Financial Analysis

NOTE J EMPLOYMENT AND OTHER AGREEMENTS In February 2016, the Company entered into revised employment agreements with two officers of the Company. Pursuant to these agreements, the base salary for one officer is $330,000 and the base salary for the other officer is $275,000. The agreements continue until terminated by either party. In April 2026, the employment agreements for Ira Levy and Steven Lubman were amended to increase the base salary to $363,000 and $302,500, respectively. The Companys compensation committee may award these officers with bonuses and will review the base salary amounts for each of the officers on an annual basis to determine if any changes to the base salary amounts need to be made and may also award these officers with annual bonuses. Pursuant to the employment agreements, the officers are prohibited from engaging in activities which are competitive with those of the Company during their employment with the Company and for one year following termination. If the agreement is terminated other than for cause, the officer would be entitled to all base salary earned through the date of termination, accrued but unused vacation, all vested equity, and bonus amounts payable to the officer through the date of termination. The officers would also be entitled to receive an additional thirty-six months of annual compensation equal to the average of his base salary and bonus for the three calendar years prior to the date of termination, payable in accordance with …

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NOTE H INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates in effect in the years in which the differences are expected to reverse. The Companys deferred income taxes are comprised of the following: May 31, November 30, 2026 2025 Deferred Tax Assets Depreciation $ 34,714 $ 35,837 Allowance for bad debts 27,264 27,264 Inventory 68,696 68,696 Facilities rental 39,599 40,876 Other Accrued Accounts 99,747 56,539 Total deferred tax assets 270,020 229,212 Valuation allowance - - Deferred Tax Assets $ 270,020 $ 229,212 A valuation allowance for the deferred tax assets relates principally to the uncertainty of the utilization of deferred tax assets and was calculated in accordance with the provisions of ASC 740, which requires that a valuation allowance be established or maintained when it is more likely than not that all or a portion of deferred tax assets will not be realized. The Companys income tax expense consists of the following: Six Months Ended May 31, 2026 May 31, 2025 Current: Federal $ 140,313 $ 36,794 States 43,785 14,310 184,098 51,104 Deferred: Federal (29,382 ) 10,807 States (11,426 ) 4,203 (40,808 ) 15,010 Provision for income taxes $ 143,290 $ 66,114 The Company files a consolidated income tax return with its wholly-owned subsidiaries. A reconciliation of the difference bet …

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NOTE I OPERATING LEASE COMMITMENTS The Company leases its office and warehouse space through 2030 from a corporation that is partly owned by officers/shareholders of the Company (Related Company). Minimum rental payments to the Related Company approximated $105,000 for the six months ended May 31, 2026, and increases at the rate of two per cent per annum throughout the lease term. Pursuant to the lease agreement, lease expense recognized in operations differs from cash lease payments due to scheduled rent increases. Lease expense is recognized on a straight-line basis over the lease term. The difference between cash payments and lease expense is reflected in the carrying amount of the Companys operating lease right-of-use asset The Company has a lease to rent office space and a warehouse in Hong Kong through November 2027. Annual minimum rental payments for this space are approximately $77,097. The Company has a lease to rent additional warehouse space in Hong Kong through November 30, 2027. Annual minimum rental payments for this space are approximately $79,564. The Companys future minimum rental commitments at May 31, 2026 are as follows: Twelve Months Ended May 31, 2027 $ 369,131 2028 295,047 2029 221,054 2030 224,474 2031 and after 75,652 $ 1,185,358 Less interest portion 113,236 Present value of lease liabilities 1,072,122 Current portion 369,131 Noncurrent portion $ 702,991 Net rental expense for the six months ended May 31, 2026 and May 31, 2025 were $222,031 and $219, …

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NOTE D LOANS PAYABLE In February 2017, the Company obtained a line of credit with a bank for up to $3,000,000 (the Credit Line). Borrowings under the Credit Line are due upon demand and accrue interest at the greater of the prime rate or the LIBOR rate plus two percent (and may be increased by three percent in the event the Company fails to (i) repay all amounts due on the Credit Line upon demand or (ii) comply with any terms or conditions relating to the Credit Line). The Credit Line is collateralized by substantially all the assets of the Company. As of May 31, 2026, the balance on the Credit Line was $0. As of May 31, 2026, the Company was in compliance with the covenant for the debt service coverage ratio for the Credit Line. Effective July 1, 2023, the use of the LIBOR rate was discontinued and replaced with the secured overnight financing rate (SOFR). …

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NOTE F RETIREMENT PLAN In June 1997, the Company adopted a qualified 401(k) retirement plan for all full-time employees who are twenty-one years of age and have completed twelve months of service. The plan allows total employee contributions of up to fifteen percent (15%) of the eligible employees salary through salary reduction. The Company makes a matching contribution of twenty percent (20%) of each employees contribution for each dollar of employee deferral up to five percent (5%) of the employees salary. Net assets for the plan, as estimated by Axa Equitable, Inc., which maintains the plans records, were approximately $2,540,000 at November 30, 2025. Pension expense for the six months ended May 31, 2026 and May 31, 2025 was $30,647 and $28,935, respectively. …

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NOTE M EXPORT SALES The Companys export sales were as follows: Six Months Ended May 31, May 31, 2026 2025 Canada 1,437,308 1,960,019 China 5,136,828 4,682,173 Other Asian Countries 651,216 348,947 South America 4,170 49,600 Europe 1,298,152 982,285 Mexico 10,750 - Revenues are attributed to countries based on location of customer. …

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NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Principles of Consolidation : The consolidated financial statements include the accounts of Surge, Challenge, and Surge Limited (collectively the Company). All material intercompany balances and transactions have been eliminated in consolidation. The accompanying interim consolidated financial statements have been prepared without audit in accordance with the instructions to Form 10Q for interim financial reporting and the rules and regulations of the Securities and Exchange Commissions. In the opinion of management, all adjustments are of a normal recurring nature and all disclosures necessary for a fair presentation of these financial statements have been included. The results and trends in these interim consolidated financial statements for the six months ended May 31, 2026 and May 31, 2025 may not be representative of those for the full fiscal year or any future periods. (2) Accounts Receivable : Trade accounts receivables are recorded at the net invoice value net of the allowance for credit losses in the consolidated balance sheet and are not interest bearing. The Company considers receivables past due based on the payment terms. The Company reviews its exposure to accounts receivable and reserves specific amounts if collectability is no longer reasonably assured. The Company also reserves a percentage of its trade receivable balance based on collection history and current economic trends that might impact the level o …

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NOTE G SHAREHOLDERS EQUITY [1] Preferred Stock : In February 1996, the Company amended its Certificate of Incorporation to authorize the issuance of 1,000,000 shares of preferred stock in one or more series. In August 2010, the number of preferred shares authorized for issuance was increased to 5,000,000 shares. In November 2000, the Company authorized 100,000 shares of preferred stock as Non-Voting Redeemable Convertible Series C Preferred Stock (Series C Preferred). Each share of Series C Preferred is automatically convertible into 10 shares of our common stock upon shareholder approval. If the Series C Preferred were converted into common stock on or before April 15, 2001, these shares were entitled to cumulative dividends at the rate of $.50 per share per annum commencing April 15, 2001 payable on June 30 and December 31 of each year. In November 2000, 70,000 shares of the Series C Preferred were issued in payment of financial consulting services to its investment banker and a shareholder of the Company. Dividends aggregating $179,069 have not been paid for the semi-annual periods ended December 31, 2001 through the semi-annual payment due December 31, 2025. The Company has accrued these dividends. At May 31, 2026 there are 10,000 shares of Series C Preferred issued and outstanding. In October 2016, the Company authorized 75,000 shares of preferred stock as Voting Non-Redeemable Convertible Series D Preferred Stock (Series D Preferred). None of the Series D Preferred Stoc …

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