OTC: SPRS

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 regular suppliers
cannot deliver.

In order for us 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 develop new and innovative products, our ability to obtain new clients, our ability to retain and attract
sales and other 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 managing growth, including monitoring an expanded level of operations.

Industry Background

The United States electronics
distribution industry is composed of manufacturers, national and international distributors, as well as regional and local distributors.
Electronics distributors market numerous products, including active components (such as transistors, microprocessors, integrated circuits
and semiconductors), passive components (such as capacitors and audibles), and electro mechanical, interconnect (such as connectors and
wire) and computer products. Surge focuses its efforts on the sale of capacitors, discrete components, and audible products.

1

The electronics industry has
been characterized by intense price cutting and rapid technological changes and development, which could materially adversely affect our
future operating results. In addition, the industry has been affected historically by periodic economic downturns, which have had an adverse
economic effect upon manufacturers and end-users of the products that we sell, as well as distributors. Furthermore, the life-cycle
of existing electronic products and the timing of new product development and introduction can affect the demand for electronic components,
including the products that we sell. Accordingly, any downturn in the electronics industry in general could adversely affect our business
and results of operations. Due to rising transportation and employment costs in Asia, we have seen some U.S. manufacturers start moving
their manufacturing facilities to Mexico to reduce transportation costs and bring manufacturing much closer to home. At this time, however,
none of our customers has moved its manufacturing facilities to Mexico.

Products

Surge supplies a wide variety
of electronic components (some of which bear our private “Surge” label) which can be broadly divided into two categories—capacitors
and discrete components. For Fiscal 2025 and Fiscal 2024, capacitors accounted for approximately 28% and 28% of Surge’s sales, respectively,
of which approximately 75% for each year was Lelon capacitors (discussed below). Discrete components accounted for Surge’s remaining
sales in Fiscal 2025 and Fiscal 2024. Capacitors and discrete components can be categorized based on various factors, including function,
construction, fabrication and capacity.

We sell, under the name of
the manufacturer, Lelon Electronics, aluminum electrolytic capacitors, which are capacitors that store and release energy into a circuit
incrementally and are used in various applications, including but not limited to, computers, appliances, automotive, lighting, telecommunications
devices and various consumer products. Our sales of products under the Lelon Electronics name accounted for approximately 28% of our total
sales (and approximately 75% of our capacitor sales as noted above) in Fiscal 2025.

The principal products sold
by Surge are sold under the Surge name (except with respect to capacitors, which the Company also sells under the Lelon Electronics name
as noted above) or by Challenge are set forth below.

Capacitors

A capacitor is an electrical
energy storage device used in the electronics industry for varied applications, principally as elements of resonant circuits, coupling
and bypass applications, blockage of DC current, frequency determining and timing elements, filters and delay-line components. All products
are available in traditional leaded as well as surface mount (chip) packages. The product line of capacitors we sell includes:

Aluminum Electrolytic Capacitors-
These capacitors, which are Surge’s principal product, are storage devices used in power applications to store and release energy
as the electronic circuitry demands. They are commonly used in power supplies and can be found in a wide range of consumer electronics
products. Our supplier has one of the largest facilities for these products in Taiwan and China. These facilities are fully certified
for the International Quality Standard ISO 9001 and QS9000, and TS16949, which means that they meet the strictest requirements established
by the automotive industry and adopted throughout the world to ensure that the facility’s manufacturing processes, equipment and
associated quality control systems will satisfy specific customer requirements. This system is also intended and designed to facilitate
clear and thorough record keeping of all quality control and testing information and to ensure clear communication from one department
to another about the information (i.e., quality control, production or engineering). This certification permits us to monitor quality
control/manufacturing process information and to respond to any customer questions.

Ceramic Capacitors- These
capacitors are the least expensive, and are widely used in the electronics industry. They are commonly used to bypass or filter semiconductors
in resonant circuits and are found predominantly in a wide range of low cost products including computer, telecom, appliances, games and
toys.

2

Mylar Film Capacitors- These
capacitors are frequently used for noise suppression and filtering. They are commonly used in telecommunication and computer products.
Surge’s suppliers in China have facilities fully certified for all of the above mentioned quality certifications.

Discrete Components

Discrete components, such
as semiconductor rectifiers, transistors and diodes, are packaged individually to perform a single or limited function, in contrast to
integrated circuits, such as microprocessors and other “chips”, which contain from only a few diodes to as many as several
million diodes and other elements in a single package, and are usually designed to perform complex tasks. Surge almost exclusively distributes
discrete, low power semiconductor components rather than integrated circuits.

The product line of discrete
components we sell includes:

Rectifiers- Low power semiconductor
rectifiers are devices that convert alternating current, or AC power, into one directional current, or DC power, by permitting current
to flow in one direction only. They tend to be found in most electrical apparatuses, especially those drawing power from an AC wall outlet.
All products are available in traditional leaded as well as surface mount (chip) packages. Surge’s rectifier suppliers all have
the aforementioned certifications, giving us an opportunity to market the products that we sell to the automotive industry.

Transistors- These products
send a signal to the circuit for transmission of waves. They are commonly used in applications involving the processing or amplification
of electric current and electric signals, including data, television, sound and power. All products are available in traditional leaded
as well as surface mount (chip) packages. Surge sells many types of ISO 9002 transistors, including power transistors, designed for large
currents to safely dissipate large amounts of power.

Diodes- Diodes are two-lead
or surface mount components that allow electric current to flow in only one direction. They are used in a variety of electronic applications,
including signal processing and direction of current. All products are available in traditional leaded as well as surface mount (chip)
packages. Diodes sold include:

Circuit Protection Devices-
Our circuit protection devices include transient voltage suppressors and metal oxide varistors, which protect circuits against switching,
lightening surges and other uncontrolled power surges and/or interruptions in circuits. Transient voltage suppressors, which offer a higher
level of protection for the circuit, are required in telecommunication products and are typically higher priced products than the metal
oxide varistors, which are more economically priced and are used in consumer products. All products are available in traditional leaded
as well as surface mount (chip) packages.

Audible Components- These
include audible transducers, Piezo buzzers, speakers, and microphones, which produce an audible sound for, and are used in back-up power
supplies for computers, alarms, appliances, smoke detectors, automobiles, telephones and other products which produce sounds. Challenge
has initiated marketing relationships with certain Asian manufacturers of audible components to sell these products worldwide. All products
are available in traditional leaded as well as surface mount (chip) packages.

New Products- We periodically
introduce new products, which are intended to complement our existing product lines. These products are ones that are commonly used in
the same circuit designs as other products that we sell and will further provide a one- stop-shop for the customer. Some of these products
are common items used in all applications and others are niche items with a focus towards a particular application. These new products
include fuses, printed circuit boards and switches. All products are available in traditional leaded as well as surface mount (chip) versions.
In 2019 we were issued a patent on a new pinpoint alarm designed to improve an individual’s ability to determine the location of
the alarm. The improved alarm can be used in a wide variety of applications including reversing vehicles, medical emergency notification
and hardware devices that use Bluetooth or other wireless communication protocols in combination with mobile software applications to
locate lost items.

3

Inventory

In order to adequately service
our customers’ needs, we believe that it is necessary to maintain large inventories, which makes us more susceptible to price and
technology changes. At any given time, we attempt to maintain a one-to-two month inventory on certain products in high demand for customers
and at least one month for other products. Our inventory currently contains more than 100 million component units consisting of more than
3,000 different part numbers. The products that we sell range in sales price from less than one cent for a commercial diode to more than
$2.00 for high power capacitors and semiconductors. As of November 30, 2025, we maintained inventory valued at $5,086,298.

Because of the experience
of our management, including Ira Levy and Steven Lubman, we believe that we know the best prices to buy the products we sell and as a
result we generally waive rights to manufacturers’ inventory protection agreements (including price protection and inventory return
rights), and thereby bear the risk of increases in the prices charged by our manufacturers and decreases in the prices of products held
in our inventory or covered by purchase commitments. If prices of components, which we hold in inventory decline, or if new technology
is developed that displaces products that we sell, our business could be materially adversely affected. The Company has experienced very
little impact from customer design changes and slowdown but this can potentially increase due to economic conditions and customer-specific
business conditions. If our customers experience these changes, our business could be adversely affected.

Product Availability

Surge and Challenge obtain
a significant amount of their products from manufacturers in Asia. Of the total goods purchased by Surge and Challenge in Fiscal 2025,
those foreign manufactured products were supplied from manufacturers in Taiwan (30%), Hong Kong (19%), elsewhere in Asia including China,
South Korea and Singapore (47%) and overseas outside of Asia (less than 1%). The Company purchases the balance of its products from the
United States. The Company purchases its products from approximately sixteen different manufacturers.

Most of the facilities that
manufacture products for Surge have obtained International Quality Standard ISO 9002 and other certifications. We typically purchase the
products that we sell in United States currency in order to minimize the risk of currency fluctuations. In most cases, Surge utilizes
two or more alternative sources of supply for each of its products with one primary and one complementary supplier for each product. Surge’s
relationships with many of its suppliers date back to the commencement of our import operations in 1983. We have established payment terms
with our manufacturers of between 30 and 60 day open account terms.

We only have one long-term
supply agreement with a supplier, Lelon Electronics, which is terminable by either party upon six months’
notice to the other party. We also have an agreement to act as the sales agent in North America for Lelon Electronics. While we believe
that we have established close working relationships with our principal manufacturers, our success depends, in large part, on maintaining
these relationships and developing new supplier relationships for our existing and future product lines. Because of the lack of long-
term contracts, we may not be able to maintain these relationships.

For Fiscal 2025 and Fiscal
2024, one of Surge’s vendors, Lelon Electronics, accounted for approximately 28% and 28% of Surge’s consolidated purchases,
respectively. The loss of or a significant disruption in the relationship with Lelon Electronics, which is our major supplier, could have
a material adverse effect on our business and results of operations until a suitable replacement could be obtained.

The Company has a written
agreement with Lelon Electronics regarding the supply of inventory for the Company’s customers. The Company purchases products under
both the Company’s name and Lelon’s brand name for the Company’s inventory in order to supply the Company’s customers.
For the majority of purchases from Lelon Electronics, the Company takes title to the products, houses them in the Company’s warehouse
and sells directly to the Company’s customers. There is no right of return on the products purchased from Lelon and the Company
accepts all credit risk with regards to sales of these products.

4

The components business has,
from time to time, experienced periods of shortages in product supply, usually as the result of demand exceeding available supply. When
these shortages occur, suppliers tend to either increase prices and or reduce the number of units sold to given customers. Should there
be shortages in the future, such shortages may benefit our business if we get preferential supply from our manufacturers. It could also
have an adverse effect upon our business, in the case that our manufacturers do not have enough capacity to provide enough components.
Conversely, due to poor market demand, there could be an excess of components in the market, causing stronger competition and an erosion
of prices. In cases of shortages, customers may purchase more than they need and thus reducing future demand for their products while
they use up their excess inventory.

Marketing and Sales

Surge’s sales efforts
are directed towards Original Equipment Manufacturer (OEM) customers in numerous industries where the products that we sell have wide
application. Surge currently employs twelve sales and marketing personnel, not including two of its executive officers, who are responsible
for certain key customer relationships. In addition, Surge has expanded its sales team, hiring a Europe manager based in London as well
as one based in China.

We also use independent sales
representatives or organizations, which often specialize in specific products and areas and have specific knowledge of and contacts in
particular markets. We currently have representation agreements with approximately 30 sales representative organizations. Sales representative
organizations, which are generally paid a 5% commission on net sales, are generally responsible in their respective geographic markets
for identifying customers and soliciting customer orders. Pursuant to arrangements with our independent sales representatives, they are
permitted to represent other electronics manufacturers, but are generally prohibited from carrying a line of products competitive with
the products that we sell. These arrangements can be terminated on written notice by either party or if breached by either party. These
organizations normally employ between one and twelve sales representatives. The individual sales representatives employed by the sales
organizations generally possess an expertise which enhances the scope of our marketing and sales efforts. This permits us to avoid the
significant costs associated with creating a direct marketing network. We have had relationships with certain sales organizations since
1988 and continue to engage new sales organizations as needed. We believe that additional sales organizations and representatives are
available to us, if required.

We have a formal national
distribution program to attract more distributors to promote the products that we sell. We expect this market segment to continue to contribute
significantly to our sales growth over time.

Many customers require their
suppliers to have a local presence and Surge’s network of independent sales representatives are responsive to these needs. Surge
formed a Hong Kong corporation, Surge Components, Limited and hired a regional sales manager to service the Hong Kong/Greater China region
customers.

Other marketing efforts include
generation and distribution of catalogs and brochures of the products we sell and attendance at trade shows. We have produced an exhibit
for display at electronics trade shows throughout the year. The products that we sell have been exhibited at the electronic distribution
show in Las Vegas, and we intend to continue our commitment and focus on the distribution segment of the industry by our visibility at
the Electronic Distributor Trade Show. In addition, we have updated our website to make it more informative and user friendly. Our search
engines have been improved so that customers can find us more easily and we have developed a new portal system to help with lead management
and disbursement.

Customers

The products that we sell
are sold to distributors and OEMs in such diverse industries as the automotive, computer, communications, cellular telephones, consumer
electronics, garage door openers, security equipment, audio equipment, telecomm products, computer related products, power supply products,
utility meters and household appliances industries. We request our distributors to provide point of sales reporting, which enables us
to gain knowledge of the breakdown of industries into which the products that we sell are sold. Two of our customers accounted for 18%
and 14% of net sales for Fiscal 2025, and 19% and 15% of net sales for Fiscal 2024. Our discrete components are often sold to the
same clients as our capacitors. These OEM customers typically accept samples for evaluation and, if approved, we work towards procuring
the next orders for these items.

5

Typically, we do not maintain
contracts with our customers and generally sell products pursuant to customer purchase orders. Although our customer base has increased,
the loss of our largest customers as well as, to a lesser extent, the loss of any other material customer, could have a materially adverse
effect on our operations during the short-term until we are able to generate replacement business, although we may not be able to obtain
such replacement business. Because of our contracts and good working relationships with our distributors, we offer the OEMs, when purchasing
through distributors, extended payment terms, just-in- time deliveries and one-stop shopping for many types of electronic products.

Competition

We conduct business in the
highly competitive electronic components industry. We expect this industry to remain competitive. We face intense competition in both
our selling efforts and purchasing efforts from the many companies that manufacture or distribute electronic components. Our principal
competitors in the sale of capacitors include Nichicon, Panasonic, Illinois Capacitor, NIC, AVX, Murata, Epcos, United Chemicon, Rubycon,
Vishay and Kemet. Our principal competitors in the sale of discrete components include Vishay, General Semiconductor Division, General
Instrument Corp., OnSemi, Inc., Microsemi Corp., Diodes, Inc. and Littlefuse, and Copper Bussman Division. Our principal competition in
the audible business include AVX, Murata, Panasonic, Projects Unlimited, International Components Corp. and Star Micronics. Many of these
companies are well established with substantial expertise, and have much greater assets and greater financial, marketing, personnel, and
other resources than we do. Many larger competing suppliers also carry product lines which we do not carry. Generally, large semiconductor
manufacturers and distributors do not focus their direct selling efforts on small to medium sized OEMs and distributors, which constitute
many of our customers. As our customers become larger, and as the market becomes more competitive, our competitors may find it beneficial
to focus direct selling efforts on those customers, which could result in our facing increased competition, the loss of customers or pressure
on our profit margins. We are finding increased competition from manufacturers located in Asia due to the increased globalization nature
of the business. There can be no assurance that we will be able to continue to compete effectively with existing or potential competitors.
Other factors that will affect our success in these markets include our continued ability to attract additional experienced marketing,
sales and management talent, and our ability to expand our support, training and field service capabilities. Additionally, since the tsunami
and earthquake in Japan in 2012, our competitors have established manufacturing facilities in China enabling them to be more competitive
by lowering their labor rates and manufacturing costs. Also, as the world continues to become global and customers have easier access
to suppliers in Asia, our business could be adversely affected since the internet enables customers to meet and interact with suppliers
through Google and other search engines which customers had not previously done.

Customer Service

We have customer service employees
whose time is dedicated largely to responding to customer inquiries such as price quote requests, delivery status of new or existing purchase
orders, changes of existing order dates, quantities, dates, etc. We intend to increase our customer service capabilities, as necessary.

Foreign Trade Regulation

Most products sold by Surge
are manufactured in Asia, including such countries as Taiwan, South Korea, Hong Kong, India, Japan and China. The purchase of goods manufactured
in foreign countries is subject to a number of risks, including economic disruptions, transportation delays and interruptions, foreign
exchange rate fluctuations, impositions of tariffs and import and export controls, and changes in governmental policies, any of which
could have a material adverse effect on our business and results of operations. Potential concerns may include drastic devaluation of
currencies, loss of supplies and increased competition within the region.

From time to time, protectionist
pressures have influenced United States trade policy concerning the imposition of significant duties or other trade restrictions upon
foreign products. We cannot predict whether additional United States customs quotas, duties, taxes or other charges or restrictions will
be imposed upon the importation of foreign components in the future or what effect such actions could have on our business, financial
condition or results of operations.

6

Our ability to remain competitive
with respect to the pricing of imported components could be adversely affected by increases in tariffs or duties, changes in trade treaties,
strikes in air or sea transportation, and possible future United States legislation with respect to pricing and import quotas on products
from foreign countries. Our ability to remain competitive could also be affected by other governmental actions related to, among other
things, anti-dumping legislation and international currency fluctuations. While we do not believe that any of these factors adversely
impact our business at the present time, there can be no assurance that these factors will not materially adversely affect us in the future.
Since July 2018, when tariffs started to impact some of the Company’s sales, the Company has been able to pass on the tariffs to
its U.S. and Canadian customers. We have also changed our shipping terms with our Mexico customers to Free Carrier, which means we deliver
the goods to the customers’ Hong Kong freight forwarder, who then becomes responsible for the transportation and tariff costs. Any
significant disruption in the delivery of merchandise from our suppliers, substantially all of whom are foreign, could have a materially
adverse impact on our business and results of operations.

Government Regulation

Various laws and regulations
relating to safe working conditions, including the Occupational Safety and Health Act, are applicable to our Company. We believe we are
in substantial compliance with all material federal, state and local laws and regulations regarding safe working conditions. We believe
that the cost of compliance with such governmental regulations is not material.

We are subject to the United
States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are
not subject to these prohibitions. If our employees or other agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
To the Company’s knowledge, none of our employees or other agents have engaged in such practices.

The Company has been impacted
by the tariffs in effect or being considered by the United States to impose on Chinese goods being imported into the United States, which
includes the Company’s products. The imposition of such tariffs will likely cause our costs, as well as the prices we charge customers,
to increase.

Environmental and Regulatory Compliance

We are subject to various
environmental laws and regulations relating to the protection of the environment, including those governing the handling and management
of certain chemicals used in electronic components.

We do not believe that compliance
with these laws and regulations will have a material adverse effect on our capital expenditures, earnings, or competitive position.

Patents, Trademarks and Proprietary Information

In September 2018, we were
issued a U.S. patent application with the United States Patent and Trademark Office for an improved pinpoint alarm designed to improve
an individual’s ability to determine the location of an alarm versus standard single, multi-frequency, or broadband alarms. The
improved alarm can be used in a wide variety of applications, including reversing vehicles, medical emergency notification, and hardware
devices that use Bluetooth or other wireless communications protocols in combination with mobile software applications to locate lost
items, including phones, wallets, and keys. Our patent issued on December 31, 2019, as United States Patent No. 10,522,008. With regard
to our other products, although we have no knowledge that such products infringe patents or trademarks, or violate proprietary rights
of others, it is possible that alleged infringement of existing or future patents, trademarks or proprietary rights of others may
occur. In the event that the products that we sell are alleged to infringe proprietary rights of others, these products may have to be
modified or redesigned. However, there can be no assurance that any infringing products will be able to be modified or redesigned in a
way that does not infringe on the proprietary rights of others, which could have a material adverse effect upon our operations. In addition,
there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary
rights violation action. Moreover, if the products we sell infringe patents, trademarks or proprietary rights of others, we could, under
certain circumstances, become liable for damages, which also could have a material adverse effect on our business.

7

With respect to the other
products that we sell, we have no patents, trademarks or copyrights registered in the United States Patent and Trademark Office or in
any state. Additionally, to the best of our knowledge the manufacturers of the products that we sell do not have patents, trademarks or
copyrights registered in the United States Patent and Trademark Officer or in any state. We rely on the know-how, experience and capabilities
of our management personnel.

Backlog

As of November 30, 2025, our
backlog was approximately $12,012,000, as compared with $9,433,000 at November 30, 2024. Substantially all backlog is expected to be shipped
by us within 365 days of booking date. Year to year comparisons of backlog are not necessarily indicative of future operating results.

Employees

As of November 30, 2025, Surge
and Challenge employed 46 persons, two of whom are employed in executive capacities, twelve are engaged in sales, four in engineering,
four in purchasing, five in administrative capacities, twelve in customer service, three in accounting and four in warehousing. None of
our employees are covered by a collective bargaining agreement, and we consider our relationship with our employees to be good.

Competitive pay and benefits.
The Company’s compensation programs are designed to provide the proper incentives to attract, retain and motivate employees to achieve
superior results. We provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge
and geographic location. Annual increases and incentive compensation are based on merit, which is communicated to the employees at the
time of hiring. Employees are eligible for paid and unpaid leaves, a retirement plan, and disability/accident coverage.

8