10-K: Surge Components Reports Annual Results: Sales Decline Amidst Economic Headwinds, Focus Remains on Growth and Efficiency

Surge Components' annual report reveals a decrease in net sales for fiscal year 2024, attributed to reduced business with both new and existing customers, alongside ongoing economic challenges.

Summary

• Surge Components, Inc. reported a decrease in consolidated net sales for the fiscal year ended November 30, 2024, falling by 14.0% to $31,211,139 compared to $36,276,542 in the previous year.
• The company attributes this decline to decreased business with new and existing customers, as well as order pushouts due to excess inventory from 2022.
• Gross profit decreased by 10.3% to $8,903,694, while gross margin as a percentage of net sales increased to 28.5% from 27.4% due to higher margin sales to certain customers.
• Selling and shipping expenses decreased by 9.0% to $2,739,994, while general and administrative expenses decreased by 2.8% to $5,189,369.
• Net income for the fiscal year was $825,677, compared to $972,110 for the previous year.
• The company had cash of $5,627,693, marketable securities of approximately $7.1 million, and working capital of $18,909,561 as of November 30, 2024.
• The company is exploring opportunities for growth and expansion using its cash resources.
• The company's backlog as of November 30, 2024, was approximately $9,432,962, compared to $11,427,000 at November 30, 2023.
• The company is cautiously optimistic about its ability to meet challenges with continued growth unless general global or electronics industry economic conditions deteriorate.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While the company highlights some positive aspects like increased gross margin and decreased operating expenses, the overall tone is cautious due to decreased net sales and net income, along with various risk factors and economic challenges. The company's cautious optimism balances the negative aspects.

Positives

• Gross margin as a percentage of net sales increased to 28.5% for the fiscal year ended November 30, 2024, compared to 27.4% for the fiscal year ended November 30, 2023.
• Selling and shipping expenses decreased by $270,515, or 9.0%, as compared to the prior year.
• General and administrative expenses decreased by $148,026, or 2.8%, as compared to the prior year.
• Other income increased by $216,733 as compared to the prior year due to income from investment in the acquisition of Treasury Bonds and notes issued by the United States Treasury.
• The company believes that its working capital levels are adequate to meet its operating requirements during the next twelve months.

Negatives

• Net sales decreased by $5,065,403 or 14.0%, to $31,211,139 as compared to the prior year.
• Gross profit for the fiscal year ended November 30, 2024 decreased by $1,024,994 to $8,903,694 or 10.3%, as compared to the prior year.
• Tax expense for the fiscal year ended November 30, 2024 was $409,973, a decrease of $243,424 as compared to the prior year.
• Net income for the fiscal year ended November 30, 2024 was $825,677, compared to a net income of $972,110 for the prior year.
• The company had a net decrease in cash of $2,007,106 for the fiscal year ended November 30, 2024, as compared to a net decrease in cash of $1,055,241 for the prior year.

Risks

• The company depends on a limited number of suppliers, with Lelon Electronics accounting for a significant portion of purchases.
• Maintaining large inventories exposes the company to price fluctuations and technology changes.
• The loss of certain customers could adversely affect operations.
• The company faces intense competition from larger competitors with greater resources.
• System failure or cybersecurity breaches could subject the company to increased operating costs and potential losses.
• Shortages of components could adversely affect the business.
• The company's success depends on key personnel whose continued service is not guaranteed.
• The business is subject to risks from trade regulation and foreign economic conditions.
• Electronics industry cyclicality may adversely affect operations.
• Most of the company's products are not protected by patents, trademarks, and proprietary information.
• The common stock is quoted on the OTC Market, which may limit liquidity and price.
• Anti-takeover provisions in organizational documents may discourage or prevent a change of control.

Future Outlook

Management expects 2025 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 customers slowly return to full production pace; 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.

Management Comments

• Management expects 2025, 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.
• 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.

Industry Context

The electronics industry is characterized by intense price cutting, rapid technological changes, and periodic economic downturns, all of which can adversely affect the company's operating results.

Comparison to Industry Standards

• The report mentions competitors such as Nichicon, Panasonic, Vishay, and Kemet in the capacitor market, and Vishay, OnSemi, and Diodes, Inc. in the discrete components market.
• These companies are generally larger and have greater resources than Surge Components, indicating a competitive disadvantage in terms of scale and market reach.
• The report does not provide specific performance comparisons against these competitors, but acknowledges that larger competitors may focus direct selling efforts on larger customers, potentially increasing competition for Surge.

Related Party Transactions

• Surge and Challenge each lease their current executive offices from Great American Realty of Jefryn Blvd., LLC, an entity owned 50% by Ira Levy, our Chief Executive Officer, and President and Steven Lubman, our Vice President, Secretary and Treasurer.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net sales and net income, but reassured by the company's cash position and exploration of growth opportunities.
• Employees may face uncertainty due to the economic challenges and potential impact on the company's performance.
• Customers may experience changes in pricing and availability due to supply chain challenges and tariffs.
• Suppliers may be affected by the company's efforts to diversify its supply base and mitigate risks related to foreign trade.

Next Steps

• The company is exploring and evaluating opportunities for growth and expansion using the company's cash resources.
• The company is taking steps to be well prepared in case of any actions from China that would cause business disruption.

Key Dates