Form 10-Q SURGE COMPONENTS INC For: Feb 29

Consolidated Balance Sheets

See notes to consolidated financial statements

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Continued)

See notes to consolidated financial statements.

Consolidated Statements of Operations

(Unaudited)

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows

(Unaudited)

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Continued)

See notes to consolidated financial statements.

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.

In February 2019, the Company converted into
a Delaware corporation. The number of authorized shares of common stock was decreased to 50,000,000 shares.

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

(1) Principles of Consolidation:

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

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

The results and trends in these interim consolidated
financial statements for the three months ended February 29, 2020 and February 28, 2019 may not be representative of those for
the full fiscal year or any future periods.

(2) Accounts Receivable:

Trade accounts receivable are recorded at the
net invoice value and are not interest bearing. The Company considers receivables past due based on the payment terms. The Company
reviews its exposure to 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:

In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from
Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. generally accepted accounting
principles guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the
application of which will require significant judgment by the Company. The Company adopted the standard using the modified
retrospective approach in its fiscal year beginning December 1, 2017. The preponderance of the Company’s contracts with
customers are standard ship and bill arrangements where revenue is recognized at the time of shipment.

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. 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)

(3) Revenue Recognition (continued):

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 $274,000
and $702,000 for the three months ended February 29, 2020 and February 28, 2019 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 $76,675 and $22,029 for the three months ended February 29, 2020 and February 28, 2019 respectively.

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

The Company and its subsidiaries currently
have agreements with several distributors. There are no provisions for the granting of price concessions in any of the agreements.
Revenues under these distribution agreements were approximately $1,357,000 and $1,519,000 for the three months ended February 29,
2020 and February 28, 2019 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 net realizable value. 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 February 29, 2020 was $449,222. The Company, at February 29, 2020 has a reserve
against slow moving and obsolete inventory of $250,565. 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:

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 a limited number of financial institutions. At February 29, 2020 and November 30, 2019, the Company’s
uninsured cash balances totaled $2,767,300 and $2,174,808, 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 J.

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, 2015, and state tax examinations for years before fiscal years ending November 30,
2014 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 benefits, nor was any interest expense
recognized during the three months ended February 29, 2020 and February 28, 2019. 

(8) Cash Equivalents:

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

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)

(9) Use of Estimates:

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

(10) Marketing and promotional costs:

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

(11) Fair Value of Financial Instruments:

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

(12) Shipping Costs

The Company classifies shipping costs as a
component of selling expenses. Shipping costs totaled $1,342 and $1,220 for the three months ended February 29, 2020 and February
28, 2019 respectively.

(13) Earnings Per Share

Basic earnings per share includes no dilution
and is computed by dividing net (loss) income available to common stockholders by the weighted average number of common shares
outstanding for the period. In the period with a profit, 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 February 29, 2020 and February 28, 2019 totaled
164,370 and 172,000, respectively.

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)

(14) Stock Based Compensation

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) Leases

In February
2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“Topic 842”). Topic
842 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases
will be classified as either finance or operating, with classification affecting expense recognition in the income statement.

On December 1, 2019,
the Company adopted Topic 842 applying the optional transition method, which allows an entity to apply the new standard at the
adoption date with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. As a result
of adopting Topic 842, the Company recognized assets and liabilities for the rights and obligations created by operating leases
totaling approximately $290,000.

The Company determines if a contract
contains a lease at inception based on whether it conveys the right to control the use of an identified asset. Substantially
all of the Company’s leases are classified as operating leases. The Company records operating lease right-of-use assets
within “Other assets” and lease liabilities are recorded within “current and noncurrent liabilities”
in the consolidated balance sheets. Lease expenses are recorded within “General and administrative expenses” in
the consolidated statements of operations. Operating lease payments are presented within “Operating cash flows”
in the consolidated statements of cash flows.

Operating lease right-of-use assets and lease
liabilities are recognized based on the net present value of future minimum lease payments over the lease term starting on the
commencement date. The Company generally is not able to determine the rate implicit in its leases and, as such, applies an incremental
borrowing rate based on the Company’s cost of borrowing for the relevant terms of each lease. Lease expense for minimum lease payments
is recognized on a straight-line basis over the lease term. Lease terms may include an option to extend or terminate a lease if
it is reasonably certain that the Company will exercise such options. The Company has elected the practical expedient to not separate
lease components from non-lease components, and also has elected not to record a right-of-use asset or lease liability for leases
which, at inception, have a term of twelve months or less. Variable lease payments are recognized in the period in which the obligation
for those payments is incurred.

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE C – FIXED ASSETS

Fixed assets consist of the following:

Depreciation and amortization expense for the
three months ended February 29, 2020 and February 28, 2019 was $9,364 and $9,578, respectively.

NOTE D – FINANCING LEASE OBLIGATIONS

The Company is obligated under financing leases
for telephone equipment. The Company leases equipment under two capital lease arrangements with NEC Financial Services. Pursuant
to the leases, the lessor retains actual title to the leased property until the termination of the lease, at which time the equipment
can be purchased for one dollar for each lease. The terms of the leases are 60 months with a combined monthly payment of $815,
respectively. The assumed interest rates on the leases are 9.342%. The leases terminate in 2022.

Future minimum lease payments under these financing lease obligations
as of February 29, 2020 are as follows:

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE E – LOAN PAYABLE

In February 2017, the Company obtained a line
of credit with a bank for up to $3,000,000 (the “Credit Line”). Borrowings under the Credit Line are due upon demand
and accrue interest at the greater of the prime rate or the LIBOR rate plus two percent (and may be increased by three percent
in the event the Company fails to (i) repay all amounts due on the Credit Line upon demand or (ii) comply with any terms or conditions
relating to the Credit Line). The Credit Line is collateralized by substantially all of the assets of the Company. As of February
29, 2020, the balance on the Credit Line was $0. As of February 29, 2020, the Company was in compliance with the debt covenants
under the Credit Line.

NOTE F – ACCRUED EXPENSES

Accrued expenses consist of the following:

NOTE G – 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 $1,486,000 at November 30, 2019. Pension expense for the three
months ended February 29, 2020 and February 28, 2019 was $387 and $1,100, respectively.

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE H – 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 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.

Between April 2001 and July 2015, 60,000 shares
of the series C shares were repurchased or converted to common stock. Dividends aggregating $149,069 have not been paid for the
semi-annual periods ended December 31, 2001 through the semi-annual payment due December 31,2019. The Company has accrued these
dividends. At February 29, 2020, there are 10,000 shares of Series C Preferred issued and outstanding.

In October 2016, the Company authorized 75,000
shares of preferred stock as Voting Non-Redeemable Convertible Series D Preferred Stock (“Series D Preferred”). None
of the Series D Preferred Stock is outstanding as of February 29, 2020.

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE H – SHAREHOLDERS’ EQUITY
(Continued)

[2] 2010 Incentive Stock Plan

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

Activity in the 2010 Stock Plan for the year ended February 29,
2020 is summarized as follows:

In March 2019, one employee director exercised
options to acquire 25,000 shares of common stock at $0.87 per share.

[3] 2015 Incentive Stock Plan

In November 2015, the Company adopted and the
shareholders ratified, the 2015 Incentive Stock Plan (“2015 Stock Plan”). The 2015 Stock 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.

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

In May 2019, a total of 47,207 shares were
issued to the Company’s officers as part of their 2018 bonus compensation under the 2015 Stock Plan.

The intrinsic value of the exercisable options
at February 29, 2020 totaled $87,150. At February 29, 2020 the weighted average remaining life of the stock options is 0.67 years.
At February 29, 2020 there was no unrecognized compensation cost related to the stock options granted under the plan.

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE H – SHAREHOLDERS’ EQUITY
(Continued)

[4] Compensation of Directors

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

NOTE I – SETTLEMENT AGREEMENT

On December 22, 2016, the Company entered into
a settlement agreement (the “Settlement Agreement”) with Michael D. Tofias and Bradley P. Rexroad (collectively, the
“Stockholders”). The Settlement Agreement generally provided that:

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE I – SETTLEMENT AGREEMENT (Continued)

On April 6, 2017, the Board of Directors elected
Peter Levy as a Class C Director. He is an independent director.

On October 4, 2018, the Company held its annual
meeting of shareholders, at which shareholders approved (i) the change in the Company’s state of incorporation from Nevada
to Delaware and (ii) the declassification of the Company’s board of directors on a rolling basis. No shareholders exercised
their dissenters’ rights in connection with the annual meeting.

The Settlement Agreement terminated on February
5, 2019, the date on which the Company completed its reincorporation from Nevada into Delaware.

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE J – 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:

The valuation allowance for the deferred tax
assets relates principally to the uncertainty of the utilization of deferred tax assets and was calculated in accordance with the
provisions of ASC 740, which requires that a valuation allowance be established or maintained when it is “more likely than
not” that all or a portion of deferred tax assets will not be realized. The valuation allowance increased by approximately
$249,244 during the three months ended February 29, 2020. 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 J – INCOME TAXES (Continued)

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

The Company files a consolidated income tax
return with its wholly-owned subsidiaries and has net operating loss carryforwards of approximately $5,830,000 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: 

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE K – OPERATING LEASE 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 $180,000 for the year ended November 30, 2019, 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 2019, the Company renewed its lease
to rent office space and a warehouse in Hong Kong for two years. Annual minimum rental payments for this space are approximately
$68,460.

In January 2019, the Company entered into a
lease to rent warehouse space in Hong Kong for two years. Annual minimum rental payments for this space are approximately $36,840.

The Company’s future minimum rental commitments
at February 29, 2020 are as follows:

Twelve Months Ended February 29,

Net rental expense for the three months ended
February 29, 2020 and February 28, 2019 were $91,678 and $84,814 respectively, of which $66,719 and $65,806 respectively, was paid
to the Related Company.

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE L – EMPLOYMENT AND OTHER AGREEMENTS

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

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

NOTE M – MAJOR CUSTOMERS

The Company had three customers who each accounted
for 20%, 11% and 11% of net sales for the three months ended February 29, 2020 and two customers who accounted for 11% and 14%
of net sales for the three months ended February 28, 2019. The Company had two customers who accounted for 20% and 11% of accounts
receivable at February 29, 2020 one customer who accounted for 14% of accounts receivable at February 28, 2019.

NOTE N – MAJOR SUPPLIERS

During the three months ended February 29,
2020 and February 28, 2019 there was one foreign supplier accounting for 39% and 35% of total inventory purchased.

The Company purchases substantially all of
its products overseas. For the three months ended February 29, 2020, the Company purchased 42% of its products from Taiwan,
18% from Hong Kong, 29% from elsewhere in Asia and less than 1% overseas outside of Asia. The Company purchases the balance of
its products in the United States.

NOTE O – EXPORT SALES

The Company’s export sales were as follows:

Revenues are attributed to countries based
on location of customer. 

NOTE P – SUBSEQUENT EVENTS

In early January 2020, an outbreak of a respiratory
illness caused by the coronavirus was identified in Wuhan, China. As part of its effort to combat the virus, the government of
China has placed travel restrictions throughout parts of China. This has resulted in some of the Company’s customers and
suppliers being closed for an extended period or operating at significantly below their normal capacity and will also affect our
suppliers that source some of their materials from China. The duration and intensity of this global health emergency and related
disruptions is uncertain. The duration of this crisis and its impact on both the Company’s customers and supply chain is
expected to have a material impact on the consolidated results of operations, cash flows and financial condition, but cannot be
reasonably estimated at this time. As an update, the unprecedented virus has grown significantly especially in America and had
significantly impacted the Company’s customers. The Company has already recorded order cancellations and order hold notices
from customers and expects this to continue.

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. Furthermore, we cannot at this time assess the affect
that the global outbreak of the novel cCronavirus may have on the Company.

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

Overview

The
Company operates with two sales groups, Surge Components (“Surge”) and Challenge Electronics (“Challenge”).
Surge is a supplier of electronic products and components. These products include capacitors, which are electrical energy storage
devices, and discrete semiconductor components, such as rectifiers, transistors and diodes, which are single function low power
semiconductor products that are packaged alone as compared to integrated circuits such as microprocessors. The products sold by
Surge are typically utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, audio
products, temperature control products, lighting products, energy related products, computer related products, various types of
consumer products, garage door openers, household appliances, power supplies and security equipment. These products are sold to
both original equipment manufacturers, commonly referred to as OEMs, who incorporate them into their products, and to distributors
of the lines of products we sell, who resell these products within their customer base. These products are manufactured predominantly
in Asia by approximately sixteen independent manufacturers. We act as the master distribution agent utilizing independent sales
representative organizations in North America to sell and market the products for one such manufacturer pursuant to a written
agreement. When we act as a sales agent, our supplier who sold the product to the customer that we introduced to our supplier
pays us a commission. The amount of the commission is determined on a sale by sale basis depending on the profit margin of the
product. Commission revenue totaled $76,675 and $22,029 for the three months ended February 29, 2020 and February 28, 2019 respectively.

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

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

The
world of business is constantly changing because of “disruptors,” which are significant changes in traditional business
practices that did not previously exist.  For example, customers continue to centralize purchasing from regional purchasing
and are stretching their payment terms.  These changes also include customers moving their manufacturing operations
from North America to Asia, and the trend of globalization. Some of our customers have been involved in mergers and acquisitions,
causing consolidation. This trend makes business more complicated and costly for the Company. The Company must have a presence
in Asia to service and further develop the business. For these reasons, we established Surge Ltd., our Asia subsidiary. Currency
fluctuations may also have an effect on doing business outside of North America. Customers have moved to reduce their supply chain,
which could adversely affect the Company. In some market segments, demand for electronic components have decreased, and in other
segments, the demand is still strong. Some technologies have become obsolete, while customers develop new products using different
kinds of components.  Management expects 2020 to be a year of change and challenge. These challenges could affect the Company
in negative ways, possibly reducing sales and or profitability. In order for the Company to grow, we will depend on, among other
things, the continued growth of the electronics and semiconductor industries, our ability to withstand intense price competition,
our ability to obtain new customers, our ability to retain and attract sales and other key personnel in order to expand our marketing
capabilities, our ability to secure adequate sources of products, which are in demand on commercially reasonable terms, our success
in executing and managing growth,  including monitoring  an expanded level of operations  and systems, controlling
costs, the availability of adequate financing, and our ability to deal successfully, with new and future disruptors. The global
economic slowdown is strongly impacted by the tariffs which are negatively impacting the growth of our customers and many of the
manufacturing companies in China. However, at this time some of the Company’s products have become excluded from tariffs
and so the Company has not yet experienced a material adverse effect from the tariffs.

The
Coronavirus is impacting all of Asia and Surge Components seriously. Factories in China that produce our products reopened after
the Chinese New Year one week late at the mandate of the Chinese government. The factory work force at reopening in February 2020
is now up to 70% – 80% of its normal 100% capacity. We do hope that it will continue to increase over the near term as China is
coming out of the virus now. This impacts the manufacturing productivity of the factories, and therefore the amount of inventory
we receive, and can ship to customers. We are hopeful that things will return to normal as soon as possible. We are doing everything
we can to keep customers production running and to keep things as smooth and stable as possible. We do expect that this could
have a negative impact on our sales until production is fully running. Furthermore, we expect our customers in china and elsewhere
will reduce their future purchases from us if they are not able to complete the manufacturer of their products due to the shortage
of components from other suppliers. The virus will potentially impact the Company’s sales performance in a negative way
for the balance of Fiscal 2020, depending on the duration and severity of the virus’ impact on the operations of our vendors
and suppliers, and on the global economy as a whole.

Critical
Accounting Policies

Accounts
Receivable

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

Revenue
Recognition

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

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

Inventory
Valuation

Inventories
are recorded at the lower of cost or net realizable value. Write-downs of inventories to net realizable value are based on stock
rotation, historical sales requirements and obsolescence as well as in the changes in the backlog. Reserves required for obsolescence
were not material in any of the periods in the financial statements presented. If market conditions are less favorable than those
projected by management, additional write-downs of inventories could be required. For example, each additional 1% of obsolete
inventory would reduce operating income by approximately $34,000.

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 three months ended February 29, 2020 decreased by $1,618,204 or 19.2%, to $6,789,138 as compared to net sales
of $8,407,342 for the three months ended February 28, 2019. We attribute the decrease to a decrease in business with new customers
as well as additional business with existing customers. We can also attribute the decline in sales to the fact that because due
to the impact of the virus in China, we did not receive enough inventory from our suppliers to cover customer orders. This has
had an impact on the Company’s sales. Net sales for the three months ended February 29, 2020 and February 28, 2019 reflect
$383,368 and $362,772, respectively of tariff costs that the Company was able to pass on to its customers.

Our
gross profit for the three months ended February 29, 2020 decreased by $437,784 to $1,885,776, or 18.8%, as compared to $2,323,560
for the three months ended February 28, 2019. Gross margin as a percentage of net sales remained flat at 27.8% for the three months
ended February 29, 2020 compared to 27.6% for the three months ended February 28, 2019. The decrease in gross profit can be attributed
to the decrease in sales volume. Our industry will continue to receive pressure from customers for price reductions. Some of them
further demand periodic price reductions on a quarterly or semi-annual basis, as opposed to annual fixed pricing. We work with
electronic manufacturing service subcontractor customers who manufacture products for other customers who do not have their own
manufacturing operations. At times we are not able to recover these price reductions from our suppliers. The Company has agreements
with these subcontractor customers to provide periodic cost reductions through rebates in the amount of 5%. These reductions
only affect future shipments of our products, and do not affect existing orders. These reductions can have a negative impact on
our profit margins since they reduce the amount of commissions we can earn. Even though this rebate can impact the Company’s
gross profit margin, these subcontractor customers represent very significant potential growth for the Company, because they can
help the Company become an approved supplier at the customers they manufacture for, and they purchase our components for these
customers. We believe it would be very difficult for the Company to achieve business at these customers without the help of these
subcontractor customers. During the three months ended February 29, 2020, the Company was impacted by tariff costs on certain
products imported from China, which went into effect as of July 6, 2018. The Company has been able to pass along a portion of
these costs to its customers. The Company is also moving some customer deliveries directly to Hong Kong in order to mitigate some
of these costs. In the first half of 2020, the Company expects the effects of the tariffs to be similar to 2019.

Selling
and shipping expenses for the three months ended February 29, 2020 was $656,838, an increase of $13,942, or 2.2%, as compared
to $642,896 for the three months ended February 28, 2019. We attribute the increase to increases in selling expenses such
as salesman payroll, travel expenses and advertising expenses, offset by a decrease in commission expenses and entertainment expenses.

General
and administrative expenses for the three months ended February 29, 2020 was $1,189,240, an increase of $102,203, or 9.4%, as
compared to $1,087,037 for the three months ended February 28, 2019. The increase is due primarily to increases in salaries and
related payroll tax expenses, rent expenses, general insurance, office expenses, temporary help expenses as well as professional
fees and public company expenses, as partially offset by decreases in utilities and computer expenses.

Depreciation
expense for the three months ended February 29, 2020 was $9,364, a decrease of $214, or 2.2%, as compared to $9,578 for the three
months ended February 28, 2019. The decrease is due the company purchasing less equipment during the three months ended February
29, 2020.

Other
income for the three months ended February 29, 2020 was $518, an increase of $517 compared to $1 for the three months ended February
28, 2019. We attribute the increase to the increase in the cash balances for the three months ended February 29, 2020.

Interest
expense for the three months ended February 29, 2020 was $567, a decrease of $166, or 22.6% compared to $733 for the three months
ended February 28, 2019. We attribute the decrease to the Company not utilizing the line of credit during the three months ended
February 29, 2020.

Tax
expense for the three months ended February 29, 2020 was $294,087 an increase $404,567 as compared to a tax benefit of $(110,480)
for the three months ended February 28, 2019. The changes result from our net income for such periods and management’s revised estimate
of future taxable income and the related impact on the reported deferred tax. The change in the valuation allowance is based on
management estimates of future taxable income. The degree of variability inherent in the estimates of future taxable income is
significant and subject to change in the near term. The Company reviews its estimates of future taxable income in each reporting
period and adjustments to the valuation allowance are reflected in the current operations.

As
a result of the foregoing, net loss for the three months ended February 29, 2020 was $(263,802), compared to a net income of $693,797
for the three months ended February 28, 2019. 

Liquidity
and Capital Resources

As
of February 29, 2020 we had cash of $3,331,796, and working capital of $7,248,819. We believe that our working capital levels
are adequate to meet our operating requirements during the next twelve months. The Company is exploring and evaluating opportunities
for growth and expansion using the Company’s cash resources.

During
the three months ended February 29, 2020, we had net cash flow provided by operating activities of $609,712, as compared to net
cash flow provided by operating activities of $63,549 for the three months ended February 28, 2019. The increase in cash flow
from operating activities resulted from increases in cash flows provided by accounts receivable, inventory, prepaid expenses and
increases in deferred income taxes as partially offset by net loss, and decreases in accounts payable and accrued expenses.

We
had net cash flow used in investing activities of $(15,343) for the three months ended February 29, 2020, as compared to net cash
flow used in investing activities of $(5,580) for the three months ended February 28, 2019.  We attribute the change to the
Company purchasing more equipment during the three months ended February 29, 2020.

We
had net cash flow used in financing activities of $(1,878) during the three months ended February 29, 2020 as compared to $(3,311)
used in financing activities for the three months ended February 28, 2019. The majority of the change relates to paying down the
lease on telephone equipment during the three months ended February 29, 2020.

As
a result of the foregoing, the Company had a net increase in cash of $592,491 for the three months ended February 29, 2020, as
compared to a net increase in cash of $54,658 for the three months ended February 28, 2019. 

The
table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations,
as of February 29, 2020:

Inflation

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

Off
Balance Sheet Arrangements

We
do not have any off balance sheet arrangements.

Not
applicable.

Evaluation
of Disclosure Controls and Procedures

The
Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“Commission”).
Ira Levy, the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of
the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of February 29, 2020 and
has concluded that, as of such date, our disclosure controls and procedures were effective.

Changes
in Internal Controls

During
the three months ended February 29, 2020 there were no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

Not
applicable.

None. 

None.

Not
applicable.

None. 

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

27

EXHIBIT
31.1

CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER

AND
PRINCIPAL FINANCIAL OFFICER

PURSUANT
TO SECTION 302 OF THE

SARBANES-OXLEY
ACT OF 2002

I,
Ira Levy, certify that:

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

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

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

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

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

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

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

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

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

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

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

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002

In connection with the Quarterly Report
of Surge Components, Inc. (the “Company”) on Form 10-Q for the period ended February 29, 2020 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: