Quarterly Report for Quarter Ending August 31, 2025 (Form 10-Q)

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. Furthermore, we cannot at this time assess the affect that the global outbreak of the novel Coronavirus may have on the Company.

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" in our most recent Annual Report on Form 10-K. 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 $302,681 and $73,235 for the nine months ended August 31, 2025 and August 31, 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 its customers find parts that regular suppliers can't 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. 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 goods could be increased which could impact the Company's manufacturing costs and subsequently the price of goods sold to customers. The Company continues to pass on the costs of tariffs to customers manufacturing in America. The Company does not expect any impact from tariffs on availability of products or the supply chain for the Company's products. The imposition of tariffs could also cause inflationary pressures on some of the Company's customers which could cause such customers to scale back on the purchases of the Company's products. To mitigate the impacts from tariffs, the Company has taken two measures. First, for many of the Company's customers that the Company sells directly to manufacturing in Mexico, the Company has changed such incoterms to FCA Hong Kong. As such, the customer assumes full responsibility for transportation to North America and duty drawback in Mexico. Second, for the Company's distribution channel partners and for many of their customers in Mexico, the Company will import the goods to the United States and deliver them to the distributor's bonded warehouse which would likely avoid potential tariffs. Supply chain challenges can present both a challenge and opportunity to the Company. The Company is cautiously optimistic about its ability to meet the challenges with continued growth unless the general global or electronics industry economic conditions deteriorate. The potential opportunities that supply chain problems present is that the Company's lead time for customers delivery is frequently shorter than our competitors lead time. This could attract customers to the Company to help keep their production lines up and running. The financial media recently had emphasized a reduction of overall consumer demand which could negatively impact the demand for the Company's products because our customers, for example in the home appliance and automotive market segments, are also producing less of their products. As such, these economic conditions and perceptions of a slowing economy could have a negative impact on sales into 2026. The combination of possible 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 additional production facilities outside of China. Although dealing with various challenges to business, the Company continues to work diligently to involve customers in new design projects, in regional expansion, and increasing its sales though its distribution sales channel.

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 $60,000.

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 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.

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.

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.

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

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.

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.

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.

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.

Liquidity and Capital Resources

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.

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.

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.

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.

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.

The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of August 31, 2025:

						Payments due
						0 - 12				13 - 36				37 - 60				More than
Contractual Obligations		Total				Months				Months				Months				60 Months
Financing Lease Obligations		$	-			$	-			$	-			$	-			$	-
Operating leases		$	1,030,134				388,041				596,593				45,500				-
Total obligations		$	1,030,134			$	388,041			$	596,593			$	45,500			$	-

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.