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 $73,235 and $135,130 for the nine months ended August 31, 2024 and August 31, 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 $84,198 and $19,190 for the three months ended February 28, 2025 and February 29, 2024 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 the remainder of 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 u…

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 2025 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 ongoing imposition of tariffs by the United States on goods continue to impact the Company. The Company’s cost of good could be increased which could impact the Company’s manufacturing costs and subsequently the price of goods sold to customers. The Company expects to pass on the …

Excerpt shortened here; the source contains the full paragraph.

Previous wording

The allowance for credit losses 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.

Current wording

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.

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 $62,000.

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 $57,000.

Previous wording

Consolidated net sales for the nine months ended August 31, 2024 decreased by $5,879,836 or 20.8%, to $22,369,017 as compared to net sales of $28,248,853 for the nine months ended August 31, 2023. Consolidated net sales for the three months ended August 31, 2024 decreased by $887,543 or 10.0%, to $7,970,316 as compared to net sales of $8,857,859 for the three months ended August 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 nine months ended August 31, 2024 and August 31, 2023 reflect $386,343 and $872,224, respectively of tariff costs that the Company was able to pass on to its customers.

Current wording

Consolidated net sales for the three months ended February 28, 2025 increased by $178,032 or 2.5%, to $7,231,738 as compared to net sales of $7,053,706 for the three months ended February 29, 2024. We attribute the increase to an increase in business with new customers as well as an increase in business with existing customers. Net sales for the three months ended February 28, 2025 and February 29, 2024 reflect $173,081 and $154,486, respectively of tariff costs that the Company was able to pass on to its customers.

Previous wording

Our gross profit for the nine months ended August 31, 2024 decreased by $1,334,498 to $6,532,263, or 17%, as compared to $7,866,761 for the nine months ended August 31, 2023. Gross margin as a percentage of net sales increased to 29.2% for the nine months ended August 31, 2024 compared to 27.8% for the nine months ended August 31, 2023. Gross profit for the three months ended August 31, 2024 increased by $191,569 to $2,487,570, or 8.3%, as compared to $2,296,001 for the three months ended August 31, 2023. Gross margin as a percentage of net sales increased to 31.2% for the three months ended August 31, 2024 compared to 25.9% for the three months ended August 31, 2023. The decrease in gross profit for the nine months ending August 31, 2024 can be attributed to decreases in sales from some of our higher margin customers. The increase in gross profit as a percentage of sales for the nine and three months ended August 31, 2024 can be attributed to increases in sales from customers whose sales carry 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 nine months ended August 31, 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 three months ended February 28, 2025 increased by $3,574 to $2,045,702, or less than 1%, as compared to $2,042,128 for the three months ended February 29, 2024. Gross margin as a percentage of net sales decreased slightly to 28.3% for the three months ended February 28, 2025 compared to 29.0% for the three months ended February 29, 2024. The increase in gross profit can be attributed to the increase in sales volume and the decrease in gross profit as a percentage of sales can be attributed to 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 the first quarter of Fiscal 2025, the Company was impacted by tariff costs on certain products imported from China, which went into effect as of July 6, 2018 as well as new tariffs that went into effect as of February 4, 2025. 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. However, there can be no assurance that we will be able to pass along the new costs or the effects if any it will have on our revenue in the future.

Previous wording

Selling and shipping expenses for the nine months ended August 31, 2024 was $2,028,864, a decrease of $230,881, or 10.2%, as compared to $2,259,745 for the nine months ended August 31, 2024. Selling and shipping expenses for the three months ended August 31, 2024 was $683,894, a decrease of $65,026, or 8.7%, as compared to $748,920 for three months ended August 31, 2023. We attribute the decrease to decreases in sales and the resulting selling expenses such as commission expenses, travel expenses, and trade show expenses, offset by increases in salesman payroll due to hiring of additional sales employees in the nine months ended August 31, 2024, as well as entertainment, freight out and auto expenses.

Current wording

Selling and shipping expenses for the three months ended February 28, 2025 was $653,367, a decrease of $19,036, or 2.8%, as compared to $672,403 for three months ended February 29, 2024. We attribute the decrease to decreases in selling expenses such as commission expenses and printing expenses offset by increases in salesman payroll, travel expenses and auto expenses.

Previous wording

General and administrative expenses for the nine months ended August 31, 2024 was $3,887,238, a decrease of $219,049, or 5.3%, as compared to $4,106,287 for the nine months ended August 31, 2023. General and administrative expenses for the three months ended August 31, 2024 was $1,250,294, a decrease of $66,310, or 5.0% as compared to $1,316,604 for the three months ended August 31, 2023. The decrease is due primarily to decreases in officer salaries for the nine months ended August 31, 2024 as well as health and rent and general insurance expenses, as well as temporary help expenses, directors fees and consulting expenses as partially offset by increases in salaries and related payroll tax expenses, telephone, office expenses and professional fees and bank charges as well as public company expenses and officer salaries for the three months ended August 31, 2024.

Current wording

General and administrative expenses for the three months ended February 28, 2025 was $1,379,262, a decrease of $57,642, or 4.0%, as compared to $1,436,904 for the three months ended February 29, 2024. The decrease is due primarily to decreases in salaries and related payroll tax expenses as well as rent expenses, directors fees, as well as computer and public company expenses, partially offset by increases in officer salaries, office expenses, professional fees and consulting expenses as well as pension expenses and bank charge expenses.

Previous wording

Other income for the nine months ended August 31, 2024 was $241,300, an increase of $179,156 as compared to $62,144 for the nine months ended August 31, 2023. Other income for the three months ended August 31, 2024 was $88,120, an increase of $$55,242 as compared to $32,878 for the three months ended August 31, 2023. We attribute the increase to income the investment in the acquisition of Treasury Bonds and notes issued by the United States Treasury.

Current wording

Other income for the three months ended February 28, 2025 was $124,966, an increase of $100,493 as compared to $24,473 for the three months ended February 29, 2024. We attribute the increase to income from investment in the acquisition of Treasury Bonds and notes issued by the United States Treasury.

Previous wording

Tax expense for the nine months ended August 31, 2024 was $234,383, a decrease of $233,273 as compared to a tax expense of $457,656 for the nine months ended August 31, 2023. Tax expense for the three months ended August 31, 2024 was $179,130, a decrease of $66,560 as compared to tax expense of $112,570 for the three months ended August 31, 2023. The decreases result from our decrease in net income for the 2024 period.

Current wording

Tax expense for the three months ended February 28, 2025 was $65,066, an increase of $53,155 as compared to a tax expense of $11,911 for the three months ended February 29, 2024. The changes result from our increase in net income for the 2025 period.

Previous wording

As a result of the foregoing, net income for the nine months ended August 31, 2024 was $570,290 compared to net income of $1,052,701 for the nine months ended August 31, 2023. The net income for the three months ended August 31, 2024 was $444,352, compared to a net income of $133,280 for the three months ended August 31, 2023.

Current wording

As a result of the foregoing, net income for the three months ended February 28, 2025 was $57,356, compared to a net loss of $(72,001) for the three months ended February 29, 2024.

Previous wording

As of August 31, 2024 we had cash of $4,416,717, marketable securities of $7,822,358, and working capital of $18,744,108. 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 business as well as opening up new offices globally and expanding the Company’s existing offices. In addition, The Company believes that during these hard economic times the Company should ensure it has sufficient cash flow to support the business until the anticipated turnaround in 2025.

Current wording

As of February 28, 2025 we had cash of $3,871,840, marketable securities of $8,779,231, and working capital of $19,030,463. 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 nine months ended August 31, 2024, we had net cash flow provided by operating activities of $954,964, as compared to net cash flow provided by operating activities of $1,269,583 for the nine months ended August 31, 2023. The decrease in cash flow from operating activities was primarily the result of lower net income and accrued expenses and an increase in inventory, as partially offset by lower accounts receivable and higher accounts payable.

Current wording

During the three months ended February 28, 2025, we had net cash flow used in operating activities of $(124,278), as compared to net cash flow provided by operating activities of $1,135,514 for the three months ended February 29, 2024. The decrease in cash flow from operating activities was primarily the result of decreased cash flows from accounts receivable, inventory and prepaid expenses as partially offset by net income and a smaller decrease in cash flows from accounts payable in 2025.

Previous wording

We had net cash flow used in investing activities of $(4,443,046) for the nine months ended August 31, 2024, as compared to net cash flow used in investing activities of $(4,002,538) for the nine months ended August 31, 2023. We attribute the change to the acquisition of $6,052,055 of Treasury bills and notes issued by the United States Treasury and the acquisition of fixed assets, as partially offset by the proceeds from maturing Treasury bills and notes of approximately $1,620,000.

Current wording

We had net cash flow used in investing activities of $(1,631,575) from financing activities for the three months ended February 28, 2025, as compared to net cash flow provided by investing activities of $321,474 for the three months ended February 29, 2024. We attribute the change to purchases by the Company 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 provided by financing activities of $0 during the nine months ended August 31, 2024 as compared to $0 for the nine months ended August 31, 2023.

Current wording

We had net cash flow from financing activities of $0 during the three months ended February 28, 2025 as compared to $0 for the three months ended February 29, 2024.

Previous 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 $(3,488,082) for nine months ended August 31, 2024, as compared to a net decrease in cash of $2,732,955 for the nine months ended August 31, 2023.

Current wording

As a result of the foregoing, the Company had a decrease in cash of $1,755,853 for three months ended February 28, 2025, as compared to a net increase in cash of $1,456,988 for the three months ended February 29, 2024.