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 $5,129 and $84,198 for the three months ended February 28, 2026 and February 28, 2025 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 $24,462 and $203,019 for the six months ended May 31, 2026 and May 31, 2025 respectively.

Previous wording

The world of business continues to change because of “disruptors,” which are significant changes in traditional business practices. 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. The Surge sales division has a sales and marketing office and warehouse in Hong Kong and for these reasons, we established Surge Ltd., our Hong Kong subsidiary. The Surge divisions regional sales in their Europe office are growing well throughout the entire European continent and management looks forward to their continued growth. The Challenge Electronics sales division is in the process of opening up a sales and marketing office in Europe as well. 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. The Challenge Electronics 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 only commodity products to also selling more customized products. Management is cautiously optimistic about continued growth in 2026 but expects 2026 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. 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 some cases the customers will accept the increase while in others, the Company absorbs the cost increase. 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 commer…

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. 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 with customers and manufactureers in the U.S. as well as local Asian customers. The Surge sales division has a sales and marketing office and warehouse in Hong Kong and for these reasons, we established Surge Ltd., our Hong Kong subsidiary. The Surge divisions regional sales in their Europe office are growing well throughout the entire European continent and management looks forward to their continued growth. The Challenge Electronics sales division has opened up a sales and marketing office in Europe as well. 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. The Challenge Electronics 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 is cautiously optimistic about continued growth in second half 2026 but expects the remainder of 2026 to be a period of continued challenge, with regards to inflation and general economic conditions and AI demand, in maintaining consistent flow of products during shortages of certain products. 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 some cases, the customers will accept the increase while in other cases the Company absorbs the cost increase. 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 ou…

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 $54,000.

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 $53,000.

Previous wording

Consolidated net sales for the three months ended February 28, 2026 increased by $962,169 or 13.3%, to $8,193,907 as compared to net sales of $7,231,738 for the three months ended February 28, 2025. 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, 2026 and February 28, 2025 reflect $165,574 and $173,081, 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, 2026 increased by $1,407,138 or 8.7%, to $17,555,601 as compared to net sales of $16,148,463 for the six months ended May 31, 2025. Consolidated net sales for the three months ended May 31, 2026 increased by $444,969 or 5.0%, to $9,361,694 as compared to net sales of $8,916,725 for the three months ended May 31, 2025. 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 six months ended May 31, 2026 and May 31, 2025 reflect $339,751 and $380,332, 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 28, 2026 increased by $362,707 to $2,408,409, or 17.7%, as compared to $2,045,702 for the three months ended February 28, 2025. Gross margin as a percentage of net sales increased to 29.4% for the three months ended February 28, 2026 compared to 28.3% for the three months ended February 28, 2025. The increase in gross profit and gross profit as a percentage of sales can be attributed to the increase in sales volume and 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. 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.

Current wording

Our gross profit for the six months ended May 31, 2026 increased by $564,627 to $5,298,732, or 11.9%, as compared to $4,734,105 for the six months ended May 31, 2025. Gross margin as a percentage of net sales increased to 30.2% for the six months ended May 31, 2026 compared to 29.3% for the six months ended May 31, 2025. Gross profit for the three months ended May 31, 2026 increased by $201,920 to $2,890,323, or 7.5%, as compared to $2,688,403 for the three months ended May 31, 2025. Gross margin as a percentage of net sales increased to 30.9% for the three months ended May 31, 2026 compared to 30.2% for the three months ended May 31, 2025. The increase in gross profit and gross profit as a percentage of sales can be attributed to the increase in sales volume and 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. 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 the 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 three months ended February 28, 2026 was $834,180, an increase of $180,813, or 27.7%, as compared to $653,367 for three months ended February 28, 2025. We attribute the increase to increases in selling expenses such as commission expenses and sales payroll, due to the hiring of additional sales personnel and travel and entertainment expenses offset by decreases in advertising expenses..

Current wording

Selling and shipping expenses for the six months ended May 31, 2026 was $1,722,191, an increase of $389,972, or 29.3%, as compared to $1,332,219 for six months ended May 31, 2025. Selling and shipping expenses for the three months ended May 31, 2026 was $888,011, an increase of $209,159, or 30.8%, as compared to $678,852 for three months ended May 31, 2025. We attribute the increase to increases in the six and three months ended May 31, 2026 to increases in selling expenses such as commission expenses, sales payroll, due to the hiring of additional sales personnel and travel and entertainment expenses, as well as auto expenses, freight out and trade show expenses offset by decreases in advertising expenses.

Previous wording

Other income for the three months ended February 28, 2026 was $104,297, a decrease of $20,669 as compared to $124,966 for the three months ended February 28, 2025. We attribute the decrease to a reduction in income from investment in bonds and notes issued by the United States Treasury.

Current wording

Other income for the six months ended May 31, 2026 was $212,734, an increase of $29,404 as compared to $183,330 for the six months ended May 31, 2025. Other income for the three months ended May 31, 2026 was $108,437, an increase of $50,073 as compared to $58,364 for the three months ended May 31, 2025. We attribute the increase to an increase in income from investment in bonds and notes issued by the United States Treasury.

Previous wording

Tax expense for the three months ended February 28, 2026 was $(19,268), a decrease of $84,334 as compared to a tax expense of $65,066 for the three months ended February 28, 2025. The changes result from our decrease in net income for the fiscal 2026 period.

Current wording

Tax expense for the six months ended May 31, 2026 was $143,290, an increase of $77,176 as compared to a tax expense of $66,114 for the six months ended May 31, 2025. Tax expense for the three months ended May 31, 2026 was $162,558, an increase of $161,510 as compared to a tax expense of $1,048 for the three months ended May 31, 2025. The changes result from our increase in net income for the fiscal 2026 period.

Previous wording

As a result of the foregoing, the net loss for the three months ended February 28, 2026 was $(34,275), compared to a net income of $57,356 for the three months ended February 28, 2025.

Current wording

As a result of the foregoing, the net income for the six months ended May 31, 2026 was $370,283, compared to a net income of $175,320 for the six months ended May 31, 2025. The net income for the three months ended May 31, 2026 was $404,558, compared to a net income of $117,964 for the three months ended May 31, 2025.

Previous wording

As of February 28, 2026 we had cash of $6,448,930, marketable securities of $8,363,700, and working capital of $20,634,936. 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, 2026, we had cash of $5,231,528, marketable securities of $9,800,386, and working capital of $21,094,357. 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 three months ended February 28, 2026, we had net cash flow provided by operating activities of $1,090,562, as compared to net cash flow used in operating activities of $(124,278) for the three months ended February 28, 2025. The increase in cash flow from operating activities was primarily the result of increased cash flows from reduced accounts receivable, accounts payable, inventory and prepaid expenses as partially offset by net loss and a smaller decrease in cash flows from accrued expenses in 2026.

Current wording

During the six months ended May 31, 2026, we had net cash flow provided by operating activities of $1,376,281, as compared to net cash flow provided by operating activities of $85,357 for the six months ended May 31, 2025. The increase in cash flow from operating activities was primarily the result of increased cash flows from reduced accounts receivable, lower inventory and higher accounts payable and lower accrued expenses as partially offset by an increase in net income.

Previous wording

We had net cash flow provided by investing activities of $26,759 for the three months ended February 28, 2026, as compared to net cash flow used in investing activities of $(1,631,575) for the three months ended February 28, 2025. We attribute the change to reduced purchases by the Company of marketable debt securities in the form of Treasury bills and notes issued by the United States Treasury in the current period..

Current wording

We had net cash flow used in investing activities of $(1,476,362) for the six months ended May 31, 2026, as compared to net cash flow used in investing activities of $(1,804,708) for the six months ended May 31, 2025. We attribute the change to increased purchases by the Company of marketable debt securities in the form of Treasury bills and notes issued by the United States Treasury in the current period.

Previous wording

As a result of the foregoing, the Company had an increase in cash of $1,117,321 for the three months ended February 28, 2026, as compared to a net decrease in cash of $1,755,853 for the three months ended February 28, 2025.

Current wording

As a result of the foregoing, the Company had a decrease in cash of $(100,081) for the six months ended May 31, 2026, as compared to a net decrease in cash of $(1,613,601) for the six months ended May 31, 2025.