George Risk Industries, Inc.: Form 10-Q for the period ended Jan 31, 2021

MANAGEMENT DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are subject to the “safe harbor” created by those sections. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “expect,” “intend,” “believe,” “estimate,” “project” or “continue,” and the negatives of such terms are intended to identify forward-looking statements. The information included herein represents our estimates and assumptions as of the date of this filing. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

The following discussion should be read in conjunction with the attached unaudited condensed financial statements, and with the Company’s audited financial statements and discussion for the fiscal year ended April 30, 2020.

Executive Summary

The Company’s performance continues to improve through the three quarters of the current fiscal year with the third quarter staying strong. The Company is on track to have a record setting year for sales. This is mainly due the closure of a competitor that got out of the security switch business at the end of calendar year 2019 and having the ability to continue to work through the COVID-19 pandemic. The state of Nebraska, where we are located, has kept businesses open during the pandemic. Additionally, the Company’s products are traditionally tied to the housing market and with that market remaining strong, it in turn helps the Company’s sales growth. Opportunities include keeping up with the business growth. One way we are doing this is by looking into more automation. We also continue to look at businesses that might be a good fit to purchase. We also have new products that have hit the marketplace and a couple more that are scheduled to be introduced by the end of the fiscal year. Challenges in the coming months include continuing to get product out to customers in a timely manner and dealing with the COVID-19 pandemic restrictions. Possible COVID-19 challenges include, but are not limited to, price increases and/or delays in the supply chain, reduced sales, workforce interruptions, and economic conditions impacting the stock market. Management continues to work at keeping operations flowing as efficient as possible with the hopes of getting the facilities running leaner and more profitable than ever before.

Results of Operations

• Net sales were $4,633,000 for the quarter ended January 31, 2021, which is a 29.09% increase from the corresponding quarter last year. Year-to-date net sales were $13,327,000 at January 31, 2021, which is a 22.81% increase from the same period last year. The significant growth in sales is due to our ongoing commitment to outstanding customer service and our ability to customize products. The Company is also seeing continued growth since a major competitor closed its doors at the end of 2019.
• Cost of goods sold was 51.48% of net sales for the quarter ended January 31, 2021 and was 51.04% for the same quarter last year. Year-to-date cost of goods sold percentages were 49.76% for the current nine months and 50.33% for the corresponding nine months last year, which is right at the target of less than 50% for both the quarter and year-to-date results. Management continues to train employees for more efficient production and strives to get the best price for raw materials.

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• Operating expenses increased by $109,000 for the quarter as they increased by $230,000 for the nine-months ended January 31, 2021 as compared to the corresponding periods last year. When comparing percentages in relation to net sales, the operating expenses for the quarter ended January 31, 2021 was 22.27% of net sales while it was 25.72% of net sales for the same quarter the prior year. For year-to-date numbers, operating expense were 21.99% and 24.88% of net sales for the nine months ended January 31, 2021 and 2020, respectively. The Company has been able to keep the operating expenses at less than 30% of net sales for many years now; however, the actual dollar amount increase is due to increased commission amounts, related to increased sales, and additional labor costs related to hiring new employees and wage increases.
• Income from operations for the quarter ended January 31, 2021 was $1,216,000, a 45.80% increase from the corresponding quarter last year, which had income from operations of $834,000. Income from operations for the nine months ended January 31, 2021 was $3,766,000, which is a 40.00% increase from the corresponding nine months last year, which had income from operations of $2,690,000.
• Other income and expenses are up $3,159,000 when comparing the current quarter to the same quarter last year. Comparatively, there is an increase of $4,858,000 in other income and expenses for the year-to-date numbers. The majority of activity in these accounts consists of investment interest, dividends, realized gains or losses on sale of investments, and unrealized gains or losses on equity securities. The majority of the larger than normal increases are from unrealized gains, which is a reflection of the stock market performing well.
• Overall, net income for the quarter ended January 31, 2021 was up $3,083,000, or 226.03%, from the same quarter last year. Similarly, net income for the nine-month period ended January 31, 2021 was up $4,503,000, or 136.62%, from the same period in the prior year.
• Earnings per common share for quarter ended January 31, 2021 were $0.90 per share and $1.58 per share for the year-to-date numbers. EPS for the quarter and nine months ended January 31, 2020 were $0.28 per share and $0.67 per share, respectively.

Liquidity and capital resources

Operating

• Net cash increased $478,000 during the nine months ended January 31, 2021 as compared to an increase of $774,000 during the corresponding period last year.
• Accounts receivable increased $376,000 for the nine months ended January 31, 2021 compared with a $460,000 decrease for the same period last year. The current year increase is a result of improved sales, partially offset by slower collections of accounts receivable. Multiple receipts were received after the close of the reporting period. An analysis of accounts receivable shows that there were only 3.65% that were over 90 days at January 31, 2021.

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• The company paid out dividends of $1,892,000 during the nine months ending January 31, 2021. These dividends were paid during the second quarter. The company declared a dividend of $0.42 per share of common stock on September 30, 2020 and these dividends were paid by October 31, 2020. As for the prior year numbers, dividends paid was $1,802,000 for the nine months ending January 31, 2020. A dividend of $0.40 per common share was declared and paid during the second fiscal quarter last year.

The following is a list of ratios to help analyze George Risk Industries’ performance:

New Product Development

The Company and its engineering department continue to develop enhancements to product lines, develop new products which complement existing products, and look for products that are well suited to our distribution network and manufacturing capabilities. Items currently in the development process include:

• Explosion proof contacts that will be UL listed for hazardous locations. There has been demand from our customers for this type of high security magnetic reed switch.
• An updated version of the pool access alarm (PAA) has met electrical listing testing (ETL) approval and we are currently waiting on component parts to begin production and field testing. This next-generation model combines our battery operated DPA series with our hard wired 289 series. A variety of installation options will be available through jumper pin settings.
• Wireless technology is a main area of focus for product development. We are considering adding wireless technology to some of our current products. A wireless contact switch is in the final stages of development. Also, we are working on wireless versions of our pool access alarm and environmental sensors that will be easy to install in current construction. We are also concentrating on making products compatible with Wi-Fi, smartphone technology and the increasing popular Z-Wave standard for wireless home automation.

Other Information

In addition to researching and developing new products, management is always open to the possibility of acquiring a business or product line that would complement our existing operations. Due to the Company’s strong cash position, management believes this could be achieved without the need for outside financing. The intent is to utilize the equipment, marketing techniques and established customers to deliver new products and increase sales and profits.

There are no known seasonal trends with any of GRI’s products, since we sell to distributors and OEM manufacturers. Our products are tied to the housing industry and will fluctuate with building trends.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which requires entities to use a forward looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. Topic 326 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We have applied this guidance, as of May 1, 2020, using a modified-retrospective approach. The application of this guidance did not require a cumulative effect adjustment to retained earnings and did not have a material effect on our financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. We applied this guidance, as of May 1, 2020. The application of this guidance did not have a material effect on our disclosures.

In January 2020, the FASB issued ASU 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its financial statements.

There are no other new accounting pronouncements that are expected to have a significant impact on our financial statements.

GEORGE RISK INDUSTRIES, INC.

Our management, under the supervision and with the participation of our chief executive officer (also working as our chief financial officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 31, 2021. Based on that evaluation, management concluded that the disclosure controls and procedures employed at the Company were not effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

In our annual report filed on Report 10-K for the year ended April 30, 2020, management identified the following material weakness in our internal control over financial reporting:

• The small size of our Company limits our ability to achieve the desired level of separation of duties for proper internal controls and financial reporting, particularly as it relates to financial reporting to assure material disclosures or implementation of newly issued accounting standards are included. A secondary review over annual and quarterly filings does not occur. Due to the departure of the Controller, the current CEO and CFO roles are being fulfilled by the same individual. We do not have an audit committee. We do not believe we have met the full requirement for separation for financial reporting purposes.

A Controller was hired by the Company in September 2020. Training is currently happening to fulfill disclosure control and procedure responsibilities, including review procedures for key accounting schedules and timely and proper documentation of material transactions and agreements. Until further sufficient training has been completed for this new Controller, we believe this control deficiency represents material weaknesses in internal control over financial reporting. To mitigate the effects of the material weakness identified in our annual report, the Company contracted with an outside CPA to perform a secondary review of our quarterly report filed on Form 10-Q.

Despite the material weaknesses in financial reporting noted above, we believe that our consolidated financial statements included in this report fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.

We are committed to the establishment of effective internal controls over financial reporting and will place emphasis on quarterly and year-end closing procedures, timely documentation and internal review of accounting and financial reporting consequences of material contracts and agreements, and enhanced review of all schedules and account analyses by experienced accounting department personnel or independent consultants.

Changes in Internal Control over Financial Reporting

Other than those mentioned above, there were no changes in our internal control over financial reporting during the fiscal quarter ended January 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

GEORGE RISK INDUSTRIES, INC.