SPRS 10-K & 10-Q changes, risk factors and insider trading

The components business has, from time to time, experienced periods of extreme shortages in product supply, generally as the result of demand exceeding available supply. When these shortages occur, suppliers tend to either increase prices or reduce the number of units sold to customers. We believe that because of our large inventory and our relationships with our manufacturers, we have not been adversely affected by shortages in certain discrete semiconductor components. However, future shortages may have an adverse effect upon our business especially if we were to reduce inventory to cut costs and reduce risks of obsolescence. Currently, theThe Company believes that itsit leadcurrently timehas sufficient inventory levels. is better than their competitors and we have been able to maintain the customers we have as well as in some instances acquire new customers . However, our business could be affected if the Company is unable to maintain the levels of inventory needed to keep our customers lines running. In addition, customers could order extra inventory of products from several suppliers when they are concerned about a possible shortage and then not reorder such products in the future for such time as they work off their excess inventory purchased.

We have also adoptedmaintain a shareholder rights plan that could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, us or a large block of our common stock. A third party that acquires 5%10% or more of our common stock could suffer substantial dilution of its ownership interest under the terms of the shareholder rights plan through the issuance of our shares to all stockholders other than the acquiring person. These and other provisions in our articles of incorporation and bylaws could make it more difficult for stockholders or potential acquirers to obtain control of our Board of Directors or initiate actions that are opposed by our then-current Board of Directors, including a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our Board of Directors could cause the market price of our common stock to decline.

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 can’tcannot deliver.

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. ForThe 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. OneThe Challenge Electronics division in the Company has had success in designing new products products for customers to better their products performance capabilities. This proactive approach separates the Company from selling commodity 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 2025,2026, 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 travel times and our ability to deal successfully, with new and future disruptors. The tariffs continue to impact the Company, although less less now then previously. The general supply chain challenges present both a challenge and opportunity to the Company. The Company is cautiously cautiously optimistic about its ability to meet these challenges with continued growth unless the general global or electronics industry economic economic conditions deteriorate. Financial news has been talking about the decreases in consumer demand which may impact negatively the demand for the Company’s products, as the customers are producing less of their products. TheseChallenging economic conditions could have a negative impact on sales into 2025.2026. 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 economicthere conditionsare havemany deteriorated, itchallenges hasin impactedthis the Company’s business. Customers have pushed back delivery dates,complicated and incompetitive somemarket, cases required cancellations because they over ordered in 2022 creating a significant excess inventory. Wethere are watchingalso closelymany asgreat customersopportunities consume their excess inventory levels to reflect this new business demand, andthat the Company is willinvolved respondin. accordingly.Therefore Wemanagement expectlooks that it could continue through 2025 as the customers continueforward to consumecontinued this excess inventory and start ordering products again more and more which will reflectgrowth in the2026 Company’s sales.an beyond.

The allowance for doubtfulcredit accounts 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.

Consolidated net sales for the fiscal year ended November 30, 20242025 decreasedincreased by $5,065,403$5,108,966 or 14.0%,16.4%, to $31,211,139$36,320,105 as compared to net sales of $36,276,542 $31,211,139 for the fiscal year ended November 30, 2023.2024. We attribute the decreaseincrease to aan decreaseincrease in business with new customers as well as aan decreaseincrease in in business with existing customers. We can also attribute the decreaseincrease to customersan pushing out orders due to them over ordering in 2022increase in responsebusiness tofrom the supplyCompany’s chaindistribution channels. constraints. The customers have excess inventory that they need to consume before re-ordering those products. Additionally, many customers, because of having this excess inventory have not launched new product development as their cash is tied up in the inventory.NetNet sales for the fiscal years ended November 30, 20242025 and November 30, 20232024 reflect $549,564$941,564 and $1,032,198, $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 decreased by $1,024,994 to $8,903,694 or 10.3%, as compared to $9,928,688 for the fiscal year ended November 30, 2023.2024. Gross margin as a percentage of net sales increased to 28.5% for the fiscal year ended November 30, 2024 comparedslightly to 27.4%28.8% for the fiscal year ended November 30, 2023.2025 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 .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 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 at these customers without the help of these subcontractor customers. During Fiscal 2024,2025, 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 ishas also movingmoved 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, 20242025 was $2,739,994,$2,906,782, aan decreaseincrease of $270,515,$166,788, or 9.0%,6.1%, as compared to $3,010,509 $2,739,994 for the fiscal year ended November 30, 2023.2024. We attribute the decreaseincrease to decreasesincreases in sales and the resulting selling expenses such as commission expenses, travel and trade show expenses, offset by the hiring of new salespeople which increased sales payroll, travel and entertainment and auto expenses, offset by decreases in freight out and entertainmentprinting expenses.

General and administrative expenses for the fiscal year ended November 30, 20242025 was $5,189,369,$6,223,384, aan decreaseincrease of $148,026,$1,034,015, or 2.8%,19.9%, as compared to $5,337,395$5,189,369 for the fiscal year ended November 30, 2023.2025. The decreaseincrease is due primarily to decreasesnon 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 expensesexpenses, utilities and temporary helpoffice expenses and directorsprofessional fees, computer expenses and consulting expenses and pension expenses as well as increases in bank charges and bad debt expenses, offset by increasesdecreases in salariesrent, anddirectors relatedfees payroll tax expenses, professional fees, telephone, bank charges and public company expenses.

Tax expense for the fiscal year ended November 30, 20242025 was $409,973,$474,301, aan decreaseincrease of $243,424$64,328 as compared to a tax expense of $653,397 $409,973 for the fiscal year ended November 30, 2023.2024. The changes result from our decreaseincrease in net income for the 20242025 period.

As of November 30, 20242025 we had cash of $5,627,693,$5,331,609, marketable securities in the amount of approximately $7.1 million,$8,438,017, and working capital of $18,909,561.$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, 2024,2025, we had net cash flow provided by operating activities of $1,812,399,$916,147, as compared to net cash flow provided by operating activities of $2,192,899$1,823,390 for the fiscal year ended November 30, 2023.2024. . The decrease in cash flow from operating activities was primarily the result of lowerdecreased netcash incomeflows from accounts receivable, inventory and relatedprepaid noncashexpenses itemsas ofpartially deferredoffset taxes,by an increase in net income, accrued expenses and non cash expenses including stock based compensation and depreciation as well as accounts receivable as offset by increases in accounts payable and prepaid expense levels in 2024.compensation.

We had net cash flow used hadin 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, as compared to net cash flow used in investing activities of $(3,248,140) for the fiscal year ended November 30, 2023.2024. We attribute the change to acquisition ofreduced approximatelypurchases $5.9by millionthe 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 $0$138,000 during the fiscal year ended November 30, 20242025 as compared to $0 provided by financing activities activities for the fiscal year ended November 30, 2023.2024. We attribute the increase to the proceeds from the exercise of stock options.

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. However, some logistics costs such as ocean and air freight are not passed along to customers. Any significant increase in inflation and interest rates could have a significant effect on the economy in general and, thereby, could could affect our future operating results.

The Company operates with two sales groups, Surge Components (“Surge”) and Challenge Electronics (“Challenge”). Surge is a supplier of electronic electronic products and components. These products include capacitors, which are electrical energy storage devices, and discrete semiconductor components, 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 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$24,462 and $84,198$203,019 for the threesix months ended FebruaryMay 28,31, 2026 and February 28,May 31, 2025 respectively.

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.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 ishas in the process of openingopened 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 second half 2026 but expects expectsthe remainder of 2026 to be a period of continued challenge, inwith regardregards to inflation and general economic conditions,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 casescases, the customers will accept the increase while in others,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 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 than 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 economic conditions deteriorate. Challenging economic conditions could have a negative impact on sales into 2027. 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 or Iran that would cause us potential business disruption.disruptions, if any. For example, many of the Company’s potential factory partners have opened production facilities outside of China. The current U.S. conflict with Iran also carries challenges in the cost of products and general global supply. As there are many challenges in this complicated and competitive market, there are also many great opportunities that the Company is involved in. ThereforeTherefore, the Company continues to seek and develop opportunities for growth in 2026 and beyond.

Consolidated net sales for the threesix months ended FebruaryMay 28,31, 2026 increased by $962,169$1,407,138 or 13.3%,8.7%, to $8,193,907$17,555,601 as compared to net sales of $7,231,738$16,148,463 for the six months ended May 31, 2025. Consolidated net sales for the three months ended FebruaryMay 28,31, 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.customers Net sales for the threesix months ended FebruaryMay 28,31, 2026 and FebruaryMay 28,31, 2025 reflect $165,574$339,751 and $173,081, $380,332, respectively of tariff costs that the Company was able to pass on to its customers.

Our gross profit for the six three months ended FebruaryMay 28,31, 2026 increased by $362,707$564,627 to $2,408,409,$5,298,732, or 17.7%,11.9%, as compared to $2,045,702$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 Februaryfor 28,the three months ended May 31, 2025. Gross margin as a percentage of net sales increased to 29.4%30.9% for the three months ended FebruaryMay 28, 31, 2026 compared to 28.3%30.2% for the three months ended FebruaryMay 28,31, 2025. The increase in gross profit and gross profit as a percentage of sales can 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,products and do not affect existing orders. These reductions can 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 impact the Company’s gross profit margin, these subcontractor customers represent very significant potential growth for the Company,Company because because they can help the Company become an approved supplier at the customers they manufacture for,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.

Selling and shipping expenses for the threesix months ended FebruaryMay 28,31, 2026 was $834,180,$1,722,191, an increase of $180,813,$389,972, or 27.7%,29.3%, as compared to $653,367$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 FebruaryMay 28,31, 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 andexpenses, 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.. expenses.

Depreciation expense for the the threesix months ended FebruaryMay 28,31, 2026 was $10,791,$16,620, a decrease of $4,826,$18,459, or 30.9%,52.6%, as compared to $15,617$35,079 for the six months ended May 31, 2025. Depreciation expense for the three months ended May 31, 2026 was $5,829, a decrease of $13,633, or 70.0%, as compared to $19,462 for the Februarythree 28,months ended May 31, 2025.

Other income for the threesix months months ended FebruaryMay 28,31, 2026 was $104,297,$212,734, aan decreaseincrease of $20,669$29,404 as compared to $124,966$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 FebruaryMay 28,31, 2025. We attribute the decreaseincrease to aan reductionincrease in income from investment in bonds and notes issued by the United States Treasury.

Tax expense for the threesix months months ended FebruaryMay 28,31, 2026 was $(19,268),$143,290, aan decreaseincrease of $84,334$77,176 as compared to a tax expense of $65,066$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 Februarythree 28,months ended May 31, 2025. The changes result from our decreaseincrease in net income for the fiscal 2026 period.

As a result of the foregoing, the net lossincome for the threesix months ended FebruaryMay 28,31, 2026 was $(34,275),$370,283, compared to a net income of $57,356$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 FebruaryMay 28,31, 2025.

As of FebruaryMay 28,31, 20262026, we had had cash of $6,448,930,$5,231,528, marketable securities of $8,363,700,$9,800,386, and working capital of $20,634,936.$21,094,357. We believe that our working capital levels 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 threesix months ended FebruaryMay 28,31, 2026, we had net cash flow provided by operating activities of $1,090,562,$1,376,281, as compared to net cash flow usedprovided inby operating activities of $(124,278)$85,357 for the threesix months ended FebruaryMay 28,31, 2025. The increase in cash flow from operating activities was primarily the result of increased cash flows from reduced accounts receivable, accounts payable,lower inventory and prepaidhigher accounts payable and lower accrued expenses as partially offset by netan loss and a smaller decreaseincrease in cashnet flows from accrued expenses in 2026.income.

We had net cash flow providedused byin investing activities of $26,759$(1,476,362) for the threesix months ended FebruaryMay 28,31, 2026, as compared to net cash flow used in investing activities of $(1,631,5751,804,708) for the threesix months ended FebruaryMay 28,31, 2025. We attribute the change to reducedincreased 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..period.

As a result of the foregoing, the Company had ana increasedecrease in cash of $1,117,321$(100,081) for the threesix months ended FebruaryMay 28,31, 2026, as compared to a net decrease in cash of $1,755,853$(1,613,601) for the threesix months ended FebruaryMay 28,31, 2025.

The table below sets forth our contractual obligations, including long-term debt, operating leases and other long-term obligations, as of FebruaryMay 28,31, 2026:

We do not have any off balanceoff-balance sheet arrangements.