SURGE COMPONENTS INC

Previous wording

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 $19,190 and $83,982 for the three months ended February 29, 2024 and February 28, 2023 respectively.

Current wording

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 $37,683 and $157,221 for the six months ended May 31, 2024 and May 31, 2023 respectively.

Previous wording

The world of business continues to change. 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 Hong Kong 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 has 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. One division in the Company has had success in designing new products for customers to better their products performance capabilities. This proactive approach separates the Company from selling commodity products to also selling more customized products. Management expects 2024 to continue to be a period of continued challenge, in regard to inflation and general economic conditions, in maintaining consistent flow of products during shortages of certain products, and growth, as we see our customers change their manufacturing and buying practices. These challenges could affect the Company in negative ways, possibly reducing sales and or profitability. Because of a labor shortage, our customers, engineering staff has been challenged, so getting our products approved has been and will continue to take longer to achieve. Additionally, if costs of raw materials continues to increase, our costs have increased. In order for the Company to continue 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 good 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 cash flow, the continued supply of products from our factories, the ability to withstand higher transportation costs and longer travel times. The tariffs continue to impact the Company, although less now then previously. Supply chain challenges can present both a challenge and opportunity to the Company. The Company is cautiously optimistic about its ability to meet these challenges with continued growth unless the general …

Excerpt shortened here; the source contains the full paragraph.

Current wording

The world of business continues to change. 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 Hong Kong 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 has 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. One division in the Company has had success in designing new products for customers to better their products performance capabilities. This proactive approach separates the Company from selling commodity products to also selling more customized products. Management expects 2024 to continue to be a period of continued challenge, in regard to inflation and general economic conditions, in maintaining consistent flow of products during shortages of certain products, and growth, as we see our customers change their manufacturing and buying practices. These challenges could affect the Company in negative ways, possibly reducing sales and or profitability. Because of a labor shortage, our customers, engineering staff has been challenged, so getting our products approved has been and will continue to take longer to achieve. Additionally, if costs of raw materials continues to increase, our costs have increased. In order for the Company to continue 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 good 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 cash flow, the continued supply of products from our factories, the ability to withstand higher transportation costs and longer travel times. The tariffs continue to impact the Company, although less now then previously. Supply chain challenges can present both a challenge and opportunity to the Company. The Company is cautiously optimistic about its ability to meet these challenges with continued growth unless the general …

Excerpt shortened here; the source contains the full paragraph.

Previous wording

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. Reserves related to stock rotation and future sales requirements for specific inventory parts involve subjective estimates to be made by management based on current and expected market conditions. 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 $42,000.

Current wording

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. Reserves related to stock rotation and future sales requirements for specific inventory parts involve subjective estimates to be made by management based on current and expected market conditions. 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 $55,000.

Previous wording

Consolidated net sales for the three months ended February 29, 2024 decreased by $2,138,067 or 23.3%, to $7,053,706 as compared to net sales of $9,191,773 for the three months ended February 28, 2023. We attribute the decrease to a decrease in business with new customers as well as a decrease in business with existing customers. We can also attribute the decrease to customers pushing out orders due to them over ordering in 2022. The customers have excess inventory that they need to consume before re-ordering those products. Additionally, many customers, because of having this excess inventory have not launched new product development as their cash is tied up in the inventory. Net sales for the three months ended February 29, 2024 and February 28, 2023 reflect $154,486 and $394,793, respectively of tariff costs that the Company was able to pass on to its customers.

Current wording

Consolidated net sales for the six months ended May 31, 2024 decreased by $4,992,293 or 25.7%, to $14,398,701 as compared to net sales of $19,390,994 for the six months ended May 31, 2023. Consolidated net sales for the three months ended May 31, 2024 decreased by $2,854,226 or 28.0%, to $7,344,995 as compared to net sales of $10,199,221 for the three months ended May 31, 2023. We attribute the decrease to a decrease in business with new customers as well as a decrease in business with existing customers. We can also attribute the decrease to customers pushing out orders due to them over ordering in 2022. The customers have excess inventory that they need to consume before re-ordering those products. Additionally, many customers, because of having this excess inventory have not launched new product development as their cash is tied up in their inventory. Net sales for the six months ended May 31, 2024 and May 31, 2023 reflect $257,608 and $731,024, respectively of tariff costs that the Company was able to pass on to its customers.

Previous wording

Our gross profit for the three months ended February 29, 2024 decreased by $606,940 to $2,042,128, or 22.9%, as compared to $2,649,068 for the three months ended February 28, 2023. Gross margin as a percentage of net sales increased to 29.0% for the three months ended February 29, 2024 compared to 28.8% for the three months ended February 28, 2023. The increase can be attributed to certain products being sold at a higher profit margin. 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 first quarters of Fiscal 2024, 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.

Current wording

Our gross profit for the six months ended May 31, 2024 decreased by $1,526,067 to $4,044,693, or 27.4%, as compared to $5,570,760 for the six months ended May 31, 2023. Gross margin as a percentage of net sales decreased to 28.1% for six months ended May 31, 2024 compared to 28.7% for the six months ended May 31, 2023. Gross profit for the three months ended May 31, 2024 decreased by $919,127 to $2,002,565, or 31.5%, as compared to $2,921,692 for the three months ended May 31, 2023. Gross margin as a percentage of net sales decreased to 27.3% for the three months ended May 31, 2024 compared to 28.6% for the three months ended May 31, 2023. The decrease can be attributed to certain products being sold at a lower profit margin, as well as decreases in sales from some of our higher margin customers. 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 first half of Fiscal 2024, 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.

Previous wording

Selling and shipping expenses for the three months ended February 29, 2024 was $672,403, a decrease of $99,136, or 12.8%, as compared to $771,539 for three months ended February 28, 2023. We attribute the decrease to decreases in sales and the resulting selling expenses such as commission expenses, travel expenses, and auto and freight out expenses, offset by entertainment and printing expenses.

Current wording

Selling and shipping expenses for the six months ended May 31, 2024 was $1,344,970, a decrease of $165,855, or 11%, as compared to $1,510,825 for six months ended May 31, 2024. Selling and shipping expenses for the three months ended May 31, 2024 was $672,567, a decrease of $66,719, or 9.0%, as compared to $739,286 for three months ended May 31, 2023. We attribute the decrease to decreases in sales and the resulting selling expenses such as commission expenses, travel expenses, and freight out expenses, offset by increases in salesman payroll due to hiring of additional sales employees in the six months ended May 31, 2024, as well as entertainment and auto expenses.

Previous wording

General and administrative expenses for the three months ended February 29, 2024 was $1,436,904, an increase of $136,441, or 10.5%, as compared to $1,300,463 for the three months ended February 28, 2023. The increase is due primarily to increases in salaries and related payroll tax expenses as well as rent expenses, general insurance expenses, as well as computer and maintenance expenses and consulting, professional fees and public company expenses, partially offset by decreases in officer salaries and health insurance as well as temporary help expenses.

Current wording

General and administrative expenses for the six months ended May 31, 2024 was $2,636,944, a decrease of $152,739, or 5.5%, as compared to $2,789,683 for the six months ended May 31, 2023. General and administrative expenses for the three months ended May 31, 2024 was $1,200,040, a decrease of $289,180, or 19.5% as compared to $1,489,220 for the three months ended May 31, 2023. The decrease is due primarily to decreases in officer salaries as well as health and general insurance expenses, as well as utilities, directors fees and consulting expenses as partially offset by increases in salaries and related payroll tax expenses, rent, office expenses and professional fees as well as public company expenses and bank charges.

Previous wording

Tax expense for the three months ended February 29, 2024 was $11,911, a decrease of $165,244 as compared to a tax expense of $177,155 for the three months ended February 28, 2023. The changes result from our decrease in net income for the 2024 period.

Current wording

Tax expense for the six months ended May 31, 2024 was $55,253, a decrease of $289,833 as compared to a tax expense of $345,086 for the six months ended May 31, 2023. Tax expense for the three months ended May 31, 2024 was $43,342, a decrease of $124,589 as compared to a tax expense of $167,931 for the three months ended May 31, 2023. The changes result from our decrease in net income for the 2024 period.

Previous wording

As a result of the foregoing, net loss for the three months ended February 29, 2024 was $(72,001), compared to a net income of $395,160 for the three months ended February 28, 2023.

Current wording

As a result of the foregoing, net income for the six months ended May 31, 2024 was $125,938 compared to a net income of $919,421 for the six months ended May 31, 2023. The net income for the three months ended May 31, 2024 was $197,940, compared to a net income of $524,261 for the three months ended May 31, 2023.

Previous wording

As of February 29, 2024 we had cash of $9,091,787, marketable securities of $2,928,008, and working capital of $17,928,425. 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.

Current wording

As of May 31, 2024 we had cash of $5,702,682, marketable securities of $6,768,049, and working capital of $18,148,705. 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 and marketable securities resources, including hiring new sales managers to help to grow the revenue as well as opening up new offices globally and expanding the Company’s existing sales offices. In addition, The Company believes that during these globally challenging economic times the Company should ensure that it has a sufficient cash flow and working capital to support the business until the anticipated turnaround in 2025.

Previous wording

During the three months ended February 29, 2024, we had net cash flow provided by operating activities of $1,135,514, as compared to net cash flow provided by operating activities of $1,525,733 for the three months ended February 28, 2023. The decrease in cash flow from operating activities was primarily the result of lower net income as well as accounts receivable and accounts payable and accrued expenses as partially offset by lower inventory levels in 2024.

Current wording

During the six months ended May 31, 2024, we had net cash flow provided by operating activities of $1,593,512, as compared to net cash flow provided by operating activities of $138,229 for the six months ended May 31, 2023. The increase in cash flow from operating activities was primarily the result of lower accounts receivable and inventory and higher accounts payable as partially offset by lower net income and accrued expenses.

Previous wording

We had net cash flow provided by investing activities of $321,474 from financing activities for the three months ended February 29, 2024, as compared to net cash flow used in investing activities of $(22,699) for the three months ended February 28, 2023. We attribute the change to proceeds of approximately $321,000 from marketable debt securities in the form of Treasury bills and notes issued by the United States Treasury.

Current wording

We had net cash flow used in investing activities of $(3,525,629) from financing activities for the six months ended May 31, 2024, as compared to net cash flow used in investing activities of $(31,851) for the six months ended May 31, 2023. We attribute the change to the acquisition of approximately $4,336,000 of Treasury bills and notes issued by the United States Treasury, as partially offset by the proceeds from maturing Treasury bills and notes of approximately $810,000.

Previous wording

We had net cash flow of $0 during the three months ended February 29, 2024 as compared to $0 for the three months ended February 28, 2023.

Current wording

We had net cash flow provided by financing activities of $0 during the six months ended May 31, 2024 as compared to $0 for the six months ended May 31, 2023.

Previous wording

As a result of the foregoing, the Company had a net increase in cash of $1,456,988 for three months ended February 29, 2024, as compared to a net increase in cash of $1,503,034 for the three months ended February 28, 2023.

Current wording

As a result of the foregoing, Including investing excess cash into short term treasury bills, the Company had a net decrease in cash of $(1,932,117) for six months ended May 31, 2024, as compared to a net increase in cash of $106,378 for the six months ended May 31, 2023.