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 $106,885 and $249,248 for the fiscal year ended November 30, 2023 and November 30, 2022 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 $95,584 and $106,885 for the fiscal year ended November 30, 2024 and November 30, 2023 respectively.

Previous wording

The world of business continues to change 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 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 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 return to full production pace. 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, the cost of raw materials has continued to increase, therefore our costs have increased. In the first half of the year of 2023, the Company has been able to handle the brokering of certain semiconductor products, helping their customers to keep product lines up and running by locating products that their regular suppliers can’t deliver, and the Company is positioned to do this in the future as needed. 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 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 c…

Excerpt shortened here; the source contains the full paragraph.

Current wording

The world of business continues to change 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 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 2025, 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 slowly return to full production pace. 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, the cost of some raw materials has continued to increase, therefore 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 high performing 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, tariffs, and longer travel times and our ability to deal successfully, with new and future disruptors. The tariffs continue to impact the Company, although less now then …

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 $58,000.

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 $54,000.

Previous wording

Consolidated net sales for the fiscal year ended November 30, 2023 decreased by $15,634,248 or 30.1%, to $36,276,542 as compared to net sales of $51,910,790 for the fiscal year ended November 30, 2022. 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. We can also attribute some of the decrease in sales during the fiscal year ended November 30, 2023, to one of the Company’s divisions reduction in brokering certain productsof only $217,000 in Fiscal 2024 from $3.9 million in Fiscal 2022. In Brokering, the Company helps customers find parts that their regular suppliers can not deliver. Net sales for the fiscal years ended November 30, 2023 and November 30, 2022 reflect $1,032,198 and $1,477,031, respectively of tariff costs that the Company was able to pass on to its customers.

Current wording

Consolidated net sales for the fiscal year ended November 30, 2024 decreased by $5,065,403 or 14.0%, to $31,211,139 as compared to net sales of $36,276,542 for the fiscal year ended November 30, 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 in response to the supply chain constraints. 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 fiscal years ended November 30, 2024 and November 30, 2023 reflect $549,564 and $1,032,198, respectively of tariff costs that the Company was able to pass on to its customers.

Previous wording

Our gross profit for the fiscal year ended November 30, 2023 decreased by $4,388,733 to $9,928,688, or 30.7%, as compared to $14,317,421 for the fiscal year ended November 30, 2022. Gross margin as a percentage of net sales decreased to 27.4% for the fiscal year ended November 30, 2023 compared to 27.6% for the fiscal year ended November 30, 2022. The decrease can be attributed to the decrease in sales volume as well as certain products being sold at a lower 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 Fiscal 2023, 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 fiscal year ended November 30, 2024 decreased by $1,024,994 to $8,903,694 or 10.3%, as compared to $9,928,688 for the fiscal year ended November 30, 2023. Gross margin as a percentage of net sales increased to 28.5% for the fiscal year ended November 30, 2024 compared to 27.4% for the fiscal year ended November 30, 2023. The increase can be attributed to the increase in sales to certain customers whose sales are at a higher gross 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 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 and will do so under potential tariffs imposed upon us. 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 fiscal year ended November 30, 2023 was $3,010,509, a decrease of $295,205, or 8.9%, as compared to $3,305,714 for the fiscal year ended November 30, 2022. We attribute the decrease to decreases in sales and the resulting selling expenses such as commission expenses, messenger and delivery and entertainment expenses, offset by the hiring of new salespeople which increased sales payroll, and growing travel and trade show expenses as well as auto and freight out expenses.

Current wording

Selling and shipping expenses for the fiscal year ended November 30, 2024 was $2,739,994, a decrease of $270,515, or 9.0%, as compared to $3,010,509 for the fiscal year ended November 30, 2023. We attribute the decrease to decreases in sales and the resulting selling expenses such as commission expenses, travel and trade show expenses, offset by the hiring of new salespeople which increased sales payroll, freight out and entertainment expenses.

Previous wording

General and administrative expenses for the fiscal year ended November 30, 2023 was $5,337,395, a decrease of $873,497, or 14.1%, as compared to $6,210,892 for the fiscal year ended November 30, 2022. The decrease is due primarily to decreases in officer salaries and office expenses as well as health insurance expenses and temporary help expenses and directors fees and bad debt expenses offset by increases in salaries and related payroll tax expenses, pension expense, general insurance, and maintenance expenses as well as consulting and public company expenses.

Current wording

General and administrative expenses for the fiscal year ended November 30, 2024 was $5,189,369, a decrease of $148,026, or 2.8%, as compared to $5,337,395 for the fiscal year ended November 30, 2023. The decrease is due primarily to decreases in officer salaries and general insurance expenses as well as health insurance expenses and temporary help expenses and directors fees, computer expenses and consulting expenses and pension expenses offset by increases in salaries and related payroll tax expenses, professional fees, telephone, bank charges and public company expenses.

Previous wording

Tax expense for the fiscal year ended November 30, 2023 was $653,397, a decrease of $518,165 as compared to a tax expense of $1,171,562 for the fiscal year ended November 30, 2022. The changes result from our decrease in net income for the 2022 period.

Current wording

Tax expense for the fiscal year ended November 30, 2024 was $409,973, a decrease of $243,424 as compared to a tax expense of $653,397 for the fiscal year ended November 30, 2023. The changes result from our decrease in net income for the 2024 period.

Previous wording

As a result of the foregoing, net income for the fiscal year ended November 30, 2023 was $972,110, compared to a net income of $3,736,146 for the fiscal year ended November 30, 2022.

Current wording

As a result of the foregoing, net income for the fiscal year ended November 30, 2024 was $825,677, compared to a net income of $972,110 for the fiscal year ended November 30, 2023.

Previous wording

As of November 30, 2023 we had cash of $7,634,799, marketable securities in the amount of approximately $3.2 million, and working capital of $17,908,922. 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 November 30, 2024 we had cash of $5,627,693, marketable securities in the amount of approximately $7.1 million, and working capital of $18,909,561. 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.

Previous wording

During the fiscal year ended November 30, 2023, we had net cash flow provided by operating activities of $2,192,899, as compared to net cash flow provided by operating activities of $2,235,298 for the fiscal year ended November 30, 2022. The decrease in cash flow from operating activities was primarily the result of lower net income and related noncash items of deferred taxes, stock based compensation and depreciation as well as accounts receivable and accounts payable and accrued expenses as offset by higher inventory levels in 2023.

Current wording

During the fiscal year ended November 30, 2024, we had net cash flow provided by operating activities of $1,812,399, as compared to net cash flow provided by operating activities of $2,192,899 for the fiscal year ended November 30, 2023. The decrease in cash flow from operating activities was primarily the result of lower net income and related noncash items of deferred taxes, stock based compensation and depreciation as well as accounts receivable as offset by increases in accounts payable and prepaid expense levels in 2024.

Previous wording

We had net cash flow used in investing activities of $(3,248,140) for the fiscal year ended November 30, 2023, as compared to net cash flow used in investing activities of $(48,351) for the fiscal year ended November 30, 2022. We attribute the change to acquisition ofapproximately $3.2 million of 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 $(3,830,496) for the fiscal year ended November 30, 2024, as compared to net cash flow used in investing activities of $(3,248,140) for the fiscal year ended November 30, 2023. We attribute the change to acquisition of approximately $5.9 million of marketable debt securities in the form of Treasury bills and notes issued by the United States Treasury.

Previous wording

We had net cash flow used in financing activities of $0 during the fiscal year ended November 30, 2023 as compared to $(8,495) provided by financing activities for the fiscal year ended November 30, 2022.

Current wording

We had net cash flow used in financing activities of $0 during the fiscal year ended November 30, 2024 as compared to $0 provided by financing activities for the fiscal year ended November 30, 2023.

Previous wording

As a result of the foregoing, the Company had a net decrease in cash of $1,055,241 for the fiscal year ended November 30, 2023, as compared to a net increase in cash of $2,178,452 for the fiscal year ended November 30, 2022.

Current wording

As a result of the foregoing, the Company had a net decrease in cash of $2,007,106 for the fiscal year ended November 30, 2024, as compared to a net decrease in cash of $1,055,241 for the fiscal year ended November 30, 2023. The net decrease in cash is mainly as compared to the prior fiscal year ended November 30, 2023 is due to an increase in purchases of marketable debt securities as detailed above.