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 $203,019 and $37,683 for the six months ended May 31, 2025 and May 31, 2024 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 $302,681 and $73,235 for the nine months ended August 31, 2025 and August 31, 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 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, as 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 and could continue to impact the Company more significantly in the future. The Company’s cost of goods could be increased which could impact the Company’s manufacturing costs and subsequentl…

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. The Company continues to introduce new in-house developed products to existing customers. 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, as 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 and could continue to impact the Company more significantly in the future. The Company’s cost of goo…

Excerpt shortened here; the source contains the full paragraph.

Previous 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.

Current 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.

Previous wording

Consolidated net sales for the six months ended May 31, 2025 increased by $1,749,762 or 12.2%, to $16,148,463 as compared to net sales of $14,398,701 for the six months ended May 31, 2024. Consolidated net sales for the three months ended May 31, 2025 increased by $1,571,730 or 21.4%, to $8,916,725 as compared to net sales of $7,344,995 for the three months ended May 31, 2024. We attribute the increase to an increase in business with new customers as well as an increase in business with existing customers, as well as sales with a higher profit margin being sold during the six months ended May 31, 2025 Net sales for the six months ended May 31, 2025 and May 31, 2024 reflect $380,332 and $257,608, respectively, due to tariff costs that the Company was able to pass on to its customers.

Current wording

Consolidated net sales for the nine months ended August 31, 2025 increased by $4,053,477 or 18.1%, to $26,422,494 as compared to net sales of $22,369,017 for the nine months ended August 31, 2024. Consolidated net sales for the three months ended August 31, 2025 increased by $2,303,715 or 28.9%, to $10,274,031 as compared to net sales of $7,970,316 for the three months ended August 31, 2024. We attribute the increase to an increase in business with new customers as well as an increase in business with existing customers,as well as increases in business from the Company’s distribution sales channels. Net sales for the nine months ended August 31, 2025 and August 31, 2024 reflect $700,253 and $386,343, respectively, due to tariff costs that the Company was able to pass on to its customers.

Previous wording

Our gross profit for the six months ended May 31, 2025 increased by $689,412 to $4,734,105, or 17.0%, as compared to $4,044,693 for the six months ended May 31, 2024. Gross margin as a percentage of net sales increased to 29.3% for the six months ended May 31, 2025 compared to 28.1% for the six months ended May 31, 2024. Gross profit for the three months ended May 31, 2025 increased by $685,838 to $2,688,403, or 34.2%, as compared to $2,002,565 for the three months ended May 31, 2024. Gross margin as a percentage of net sales increased to 30.2% for the three months ended May 31, 2025 compared to 27.3% for the three months ended May 31, 2024. The increase in gross profit and gross profit as a percentage of sales can be attributed to the increase 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 first half of fiscal year of 2025, the Company was impacted by tariff costs on certain products imported from China as well as new tariffs that went into effect as of February 4, 2025 in addition to pre-existing tariffs that 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. 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.

Current wording

Our gross profit for the nine months ended August 31, 2025 increased by $1,046,545 to $7,578,808, or 16.0%, as compared to $6,532,263 for the nine months ended August 31, 2024. Gross margin as a percentage of net sales decreased to 28.7% for the nine months ended August 31, 2025 compared to 29.2% for the nine months ended August 31, 2024. Gross profit for the three months ended August 31, 2025 increased by $357,133 to $2,844,703, or 14.4%, as compared to $2,487,570 for the three months ended August 31, 2024. Gross margin as a percentage of net sales decreased to 27.7% for the three months ended August 31, 2025 compared to 31.2% for the three months ended August 31, 2024. The increase in gross profit for the nine months ended August 31, 2025 can be attributed to the increase in sales volume. The decrease in gross profit as a percentage of sales for the nine months ended August 31, 2025 can be attributed to sales for the period 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 half of fiscal year of 2025, the Company was impacted by tariff costs on certain products imported from China as well as new tariffs that went into effect as of February 4, 2025 in addition to pre-existing tariffs that 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. 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 six months ended May 31, 2025 was $1,332,219, a decrease of $12,751, or less than 1%, as compared to $1,344,970 for six months ended May 31, 2024. Selling and shipping expenses for the three months ended May 31, 2025 was $678,852, an increase of $6,285, or less than 1%, as compared to $672,567 for three months ended May 31, 2024. We attribute the decrease for the six months ended May 31, 2025 to decreases in selling expenses such as commission expenses and salesman payrolls offset by increases in travel and entertainment expenses and freight out expenses. We attribute the increase for the three months ended May 31, 2025 to increases in commission expenses, freight expenses, travel and entertainment expenses offset by decreases in salesman payroll and auto expenses.

Current wording

Selling and shipping expenses for the nine months ended August 31, 2025 was $2,053,493, an increase of $24,629, or 1.2%, as compared to $2,028,864 for nine months ended August 31, 2024. Selling and shipping expenses for the three months ended August 31, 2025 was $721,274, an increase of $37,380, or 5.5%, as compared to $683,894 for three months ended August 31, 2024. We attribute the increase for the nine months ended August 31, 2025 to increases in selling expenses such as commission expenses, travel and entertainment expenses offset by decreases in sales payroll expenses and freight out expenses. We attribute the increase for the three months ended August 31, 2025 to increases in commission expenses, sales payroll expenses, travel and entertainment expenses offset by decreases in freight out expenses.

Previous wording

General and administrative expenses for the six months ended May 31, 2025 was $3,308,703, an increase of $671,759, or 25.5%, as compared to $2,636,944 for the six months ended May 31, 2024. General and administrative expenses for the three months ended May 31, 2025 was $1,929,441, an increase of $729,401, or 60.8% as compared to $1,200,040 for the three months ended May 31, 2024. The increase is due primarily to non cash stock based compensation of $531,797 in the three months ending May 31, 2025 as well as increases in the six months ended May 31, 2025 in officer salaries and related payroll tax expenses as well as office, pension, bank charges and bad debt expenses as well as professional fees and consulting expenses but partially offset by decreases in other salaries, rent expenses, directors fees and public company expenses. The increase for the three months ended May 31, 2025 can also be attributed to increases in salaries and related payroll tax expenses as well as bank charges and bad debt expenses, professional fees and consulting expenses but partially offset by decreases in rent expenses and public company expenses

Current wording

General and administrative expenses for the nine months ended August 31, 2025 was $4,755,491, an increase of $868,253, or 22.3%, as compared to $3,887,238 for the nine months ended August 31, 2024. General and administrative expenses for the three months ended August 31, 2025 was $1,446,788, an increase of $196,494, or 15.7% as compared to $1,250,294 for the three months ended August 31, 2024. The increase is due primarily to non cash stock based compensation of $518,954 in the nine months ending August 31, 2025 as well as increases in the nine months ended August 31, 2025 in officer salaries and related payroll tax expenses as well as pension, bank charges and bad debt expenses as well as professional fees, office and consulting expenses, utilities and general insurance expenses and computer expenses but partially offset by decreases in other rent expenses, directors fees and public company expenses. The increase for the three months ended August 31, 2025 can also be attributed to increases in salaries and related payroll tax expenses as well as bad debt expenses, general insurance, office and computer expenses and professional fees and public company expenses but partially offset by decreases consulting expenses

Previous wording

Depreciation expense for the six months ended May 31, 2025 was $35,079, an increase of $311, or less than 1%, as compared to $34,768 for the six months ended May 31, 2024. Depreciation expense for the three months ended May 31, 2025 was $19,462, an increase of $2,078, or 12%, as compared to $17,384 for the three months ended May 31, 2024. We attribute the increases for the three and six months ended May 31, 2025 to the purchase of fixed assets.

Current wording

Depreciation expense for the nine months ended August 31, 2025 was $52,887, an increase of $99, or less than 1%, as compared to $52,788 for the nine months ended August 31, 2024. Depreciation expense for the three months ended August 31, 2025 was $17,808, a decrease of $212, or 1.2%, as compared to $18,020 for the three months ended August 31, 2024.

Previous wording

Other income for the six months ended May 31, 2025 was $183,330, an increase of $30,150 as compared to $153,180 for the six months ended May 31, 2024. Other income for the three months ended May 31, 2025 was $58,364, a decrease of $70,344 as compared to $128,708 for the three months ended May 31, 2024. We attribute the change to income from investment in the acquisition of treasury bonds and notes issued by the United States Treasury.

Current wording

Other income for the nine months ended August 31, 2025 was $284,181, an increase of $42,881 as compared to $241,300 for the nine months ended August 31, 2024. Other income for the three months ended August 31, 2025 was $100,851, an increase of $12,731 as compared to $88,120 for the three months ended August 31, 2024. We attribute the change to income from investment in the acquisition of treasury bonds and notes issued by the United States Treasury.

Previous wording

Tax expense for the six months ended May 31, 2025 was $66,114, an increase of $10,861 as compared to a tax expense of $55,253 for the six months ended May 31, 2024. Tax expense for the three months ended May 31, 2025 was $1,048, a decrease of $42,294 as compared to a tax expense of $43,342 for the three months ended May 31, 2024. The changes result from our increase in net income for the six months ended May 31,2025.

Current wording

Tax expense for the nine months ended August 31, 2025 was $353,593, an increase of $119,210 as compared to a tax expense of $234,383 for the nine months ended August 31, 2024. Tax expense for the three months ended August 31, 2025 was $287,479, a decrease of $108,349 as compared to a tax expense of $179,130 for the three months ended August 31, 2024. The changes result from our increase in net income for the nine months ended August 31, 2025.

Previous wording

As a result of the foregoing, net income for the six months ended May 31, 2025 was $175,320, compared to a net income of $125,938 for the six months ended May 31, 2024. The net income for the three months ended May 31, 2025 was $117,964, compared to a net income of $197,940 for the three months ended May 31, 2024.

Current wording

As a result of the foregoing, net income for the nine months ended August 31, 2025 was $647,525, compared to a net income of $570,290 for the nine months ended August 31, 2024. The net income for the three months ended August 31, 2025 was $472,205, compared to a net income of $444,352 for the three months ended August 31, 2024.

Previous wording

As of May 31, 2025 we had cash of $4,014,092, marketable securities of $8,799,630, and working capital of $19,774,332. 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 August 31, 2025 we had cash of $4,275,802, marketable securities of $8,665,967, and working capital of $20,185,771. 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 six months ended May 31, 2025, we had net cash flow provided by operating activities of $85,357, as compared to net cash flow provided by operating activities of $1,593,512 for the six months ended May 31, 2024. The decrease in cash flow from operating activities was primarily the result of decreased cash flows from stock accounts receivable, inventory and prepaid expenses and income taxes, accrued expenses and a smaller decrease in cash flows from accounts payable in 2025, as partially offset by an increase in net income and non cash expenses including stock based compensation.

Current wording

During the nine months ended August 31, 2025, we had net cash flow provided by operating activities of $184,801, as compared to net cash flow provided by operating activities of $954,964 for the nine months ended August 31, 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 an increase in net income, accounts payable and non cash expenses including stock based compensation.

Previous wording

We had net cash flow used in investing activities of $(1,804,708) from financing activities for the six months ended May 31, 2025, as compared to net cash flow used in investing activities of $(3,525,629) for the six months ended May 31, 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.

Current wording

We had net cash flow used in investing activities of $(1,568,942) from financing activities for the nine months ended August 31, 2025, as compared to net cash flow used in investing activities of $(4,443,046) for the nine months ended August 31, 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 from financing activities of $105,750 during the six months ended May 31, 2025 as compared to $0 for the six months ended May 31, 2024. The increase in financing activities is related to the proceeds from the exercise of stock options.

Current wording

We had net cash flow from financing activities of $32,250 during the nine months ended August 31, 2025 as compared to $0 for the nine months ended August 31, 2024. The increase in financing activities is related to the proceeds from the exercise of stock options.

Previous wording

As a result of the foregoing, the Company had a decrease in cash of $(1,613,601) for the six months ended May 31, 2025, as compared to a net decrease in cash of $(1,932,117) for the six months ended May 31, 2024 which is attributable to the purchase of marketable securities.

Current wording

As a result of the foregoing, the Company had a decrease in cash of $(1,351,891) for the nine months ended August 31, 2025, as compared to a net decrease in cash of $(3,488,082) for the nine months ended August 31, 2024 which is attributable to the purchase of marketable securities.