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 $249,248 and
$186,566 for the fiscal year ended November 30, 2022 and November 30, 2021
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 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 Company has also made progress in expanding its footprint in
China and Europe by hiring key sales managers in thise areas.



                                       16





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. 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 have 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.
Management expects 2023 to be a year of continued change, in regards to pandemic
healing, inflation and general economic conditions, challenge, in regards to
maintaining consistent flow of products during shortages of certain products,
and growth as we see our customers 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 raw materials has
continued to increase, and due to that fact, our costs have increased. Our 2023
year-to-date sales reflect strong growth and the Company has a strong backlog
with customers due to the increased demand for products and the fact that
customers are placing orders further into 2023. The Company has also been able
to handle the brokering of certain semiconductor products, helping their
customers to keep product lines up and running by locating products that their
regular suppliers can't deliver. 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 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 financing, the continued supply
of products from our factories, the ability to withstand higher transportation
costs and longer travel times due to the backup at the ports and our ability to
deal successfully, with new and future disruptors. The tariffs continue to
impact the Company. At this time there is a shortage of electronics components
which could impact the Company's growth. 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 economic conditions deteriorate. Financial news has
been talking about the decreases in consumer demand for certain consumer goods
such as PC's and smartphones and the possibility of a recession in 2023. These
economic conditions could have a negative impact on sales in 2023. The
combination of 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. As economic conditions have deteriorated, it has impacted the
Company's business. Customers have pushed back delivery dates and in some cases
required cancellations. We are watching closely as customers adjust their
inventory levels to reflect this new business demand, and the Company will

respond accordingly.



Impact of Covid-19



In March 2020, the World Health Organization categorized COVID-19 as a pandemic
and it continues to impact the global economy. During the pandemic we did
everything we could do to keep customers production running and keep operations
as smooth and stable as possible, and we will continue to do our best to do so.
The Company has experienced order cancellations and order hold notices from
customers and we expect this could continue. While the worst effects of the
pandemic may be behind us in the United States, the virus situation is still
serious globally, and business with customers in different regions is impacted
more or less based on the Covid status in that region. Spikes of Covid that may
cause China lockdowns can have an adverse impact on manufacturing stability and
the ability of our Asia salespeople to visit customers. Although the Company's
business has improved in the Fiscal year ended November 30, 2022 and our
customers' outlook for their business is stronger than it was previously, we
cannot guarantee that the increase in subsequent quarters will continue as the
coronavirus conditions may change. Additionally, the spread of COVID-19 and the
related actions implemented by governments of the United States and elsewhere
across the globe, may worsen again over time. Thus, the pandemic may have an
impact on the Company's operations, the future effect of which will largely
depend on future developments which are highly uncertain and cannot be predicted
at this time. The Company continues to monitor its operations and applicable
government recommendations and requirements.



Critical Accounting Policies



Accounts Receivable




The allowance for doubtful accounts 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.



                                       17

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 $67,000.



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, 2022 increased by
$12,082,533 or 30.3%, to $51,910,790 as compared to net sales of $39,828,257 for
the fiscal year ended November 30, 2021. 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 some of the increase in sales during
the fiscal year ended November 30, 2022, to one of the Company's divisions
brokering certain products. In Brokering, the Company helps customers find parts
that their regular suppliers can not deliver. Net sales for the fiscal years
ended November 30, 2022 and November 30, 2021 reflect $1,477,031 and $862,854,
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, 2022 increased by
$3,431,641 to $14,317,421, or 31.5%, as compared to $10,885,780 for the fiscal
year ended November 30, 2021. Gross margin as a percentage of net sales
increased to 27.6% for the fiscal year ended November 30, 2022 compared to 27.3%
for the fiscal year ended November 30, 2021. The increase can be attributed to
the increase in sales volume as well as offset by 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.
During Fiscal 2022, 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. The Company
is also moving some customer deliveries directly to Hong Kong in order to
mitigate some of these costs.



                                       18





Selling and shipping expenses for the fiscal year ended November 30, 2022 was
$3,305,714, an increase of $719,107, or 27.8%, as compared to $2,586,607 for the
fiscal year ended November 30, 2021. We attribute the increase to increases in
sales and the resulting selling expenses such as commission expenses, travel and
entertainment expenses, sales payroll and auto expenses, offset by decreases in
freight out expenses.




General and administrative expenses for the fiscal year ended November 30, 2022
was $6,210,892, an increase of $1,135,086, or 22.4%, as compared to $5,075,806
for the fiscal year ended November 30, 2021. The increase is due primarily to
increases in salaries and related payroll taxes, rental expenses, professional
fees and office expenses as well as health and general insurance expenses and
temporary help expenses and consulting and directors fees, public company
expenses and warehouse expenses offset by decreases in computer expenses, bad
debt expenses and settlement expenses.



Depreciation expense for the fiscal year ended November 30, 2022 was $78,398, an
increase of $8,300, or 11.8%, as compared to $70,098 for the fiscal year ended
November 30, 2021. The increase is due to the company purchasing new equipment
during the fiscal year ended November 30, 2022.



Tax expense for the fiscal year ended November 30, 2022 was $1,171,562, an
increase of $79,275 as compared to a tax expense of $1,092,287 for the fiscal
year ended November 30, 2021. The changes result from our increase in net income
for such periods.




As a result of the foregoing, net income for the fiscal year ended November 30,
2022 was $3,736,146, compared to a net income of $2,510,761 for the fiscal

year
ended November 30, 2021.

Liquidity and Capital Resources





As of November 30, 2022 we had cash of $8,690,040, and working capital of
$16,845,484. 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, 2022, we had net cash flow provided by
operating activities of $2,235,298, as compared to net cash flow provided by
operating activities of $2,327,043 for the fiscal year ended November 30, 2021.
The increase in cash flow from operating activities resulted from increases in
net income, changes in stock compensation expense, accounts receivable and a
smaller increase in inventory, and a decrease in the gain on forgiveness of the
Payroll Protection Plan loan, as partially offset by a decrease in accounts
payable and accrued expenses and deferred taxes.



We had net cash flow used in investing activities of $(48,351) for the fiscal
year ended November 30, 2022, as compared to net cash flow used in investing
activities of $(194,909) for the fiscal year ended November 30, 2021. We
attribute the change to the Company purchasing more new equipment during the
fiscal year ended November 30, 2021.

We had net cash flow used in financing activities of $(8,495) during the fiscal year ended November 30, 2022 as compared to $(8,475) provided by financing activities for the fiscal year ended November 30, 2021.





                                       19

As a result of the foregoing, the Company had a net increase in cash of $2,178,452 for the fiscal year ended November 30, 2022, as compared to a net increase in cash of $2,123,659 for the fiscal year ended November 30, 2021.





The table below sets forth our contractual obligations, including long-term
debt, operating leases and other long-term obligations, as of November 30, 2022:



                                                       Payments due
                                                   0 - 12        13 - 36       37 - 60      More than
Contractual Obligations              Total         Months        Months        Months       60 Months
Financing Lease Obligations       $         -     $       -     $       -     $       -     $        -
Operating leases                  $ 1,773,872       309,216       408,452       424,952        631,252
Total obligations                 $ 1,773,872     $ 309,216     $ 408,452     $ 424,952     $  631,252




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. 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 affect our future operating results.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

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