Annual Report for Fiscal Year Ending November 30, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements. All statements other than statements of historical facts contained herein, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, forward-looking statements can be identified by terms such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading "Risk Factors." Also, these forward-looking statements represent our estimates and assumptions only as of the date of the filing of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of the filing of this report.

Overview

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 $312,389 and $95,584 for the fiscal year ended November 30, 2025 and November 30, 2024 respectively.

Challenge is engaged in the sale of electronic components. In 1999, Challenge began as a division to sell audible components. We have been able to increase the types of products that we sell because some of our suppliers introduced new products, and we also located other products from new suppliers. Our core products include buzzers, speakers, microphones, resonators, alarms, chimes, filters, and discriminators. We now also work with our suppliers to have our suppliers customize many of the products we sell for many customers through the customers' own designs and those that we work with our suppliers to have our suppliers redesign for them at our suppliers' factories. We have engineers on our staff who work with our suppliers on such redesigns and assists with the introduction of new product lines. We are continually looking to expand the line of products that we sell. We sell these products through independent representatives that earn a commission on the products we sell. We are also working with local, regional, and national distributors to sell these products to local accounts in every state. Challenge also at times handles the brokering of certain products, helping their customers find parts that that regular suppliers cannot deliver.

The Company has a Hong Kong office to effectively handle the transfer business from United States customers purchasing and manufacturing in Asia after designing the products in the United States. This office has strengthened the Company's global position, improving our capabilities and service to our customer base.

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. The Surge sales division has a sales and marketing office and warehouse in Hong Kong for these reasons, we established Surge Ltd., our Hong Kong subsidiary. The Surge divisions regional sales in their Europe office are growing strong 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 commodity products to also selling more customized products. Management is encouraged by the results of 2025 providing strong growth in sales and profitability. Exclusive of the one time charge of the employee stock options the Company has doubled it's profitability in 2025. 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, 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 previously. The general supply chain challenges present both a challenge and opportunity to the Company. The Company is cautiously optimistic about its ability to meet these challenges with continued growth unless the general global or electronics industry economic conditions deteriorate. Challenging economic conditions could have a negative impact on sales into 2026. The combination of possible disruptors such as increased costs and longer lead times from factories to the Company could also have negative impacts on the business in the future. The tense relations between America and China could also impact the Company's business. China could impose rules and laws that make it more difficult to do business in Hong Kong and China. The Company is taking steps to be well prepared in case of any actions from China that would cause us business disruption. For example, many of the Company's factory partners have opened production facilities outside of China. As there are many challenges in this complicated and competitive market, there are also many great opportunities that the Company is involved in. Therefore management looks forward to continued growth in 2026 an beyond.

Critical Accounting Policies

Accounts Receivable

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.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, collectability is reasonably assured and title and risk of loss have been transferred to the customer. This occurs when product is shipped from the Company's warehouse. For direct shipments from our suppliers to our customer, revenue is recognized when product is shipped from the Company's supplier. The Company acts as a sales agent for certain customers buying direct from one of its suppliers. The Company reports these commissions as revenues in the period earned.

The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.

Inventory Valuation

Inventories are recorded at the lower of cost or net realizable value. Write-downs of inventories to net realizable value are based on stock rotation, historical sales requirements and obsolescence as well as in the changes in the backlog. Reserves required for obsolescence were not material in any of the periods in the financial statements presented. Reserves related to stock rotation and future sales requirements for specific inventory parts involve subjective estimates to be made by management based on current and expected market conditions. If market conditions are less favorable than those projected by management, additional write-downs of inventories could be required. For example, each additional 1% of obsolete inventory would reduce operating income by approximately $55,000.

The Company does not have price protection agreements with any of its vendors and assumes the risk of changes in the prices of its products. The Company does not believe there to be a significant risk with regards to the lack of price protection agreements as many of its inventory items are purchased to fulfill purchase orders received.

Income Taxes

We have made a number of estimates and assumptions relating to the reporting of a deferred income tax asset to prepare our financial statements in accordance with generally accepted accounting principles. These estimates may have a significant impact on our valuation allowance relating to deferred income taxes. Our estimates could materially impact the financial statements.

Results of Operations

Consolidated net sales for the fiscal year ended November 30, 2025 increased by $5,108,966 or 16.4%, to $36,320,105 as compared to net sales of $31,211,139 for the fiscal year ended November 30, 2024. We attribute the increase to an increase in business with new customers as well as an increase in business with existing customers. We can also attribute the increase to an increase in business from the Company's distribution channels. Net sales for the fiscal years ended November 30, 2025 and November 30, 2024 reflect $941,564 and $549,564, respectively of tariff costs that the Company was able to pass on to its customers.

Our gross profit for the fiscal year ended November 30, 2025 increased by $1,551,477 to $10,455,171 or 17.4%, as compared to $8,903,694 for the fiscal year ended November 30, 2024. Gross margin as a percentage of net sales increased slightly to 28.8% for the fiscal year ended November 30, 2025 compared to 28.5% for the fiscal year ended November 30, 2024. 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 2025, 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 has also moved some customer deliveries directly to Hong Kong in order to mitigate some of these costs.

Selling and shipping expenses for the fiscal year ended November 30, 2025 was $2,906,782, an increase of $166,788, or 6.1%, as compared to $2,739,994 for the fiscal year ended November 30, 2024. We attribute the increase to increases in sales and the resulting selling expenses such as commission expenses, the hiring of new salespeople which increased sales payroll, travel and entertainment and auto expenses, offset by decreases in freight out and printing expenses.

General and administrative expenses for the fiscal year ended November 30, 2025 was $6,223,384, an increase of $1,034,015, or 19.9%, as compared to $5,189,369 for the fiscal year ended November 30, 2025. The increase is due primarily to non cash stock based compensation of $538,361 during the fiscal year ended November 30, 2025. As well as increases in officer salaries, other salaries and related payroll taxes, general insurance expenses as well as health insurance expenses, utilities and office expenses and professional fees, computer expenses and consulting expenses and pension expenses as well as increases in bank charges and bad debt expenses, offset by decreases in rent, directors fees and public company expenses.

Depreciation expense for the fiscal year ended November 30, 2025 was $70,603, an increase of $219, or less than 1%, as compared to $70,384 for the fiscal year ended November 30, 2024.

Other income for the fiscal year ended November 30, 2025 was $356,612, an increase of $24,909 as compared to $331,703 for the fiscal year ended November 30, 2024. We attribute the increase to income from investment in the acquisition of Treasury Bonds and notes issued by the United States Treasury.

Tax expense for the fiscal year ended November 30, 2025 was $474,301, an increase of $64,328 as compared to a tax expense of $409,973 for the fiscal year ended November 30, 2024. The changes result from our increase in net income for the 2025 period.

As a result of the foregoing, net income for the fiscal year ended November 30, 2025 was $1,136,713, compared to a net income of $825,677 for the fiscal year ended November 30, 2024.

Liquidity and Capital Resources

As of November 30, 2025 we had cash of $5,331,609, marketable securities in the amount of $8,438,017, and working capital of $20,763,574. 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.

During the fiscal year ended November 30, 2025, we had net cash flow provided by operating activities of $916,147, as compared to net cash flow provided by operating activities of $1,823,390 for the fiscal year ended November 30, 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, accrued expenses and non cash expenses including stock based compensation.

We had net cash flow used in investing activities of $(1,350,231) for the fiscal year ended November 30, 2025, as compared to net cash flow used in investing activities of $(3,830,496) for the fiscal year ended November 30, 2024. 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.

We had net cash flow used in financing activities of $138,000 during the fiscal year ended November 30, 2025 as compared to $0 provided by financing activities for the fiscal year ended November 30, 2024. We attribute the increase to the proceeds from the exercise of stock options.

As a result of the foregoing, the Company had a net decrease in cash of $(296,084) for the fiscal year ended November 30, 2025, as compared to a net decrease in cash of $(2,007,106) for the fiscal year ended November 30, 2024, but Marketable securities increased by more than $1.3M.

The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of November 30, 2025:

						Payments due
						0 - 12				13 - 36				37 - 60				More than
Contractual Obligations		Total				Months				Months				Months				60 Months
Financing Lease Obligations		$	-			$	-			$	-			$	-			$	-
Operating leases		$	1,369,528				367,033				590,113				412,382				-
Total obligations		$	1,369,528			$	367,033			$	590,113			$	412,382			$	-

Inflation

In the past two fiscal years, inflation has not had a significant impact on our business. The Company has been able to pass along increases in purchasing costs to their Customers. Any significant increase in inflation and interest rates could have a significant effect on the economy in general and, thereby, could affect our future operating results.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.