sale and servicing of customers and potential customers for the Products and to satisfy any and all quality standards established from time to time with respect thereto by Supplier.

3.  
Responsibilities of SUPPLIER.   SUPPLIER, at its cost and expense, shall cooperate with and assist DISTRIBUTOR in performing its duties under this Agreement and shall utilize its best efforts commensurate with its overall business to promote the sale and distribution of the Products. Without limiting the generality of the foregoing:

3.1  
Training.   SUPPLIER shall provide DISTRIBUTOR’s sales organization with all necessary and appropriate Product sales training, support and assistance.

3.2  
Literature. SUPPLIER shall furnish DISTRIBUTOR with a reasonable supply of current price and product information including price lists, sales literature, books, specifications sheets, catalogues, promotional plans and information and the like as SUPPLIER may prepare for nationwide distribution and shall also provide DISTRIBUTOR with such training, technical and sales support and assistance (including sales forecasting and planning assistance) as may be necessary to assist DISTRIBUTOR in effectively carrying out its activities under this Agreement.

3.3  
Quality Control. SUPPLIER shall establish and maintain quality control procedures for product manufacturing, handling and testing, including but not limited to, electrostatic discharge sensitivity procedures and other customary programs as are necessary to ensure that the Products, as manufactured and sold to DISTRIBUTOR, are the highest quality and reliability.

3.4  
Compliance with Laws . SUPPLIER warrants that the Products, as manufactured and sold to DISTRIBUTOR, are in full compliance with applicable laws, standards, codes and regulations, are duly marked and labeled and are suitable for resale or other distribution by DISTRIBUTOR.

 
 
2
 
 
4.  
Orders; Delivery; Rescheduling; Cancellation

4.1  
Orders. DISTRIBUTOR may place written, telefaxed, telexed or electronically transmitted purchase orders or oral purchase orders confirmed in writing within ten (10) business days. Such purchase orders shall describe the Products ordered, the quantities requested, delivery dates requested, prices and shipping instructions, where appropriate. SUPPLIER shall acknowledge acceptance of each order in writing, by telefax, telex, or electronic transmission at the earliest practicable date, but in any event within ten (10) business days following receipt thereof. In such acceptance, SUPPLIER shall confirm DISTRIBUTOR’s requested delivery date as the shipment date or specify an alternative shipment date (“Acknowledged Shipment Date”). If the Acknowledged Shipment Date is more than thirty (30) days later than DISTRIBUTOR’s  requested delivery date, DISTRIBUTOR, at its election, may cancel the order without the payment of a penalty or charge; provided, however, that DISTRIBUTOR shall receive credit for any such order to establish quantities purchased, quantity discounts and the like, where applicable, as if such order had been fulfilled.  Order minimum DISTRIBUTOR places with SUPPLIER is $50.00 USD, Line minimum is $25.00 USD.

4.2  
Method of Shipping . All shipments from SUPPLIER’s F.O.B. point shall be made in accordance with DISTRIBUTOR’s then current shipping instructions. DISTRIBUTOR’s shipping instructions are subject to change upon written notice from DISTRIBUTOR. If SUPPLIER elects to ship otherwise than in keeping with the shipping instructions, it shall do so at its own cost and bear all risk of loss until the shipment is received by DISTRIBUTOR. In the absence of specific instructions from DISTRIBUTOR, the shipping and packaging method shall be at the discretion of SUPPLIER, provided that SUPPLIER shall, consistent with sound business practice, select a method of shipping and packaging which is suitable for the Product. In the event of any misdelivery by the carrier, SUPPLIER shall assist DISTRIBUTOR in tracing the shipment and obtaining delivery of the Products.

4.3  
Acceptance.   DISTRIBUTOR shall be deemed to have accepted Products upon delivery to and inspection by Distributor, unless DISTRIBUTOR notifies SUPPLIER within thirty (30) days after delivery that the Products are rejected because they are defective or do not conform to the SUPPLIER’s applicable warranty, the terms of this Agreement or DISTRIBUTOR’s order.

4.4  
Early Shipments.   DISTRIBUTOR shall have the right to accept or reject any and all Products delivered prior to their Acknowledged Shipment Date. If SUPPLIER is notified of DISTRIBUTOR’s  intention to reject and return any such delivery, it shall issue (or shall be deemed to have issued) a Return Material Authorization within five (5) business days. The return shall be made freight collect. If DISTRIBUTOR elects to accept any such delivery, DISTRIBUTOR shall not become obligated to pay any invoices submitted therefor until thirty (30) after the Acknowledged Shipment Date.

5.  
Prices . The prices for Products purchased under this Agreement shall be as set forth in SUPPLIER’s Price List in effect as of the date of this Agreement, a copy of which is attached to this Agreement as Exhibit A. The prices shown in Exhibit A are subject to change upon at least thirty (30) days prior written notice from SUPPLIER to DISTRIBUTOR.

5.1  
Price Increases .  Prior to the effective date of a price increase, DISTRIBUTOR may order Products for delivery at the prior (i.e., lower) price. All Products shipped under orders placed by DISTRIBUTOR prior to the effective date of any price increase shall be shipped and invoiced at the price in effect at the time of order placement.
 
5.2  
Price Decreases . In the event Surge/Lelon decreases the price of any product, the Distributor shall be entitled to a credit equal to the difference between the price paid for the Product by the Distributor (less any prior credits granted by Surge/ Lelon on such Products) and the new decreased price for the Product multiplied by the quantity of such Product in the Distributor’s inventory on the effective date of the decrease. Similar price adjustment, if appropriate, will also be made on all Products in transit to the Distributor on the effective date of the price decrease. Similar price adjustment, if appropriate, will also be made on all Products in transit to the Distributor shall submit to Surge/Lelon, within 45 calendar days following the date of distributor’s receipt of written notice of such price decrease, a report of the Products subject to the price decrease and in the Distributor’s inventory as of the effective date of the price decrease. All Products, except those designated as NC/NR in the Surge/Lelon price book or those which have been deemed obsolete by Surge/ Lelon, shipped after the effective date of any price decrease will be shipped and invoiced at the price in effect at the time of shipment. Credits will be applied to future Distributor purchases of Products or to the Distributor’s accounts receivable with Surge/Lelon.
 
5.3  
SUPPLIER’s Representation. SUPPLER represents and warrants that the practices and policies, including any prices or discounts extended to DISTRIBUTOR in connection with the Products, comply with all applicable laws and are not, and will not be, less favorable than those extended to other purchasers of similar quantities of Products from SUPPLIER for resale or other distribution.
 
5.4  
  F.O.B. All prices are F.O. B. SUPPLIER’s domestic shipping facility at Deer Park, New York.
      
5.5 
Sales Taxes, Export and Other Charges. DISTRIBUTOR shall be responsible for any and all applicable sales or use taxes pertaining to its purchase of the Products, and, if Products are to  be delivered by Supplier to points outside the domestic United States, the cost of export packing, export duties, licenses, and fees, if included as a separate item on the invoices sent by SUPPLIER to DISTRIBUTOR.
 
5.6 
Risk of Loss. DISTRIBUTOR shall assume all risk of loss and pay all costs of insurance for the Products upon SUPPLIER’s delivery thereof to a common carrier.

6.  
Terms of Payment. SUPPLLIER shall invoice DISTRIBUTOR upon shipment of each order. Such invoices shall be due and payable by DISTRIBUTOR within thirty (30) days following DISTRIBUTOR’s acceptance of the Products or DISTRIBUTOR’s receipt of the invoice, whichever is later. DISTRIBUTOR shall be entitled to a prompt payment discount of     ONE   percent  (     1 %  ) if payment is made within ten (10) days of the due date of any such receipt.  Distributor shall remit payment to supplier by electronic fund transfer.
 
 
 
3
 

 
7.  
Return of Product.

7.1  
Bi-annual Rotation. Within three (3) months following each half year period of this Agreement determined as of the commencement date of this Agreement, six (6) month DISTRIBUTOR may return to SUPPLIER, for credit, a quantity of Products the value of which shall not exceed    FIVE    percent   (5 %) of the net sales dollars invoiced by SUPPLIER to DISTRIBUTOR for all products purchased by DISTRIBUTOR during the preceding Contract 6 months.  Credit issued for such returned Products shall equal the price paid by DISTRIBUTOR, excluding prompt payment discount, less any prior credits. DISTRIBUTOR may make such returns from one or more stocking locations. The foregoing return privilege shall be subject to the following:
 
7.1.1  
The Products must be returned in their original unopened packaging where feasible, or if not feasible, must be free of damage and be in merchantable condition. SUPPLIER agrees to furnish packaging materials when requested by DISTRIBUTOR:, All date coded products must be returned within one (1) year of date code.

Prior to returning any Products, DISTRIBUTOR must obtain a Return Authorization from SUPPLIER, which shall be given to DISTRIBUTOR within thirty (30) days of request by Distributor; and

7.1.2  
 All Products returned under this Subsection 7.1 shall be shipped F.O.B.  SUPPLIERS domestic facility at 95 E. Jefryn Blvd, Deer Park, NY 11729 , freight and shipping charges prepaid by DISTRIBUTOR.

7.1.3
DISTRIBUTOR must place offsetting order equal to / or greater than stock rotation RMA at the same time RMA is given.  Stock rotation RMA will not be giving with out offsetting order.

7.1.4
Scrap Allowance Distributor can choose to Scrap allowance instead of rotation. Distributor will receive a quarterly credit against payments owed to supplier for a scrap allowance equal to five percent (5%) of Supplier’s gross sales to Distributor for the previous six (6) month period, minus all credits instead of rotation depending on items. 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. Supplier has opportunity to approve scrap decide what items can be send back to supplier instead of scrap. DISTRIBUTOR must place offsetting order equal to / or greater that Scrap RMA at the same time RMA is given. Scrap RMA will not be giving with out offsetting order.
 
7.2  
 New Products. For purposes hereof, the term “New Products” shall mean any and all Products (i) ordered by DISTRIBUTOR under its initial stocking order (i.e., ordered within ninety (90) days of the date of this Agreement of (ii) added to the Products listed in Exhibit A and ordered within ninety (90) days of the date of such addition. Within six (6) months following the date of this Agreement or following the date of any New Product is added hereunder, whichever is later, DISTRIBUTOR may elect to return to SUPPLIER, for credit, any and all of such New Products in its inventory. Such return is subject to all of the terms and conditions of Subsection 7.1 above, except of Subsection 7.1.2 thereof. Returns of new Products under this Subsection 7.2 shall not be counted as “stock rotation” for purposes of computing the amount of Products returnable by DISTRIBUTOR under Subsection 7.1.

8.  
Product Changes.

8.1  
Discontinuance and Obsolescence. SUPPLIER reserves the right to discontinue the manufacture of sale of, or otherwise render or treat as obsolete, any or all of the Products covered by this Agreement upon at least forty five (45) days prior written notice to DISTRIBUTOR. DISTRIBUTOR may, in its discretion, within thirty (30) days following receipt of such notice, notify SUPPLIER in writing of its intention to return any or all Products so discontinued or rendered obsolete which remain in its inventory and shall receive a credit for such Products equal to the net price paid by DISTRIBUTOR for the same, provided that said Products are returned within thirty (30) days of the date of DISTRIBUTOR’s receipt of SUPPLIER’s Return Material Authorization, which RMA shall be promptly issued by SUPPLIER.  SUPPLIER shall pay all freight and shipping charges in connection with any such returns. Returns of Products under this Subsection 8.1 shall not be counted as “stock rotation” for purposes of computing the amount of Products returnable by DISTRIBUTION under Subsection 7.1.

8.2   
Modification of Products. SUPPLIER shall give DISTRIBUTOR at least thirty (30) days prior written notice of all engineering modifications that will affect products in DISTRIBUTOR’s inventory if such changes affect form, fit, or function, or if the modifications will preclude or materially limit the salability of DISTRIBUTOR’s affected inventory of Products once the engineering modifications are implemented.  SUPPLIER shall work with DISTRIBUTOR to move the affected inventory through resale or repurchase for ninety (90) days following such notification.  If, after the above efforts, affected Product still remains in DISTRIBUTOR’s inventory, SUPPLIER agrees to replace it with upgraded Products within one hundred twenty (120) days of the official public announcement of such modification or SUPPLIER’s first shipment of the modified Product, whichever occurs first. SUPPLIER shall pay all freight and shipping charges in connection with any such returns or replacements. Returns of Products under this Subsection 8.2 shall not be counted as “stock rotation” for purposes of computing the amount of Products returnable by DISTRIBUTOR under Subsection 7.1.


8.3  
Introduction of New Products.   SUPPLIER shall give DISTRIBUTOR at least thirty (30) days prior written notice of the introduction of any New Products that preclude or materially limit DISTRIBUTOR from selling any Products in its inventory, and shall work with DISTRIBUTOR to move the affected inventory through resale or repurchase for 90 days, following such notification. If, after the above efforts, affected Products still remains in DISTRIBUTOR’s inventory, SUPPLIER agrees to replace them with the New Products within one hundred twenty (120) days of the official public announcement of such New Products or SUPPLIER’s first shipment of New Products, whichever occurs first. Returns of Products under this Subsection 8.3 shall not be counted as “stock rotation” for purposes of computing the amount of Products returnable by DISTRIBUTOR under Subsection 7.1.

8.4  
Return Material Authorization. A Return Material Authorization shall be issued by SUPPLIER within thirty (30) days of any request for the same by DISTRIBUTOR when required in connection with any return request under this Agreement.
 
 
 
 
4
 

 
9.  
Warranty; Compliance With Laws.

9.1  
Standard Warranty.   The Products shall be covered by SUPPLIER’s standard warranty terms and provisions, copies of which are annexed to this Agreement as Exhibit B; provided, however, that the warranty coverage shall be no less than the following: (i) the warranty period set forth therein shall run for at least one (1) year following DISTRIBUTOR’s shipment of any Product to it’s customer; (ii) SUPPLIER shall extend such warranty directly to DISTRIBUTOR’s customer as if such customer had purchased the Product directly from SUPPLIER; (iii) SUPPLIER shall warrant the Product against defects in material and workmanship under normal use and service and shall repair or replace at its cost any defective Product (or issue a credit or refund, as the case may be, based on the purchase price paid therefor; and (iv) SUPPLIER shall pay (or refund the amount of) all freight and shipping charges for any defective Product returned.

10.  
Special Purchases .  SUPPLIER and DISTRIBUTOR may at any time during the term of this Agreement enter into separate agreements for the special purchase of other Products, including non-standard Products and Products in greater quantities than those set forth in SUPPLIER’s then current Published Price List, and such agreements shall be subject to all terms and conditions hereof unless inconsistent with the terms of such special agreements or unless otherwise agreed.
                               
11. 
Term and Termination.
 
11 . 1
Term. The initial term of this Agreement is for one (1) year commencing on July 1 st 2012. This Agreement, thereafter, shall automatically renew and extend annually for a one (1) year term unless either Party has given the other at least sixty (60) days prior to the end of the term written notice of its intention not to renew the Agreement.

11.2
Termination for Convenience .  Either SUPPLIER or DISTRIBUTOR may at any time terminate  this Agreement without cause and for its convenience by giving ninety (90) days prior written notice to the other. Both SUPPLIER and DISTRIBUTOR represent that they have considered the making of expenditures in preparing to perform under this Agreement, as well as the possible  losses which might result in the event of any termination of the Agreement.

11.3 
Immediately upon the expiration or termination of this Agreement for any reason, Distributor shall immediately and forever cease to solicit orders for Products and shall  cease to represent or to hold itself out in any manner that Distributor is associated with Supplier.

 11.4 
Events of Default .  Any of the following shall constitute a default under this Agreement.

 11.4.1 
Except as otherwise permitted under Subsection 17.04 of this Agreement, the assignment by DISTRIBUTOR or SUPPLIER of this Agreement or any of its respective rights hereunder without the prior written consent of the non-assigning party (the word “assign”  to include, with out limiting the generality thereof, a merger, sale of any substantial  portion of assets or business or any similar transaction);
 
11.4.2 
DISTRIBUTOR or SUPPLIER’S failure to perform or observe any of its obligations hereunder for a period of thirty (30) days following written notice thereof from the other; or if the breach is of such a nature that it could not reasonably be cured within such thirty (30) day period, DISTRIBUTOR’s or SUPPLIER’s failure within such thirty (30)  days to commence to cure the breach and, thereafter, proceed with due diligence to cure it; or
      
11.4.3 
The assignment by DISTRIBUTOR or SUPPLIER of its business for the benefit of creditors, or the filing of a petition by DISTRIBUTOR or SUPPLIER under the Bankruptcy Code or any similar statute, or the filing of such a petition against either of them which is not discharged or stayed within sixty (60) days, or the appointment of a  receiver or similar officer to take charge of DISTRIBUTOR’s or SUPPLIER’s property,  or any other act indicative of bankruptcy or insolvency, or the determination by Supplier, in its sole discretion, that Distributor lacks the financial resources to  satisfactorily perform its obligations and/or duties hereunder.

11.5 
Remedies Upon Default . In the event of any default set forth in Subsection 13.4 above, the non-defaulting party may, at its option:

11.5.1 
Proceed by any lawful means to enforce performance of this Agreement and to recover  damages for a breach thereof (and the breaching party agrees to bear the other’s costs  and expenses, including reasonable attorney’s fees incurred in any judicial action to  enforce such performance or recover such damages if the aggrieved party is  determined to be entitled to such relief in such action;
 
11.5.2 
Terminate this Agreement for cause by written notice and proceed by any lawful means to recover damages for breach thereof; or

11.5.3 
Avail itself of any other lawful remedy available under law or equity.

11.5.4 
The rights and remedies under Subsection 13.5.1, 13.5.2, and 13.5.3 above are  intended to be cumulative and not exclusive, so that the non-defaulting party can elect  to pursue any one or more of the same.

11.6 
Return of Inventory
 
11.6.1 
In the event SUPPLIER terminates this Agreement without cause or elects not to renew the same, or DISTRIBUTOR terminates this Agreement for cause, SUPPLIER shall repurchase from DISTRIBUTOR any and all unsold Products designated by DISTRIBUTOR from its  inventory at the price paid therefor by DISTRIBUTOR, less any prior credits granted by  SUPPLIER on such Products. SUPPLIER shall pay all freight and shipping charges in connection with such repurchases.

11.6.2
In the event DISTRIBUTOR terminates this Agreement without cause or elects not to renew the same, SUPPLIER shall repurchase from DISTRIBUTOR from its inventory at  the same price as set forth in Subsection 12.6.1 above. A twenty percent (20%) handling charge may be deducted by SUPPLIER  from the purchase price to be paid by DISTRIBUTOR for all Products returned in salable condition in opened or non-original  packaging. DISTRIBUTOR shall pay all freight and shipping charges in connection with  such repurchases.
 
11.6.3
Notwithstanding the foregoing, SUPPLIER shall be required to accept only those Products which are in their original unopened packaging or, where not in such packaging, are undamaged and in salable or merchantable condition after testing and inspection by  SUPPLIER.
 
 
 
 
5
 

 
11.7  
Outstanding Order .  In the event of any termination, SUPPLIER shall, if requested to do so by  DISTRIBUTOR, honor any open DISTRIBUTOR purchase order then outstanding.

11.8 
Release .  No termination of this Agreement shall affect any obligation of either party to pay amounts due to the other hereunder and all such payments shall be made when due.

12.
Trademarks; Trade Names .  This Agreement shall not create, and SUPPLIER shall have no right in, or to the use of, any trademark, trade name, logo, service mark or other mark, identification or name of DISTRIBUTOR. DISTRIBUTOR recognizes SUPPLIER’s ownership of, and right to use, certain trademarks, trade names, logos and other marks, and names and acknowledges that, except as hereinafter set forth, DISTRIBUTOR has no right in, or to use, any thereof. Notwithstanding the foregoing, DISTRIBUTOR   is hereby granted a non-exclusive right to use SUPPLIER’s trademarks, trade names, logos and other marks and names for the purposes of identifying itself to the public as an authorized distributor of the Products and for advertising and otherwise promoting the resale, lease or servicing of any products purchased under this Agreement.

13. 
Confidential Information . SUPPLIER, SUPPLIER’s authorized representatives and DISTRIBUTOR shall each receive and maintain in confidence any and all proprietary information, trade secrets or other know-how belonging to the other (including, but not limited to,  knowledge of manufacturing or  technical processes, financial and systems data, customer information and resale reports), (“Confidential Information”), which is expressly designated and conspicuously marked confidential  (except and to the extent that disclosure of any Confidential Information is (i) required by any law or  governmental regulation or the decree of a  court having competent jurisdiction or (ii) enters into or exists in the public domain without the act of the party obligated to maintain such confidentiality hereunder). Without limiting the foregoing, all books, documents, records and other material and  information made known to SUPPLIER or SUPPLIER’s authorized representatives by DISTRIBUTOR pursuant to Subsection 2.4 of this Agreement are hereby designated as confidential. This Section 16 shall survive termination or expiration of this Agreement for a period of two (2) years.

14. 
General
 
14.1 
Entire Agreement .  This Agreement supersedes all prior communications or understandings between DISTRIBUTOR and SUPPLIER and constitutes the entire agreement between the parties with respect to the matters covered herein. In the event of a conflict or inconsistency between the terms of this Agreement and those of any order, quotation,  solicitation or other communication from one party to the other, the terms of this Agreement  shall be controlling.

14.2 
 Amendment .  This Agreement cannot be changed, modified or amended unless such  change, modification, or amendment is in writing and executed by the party against which the enforcement of such change, modification or amendment is sought.
 
14.3
Governing Law .  This Agreement is made in, governed by, and shall be construed solely in accordance with, the internal laws of the State of      New York   .

14.4
Assignment .  Neither party shall have the right to assign this Agreement or any rights  hereunder without the prior written consent of the other except that either party may make such an assignment to another corporation wholly owned by or under common control with it.  For purposes hereof, the term “assign” shall include, without limitation, a merger, sale of assets or business, or other transfer of control by operation of law or otherwise.

14.5 
Authority .  Both parties represent and warrant to each other that they have the right and lawful authority to enter into this Agreement for the purposes herein and that there are no other outstanding agreements or obligations inconsistent with the terms and provisions hereof.

14.6
Paragraph headings .  Paragraph headings and numbers have been inserted for convenience of reference only, and if there shall be any conflict between any such headings and numbers and text of this Agreement, the text shall control.
 
14.7 
Waiver .  Waiver by either party of any term or condition of this Agreement or any breach shall not constitute a waiver of any other term or condition or breach of this Agreement
 
14.8
Notices . Notices and other communications by either party under this Agreement shall be deemed given when delivered by hand or deposited in the United States mail as certified mail, postage prepaid, addressed to the chief executive officer of the other party at its then  principal place of business as follows.

 
If to SUPPLIER:      
    Ira Levy    
   Surge Components Inc.    
   95 E. Jefryn Blvd.    
   Deer Park, NY  11729    
       
   If to DISTRIBUTOR:          
   Frank Sganga       
   TTI    
   2441 NE Pkwy    
   Fort Worth, TX 76106-1816    
 
 
 
6
 
 
 
15.09
Invalidity of Provisions . In the event that any term or provision of this Agreement  shall be deemed by a court of competent jurisdiction to be overly broad in scope, duration or area of  applicability, the court considering the same shall have the power and hereby is authorized  and directed to modify such term or provision to limit such scope, duration or area, or all  of them, so that such term or provision is no longer overly broad and to enforce the same as so limited. Subject to the foregoing sentence, in the event any provision of  this Agreement shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall attach only to such provision and shall  not affect or render invalid or unenforceable any other provision of this Agreement.

15.10
Consent Not Unreasonably Withheld .  Whenever any consent, action or authorization is  required or requested of SUPPLIER hereunder, such consent, action or authorization shall  not be unreasonably withheld or delayed.

15.11
Force Majeure . Nonperformance under this Agreement shall be excused,  and neither party shall be liable for any loss, damage, penalty or expense, to the extent that such performance is rendered impossible or delayed by fire, flood, act of God or the public enemy, act of the Government, labor difficulties, riot, inability to obtain materials or any  other cause where the failure to perform or delay is beyond the reasonable control of the non-performing party and without the negligence of such party.
 
15.12 
Relationship of Parties . The relationship between the parties hereto shall be   that of independent contractors, each being in full control of its own business. Under no circumstances shall either party have the right or authority, expressed or implied, to act or make any commitment on behalf of or bind the other or represent the other as its agent  in any way. Nothing contained in this Agreement shall be construed as creating a joint venture or partnership between SUPPLIER and DISTRIBUTOR.


 
AGREED TO THIS      ACCEPTED THIS
     
      1st           day of                July                   , 2012     14          day of               August     , 2012
     
/s/ Ira Levy   /s/ Frank Sganga
Name (Signature)       Name (Signature)
     
Address    Address
     
95 E. Jefryn Blvd.   2441 North East Parkway  
Deer Park,   NY  11729   NY 11729
     
By     Ira Levy   By   Frank Sganga
Title    President                           Title  
 

                                                                            
 
 
 
 
 
 
7
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Ira Levy, certify that:
1. I have reviewed this 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, 2013
By:
/s/ Ira Levy
 
   
Ira Levy
 
   
Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
 

 
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Surge Components, Inc. (the "Company") on Form 10-K for the year ended November 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ira Levy, Chief Executive Officer (principal executive officer and principal financial officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

       
Date: February 28, 2013
By:
/s/ Ira Levy
 
   
Ira Levy
 
   
Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)