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 of future credit losses. The Company re-evaluates such reserves on a regular basis and adjusts its reserves as needed. Based on the Company’s operating history and customer base, bad debts to date have not been material. Payment terms vary from customer to customer and range from 15 days to 120 days.

(3) Revenue Recognition:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which the Company adopted effective December 1, 2017 using the modified retrospective transition method with no cumulative adjustment to opening equity.

The Company recognizes revenue in accordance with the five-step model under ASC 606: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue when, or as, a performance obligation is satisfied.

The Company’s contracts with customers are primarily standard purchase orders for the sale of electronic components. Each purchase order gives rise to a single performance obligation — delivery of the specified products — which is satisfied at a point in time when control of the goods transfers to the customer. For products shipped from the Company’s warehouse, control transfers upon shipment. For direct shipments, where the Company arranges for a supplier to ship product directly to the customer through a freight forwarder, control transfers when the product is received by the freight forwarder. The transaction price is the invoiced amount, which is fixed at the time of the order.

The Company also acts as a sales agent for certain customers purchasing directly from one of its suppliers. In these arrangements, the Company has determined it is acting as an agent rather than a principal because it does not control the specified goods before they are transferred to the customer. Accordingly, commission revenue is recognized on a net basis in the period earned. Commission revenue totaled $24,462 and $203,019 for the six months ended May 31, 2026 and May 31, 2025, respectively.

Direct shipment revenues were approximately $2,925,000 and $2,639,000 for the six months ended May 31, 2026 and May 31, 2025, respectively. Revenues under distribution agreements were approximately $2,030,000 and $2,797,000 for the six months ended May 31, 2026 and May 31, 2025, respectively.

The Company has entered into arrangements with certain subcontractor customers that provide for periodic cost reductions in the form of rebates of 5% of applicable sales. These rebates represent variable consideration under ASC 606. The Company estimates the amount of variable consideration using the most likely amount method and reduces the transaction price accordingly. Cooperative advertising arrangements with distributors are similarly treated as a reduction of the transaction price. These amounts have not been material to date.

The Company performs ongoing credit evaluations of its customers. Payment terms vary by customer and range from 15 to 120 days. The Company does not have significant financing components in its contracts. No contract assets or contract liabilities were recorded as of May 31, 2026 or November 30, 2025, as the Company’s performance obligations are satisfied at or near the time payment becomes due.

(4) Inventories:

Inventories, which consist solely of products held for resale, are stated at the lower of cost (first-in, first-out method) or net realizable value. Products are included in inventory when the Company obtains title and risk of loss on the products, primarily when shipped from the supplier. Inventory in transit principally from foreign suppliers at May 31, 2026 was $733,685. The Company, at May 31, 2026, has a reserve against slow moving and obsolete inventory of $440,646. From time to time the Company’s products are subject to legislation from various authorities on environmental matters.

(5) Depreciation and Amortization:

Fixed assets are recorded at cost. Depreciation is generally calculated on a straight line method and amortization of leasehold improvements is provided for on the straight-line method over the estimated useful lives of the various assets as follows:

Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized.

(6) Concentration of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable and cash. The Company maintains substantially all of its cash balances in a limited number of financial institutions. At May 31, 2026 and November 30, 2025, the Company’s uninsured cash balances totaled $4,166,533 and $4,267,113, respectively. The increase in cash balances is due to an increase in cash generated from the Company’s operations.

(7) Income Taxes:

The Company’s deferred income taxes arise primarily from the differences in the recording of allowances for bad debts, inventory reserves, depreciation and other expenses for financial reporting and income tax purposes. A valuation allowance is provided when it has been determined to be more likely than not that the likelihood of the realization of deferred tax assets will not be realized. See Note H.

The Company follows the provisions of the Accounting Standards Codification topic, ASC 740, “Income Taxes” (ASC 740). There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company’s financial condition or results of operations as a result of ASC 740.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before fiscal years ending November 30, 2021, and state tax examinations for years before fiscal years ending November 30, 2020. Management does not believe there will be any material changes in our unrecognized tax positions over the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of ASC 740, there was no accrued interest or penalties associated with any unrecognized benefits, nor was any interest expense recognized during the six months ended May 31, 2026 and May 31, 2025.

(8) Cash Equivalents:

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

(9) Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

(10) Marketing and promotional costs:

Marketing and promotional costs are expensed as incurred and have not been material to date. The Company has contractual arrangements with several of its distributors which provide for cooperative advertising rights to the distributor as a percentage of sales. Cooperative advertising is reflected as a reduction in revenues and has not been material to date.

(11) Fair Value Measurements and Fair Value of Financial Instruments:

The estimated fair value of certain financial instruments, including all current liabilities are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

ASC subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

The Company follows ASC subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and ASC 825-10, which permits entities to choose to measure many financial instruments and certain other items at fair value. The following table represents the Company’s assets and liabilities by level measured at fair value on a recurring basis at May 31, 2026 and November 30, 2025.

(12) Marketable securities and other investments

The Company’s investments in U.S. Treasury bills and Treasury notes are classified as available-for-sale debt securities in accordance with ASC Topic 320, Investments — Debt Securities. These securities are carried at fair value, with unrealized gains and losses reported net of tax in accumulated other comprehensive income (loss) within shareholders’ equity. Realized gains and losses are determined on an average cost basis and are reclassified from accumulated other comprehensive income into net income in the period of sale. The market value of these securities is determined using quoted prices in active markets (Level 1 inputs under ASC Topic 820).

The Company reviews its available-for-sale debt securities for impairment at each reporting date. An unrealized loss position is evaluated to determine whether the decline in fair value below amortized cost results from a credit loss or other factors. Because the Company’s securities consist entirely of obligations of the U.S. government, the risk of credit loss is considered remote, and no allowance for credit losses has been recorded as of May 31, 2026 or November 30, 2025. The Company also considers whether it intends to sell, or whether it is more likely than not that it will be required to sell, any security in an unrealized loss position before recovery of its amortized cost basis. As of May 31, 2026, no such intent or requirement exists. These securities are invested until such time as the funds are needed for operations.

The value of these marketable securities at May 31, 2026 and November 30, 2025 is as follows:

(13) Shipping Costs

The Company classifies shipping costs as a component of selling expenses. Shipping costs totaled $1,620 and $902 for six months ended May 31, 2026 and May 31, 2025 respectively.

(14) Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

Total potentially dilutive shares excluded from diluted weighted-average shares outstanding at May 31, 2026 and May 31, 2025 were 487,830 and 670,064, respectively.

The following sets forth the computation of basic and diluted earnings per share:

(15) Stock Based Compensation

Stock Based Compensation to Employees

The Company accounts for its stock-based compensation for employees in accordance with Accounting Standards Codification (“ASC”) 718. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees over the related vesting period.

Stock Based Compensation to Other than Employees

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

(16) Leases:

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“Topic 842”). Topic 842 requires the entity to recognize the assets and liabilities for the rights and obligations created by leased assets. Leases will be classified as either finance or operating, with classification affecting expense recognition in the income statement.

On December 1, 2019, the Company adopted Topic 842 applying the optional transition method, which allows an entity to apply the new standard at the adoption date with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of adopting Topic 842, the Company recognized assets and liabilities for the rights and obligations created by operating leases totaling approximately $290,000.

The Company determines if a contract contains a lease at inception based on whether it conveys the right to control the use of an identified asset. Substantially all of the Company’s leases are classified as operating leases. The Company records operating lease right-of-use assets within “Other assets” and lease liabilities are recorded within “current and noncurrent liabilities” in the consolidated balance sheets. Lease expenses are recorded within “General and administrative expenses” in the consolidated statements of operations. Operating lease payments are presented within “Operating cash flows” as other assets in the consolidated statements of cash flows.

Operating lease right-of-use assets and lease liabilities are recognized based on the net present value of future minimum lease payments over the lease term starting on the commencement date. The Company generally is not able to determine the rate implicit in its leases and, as such, applies an incremental borrowing rate based on the Company’s cost of borrowing for the relevant terms of each lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Lease terms may include an option to extend or terminate a lease if it is reasonably certain that the Company will exercise such options. The Company has elected the practical expedient to not separate lease components from non-lease components, and also has elected not to record a right-of-use asset or lease liability for leases which, at inception, have a term of twelve months or less. Variable lease payments are recognized in the period in which the obligation for those payments is incurred.

(17) Segment information

The Company operates through two divisions, Surge and Challenge. The Company’s Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer. The CODM reviews financial information for Surge and Challenge separately in order to assess performance and allocate resources.

Each division acquires and distributes substantially similar products that are sold to similar customer types and operate within the same economic environment. The divisions share similar production processes, distribution methods, and regulatory environments. Accordingly, although financial information is reviewed separately by the CODM, the Company has determined that Surge and Challenge meet the aggregation criteria under ASC 280, Segment Reporting, and are aggregated into a single reportable segment.

Because the Company has one reportable segment, segment disclosures required under ASC 280 consist of the following entity-wide disclosures. Revenue by geographic regions is reported in Note M. Long-lived assets are primarily located within the US and Hong Kong.