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 current information becomes available in the future.
The following discussion should be read in conjunction with the attached
condensed financial statements, and with the Company's audited financial
statements and discussion for the fiscal year ended
Executive Summary
The Company's performance improved during the quarter ended
Results of Operations ? Net sales for the quarter endedJuly 31, 2020 showed a 13.94% increase over the same period in the prior year. The Company saw increased sales resulting primarily from a competitor no longer selling competing products. Management also believes that they have been successful at training employees on the new computer system and production is running smoothly. ? Cost of goods sold decreased from 49.80% of sales in the prior year, to 48.23% in the current quarter, which is inside of Management's goal to keep labor and other manufacturing expenses within the range of 45 to 50%. The decreased cost of goods sold percentage is a reflection of training initiatives resulting in more efficient production. 18 ? Operating expenses increased by$36,000 when comparing the current year quarter to the same quarter for the prior year; however, the percentage of net sales decreased to 22.46% for the quarter endedJuly 31, 2020 compared to 24.58% for the corresponding quarter last year. The dollar amount increase is the result of increased personnel and commission expense related to the increase in net sales; however, the Company maintained the ratio of operating expenses to net sales at less than 30%, which is in line with historical ratios. ? Income from operations for the quarter endedJuly 31, 2019 was at$1,186,000 , which is a 30.33% increase from the corresponding quarter last year, which had income from operations of$910,000 . ? Other income and expenses showed a$2,254,000 gain for the quarter endedJuly 31, 2020 as compared to a$388,000 gain for the quarter endedJuly 31, 2019 . For the three months endedJuly 31, 2020 ,$2,114,000 of unrealized gains from equity securities were recorded, compared to the$145,000 of unrealized gains from equity securities recorded for the three months endedJuly 31, 2019 . The remainder of the increase is primarily due to dividend and interest income. ? The Company's provision for income taxes showed an increase of$626,000 from$322,000 in the quarter endedJuly 31, 2019 to$948,000 for the quarter endedJuly 31, 2020 . This increase is primarily due to increased deferred taxes resulting from a much larger unrealized gain for the current quarter. ? In turn, net income for the quarter endedJuly 31, 2020 was$2,492,000 , a 155.33% increase from the corresponding quarter last year, which showed net income of$976,000 . ? Earnings per share for the quarter endedJuly 31, 2020 were$0.50 per common share and$0.20 per common share for the quarter endedJuly 31, 2019 .
Liquidity and capital resources
Operating ? Net cash increased$1,033,000 during the quarter endedJuly 31, 2020 as compared to an increase of$794,000 during the corresponding quarter last year. ? Accounts receivable decreased$49,000 for the quarter endingJuly 31, 2020 compared with a$163,000 decrease for the same quarter last year. The smaller decrease in accounts receivable is directly attributable to some of the Company's customers not paying as timely as before. Management believes this is because of the COVID-19 pandemic. Management still has the ability to collect on accounts and to keep past due accounts to a minimum. An analysis of accounts shows that there were only 0.63% that were over 90 days atJuly 31, 2020 . ? Inventories increased$405,000 during the current quarter as compared to a$288,000 increase last year. The larger increase is primarily due to the fact that the Company is stocking up on more raw materials due to increased orders. In addition, the Company is keeping more inventory on hand in order to reduce the likelihood of running into a shortage on some major raw materials, such as we experienced last year. 19 ? For the quarter endedJuly 31, 2020 there was a$94,000 decrease in prepaid expenses compared to a decrease of$79,000 for the quarter endedJuly 31, 2019 . The current decrease is due to less prepayment of raw materials and running through some of our prepaid agreements without needing to renew them. ? Accounts payable shows an increase of$117,000 for the quarter endedJuly 31, 2020 compared to an increase of$55,000 for the same quarter the year before, primarily due to increases in inventory of raw materials and timing issues. Management strives to pay all payables within terms, unless there is a problem with the merchandise. ? Accrued expenses decreased$61,000 for the current quarter as compared to a$66,000 decrease for the quarter endedJuly 31, 2019 . The difference in the amounts is primarily due to timing issues. ? Income tax payable for the quarter endedJuly 31, 2020 increased$346,000 , compared to a$289,000 increase for the quarter endedJuly 31, 2019 . The current increase is due to larger tax estimates in relation to increased income. Investing ? The Company purchased$95,000 of property and equipment during the current fiscal quarter. In comparison,$169,000 was spent on purchases of property and equipment during the corresponding quarter last year. ? The Company continues to purchase marketable securities, which include municipal bonds and quality stocks. Cash spent on purchases of marketable securities for the quarter endedJuly 31, 2020 was$111,000 compared to$132,000 spent during the quarter endedJuly 31, 2019 . We continue to use "money manager" accounts for most stock transactions. By doing this, the Company gives an independent third party firm, who are experts in this field, permission to buy and sell stocks at will. The Company pays a quarterly service fee based on the value of the investments. Financing ? The Company continues to purchase back common stock when the opportunity arises. For the quarter endedJuly 31, 2020 , the Company did not buyback any treasury stock, compared to the$53,000 of common stock purchased during the same period the prior year. 20
In conjunction with the Company's Condensed Financial Statements, we have provided the following list of ratios to help analyzeGeorge Risk Industries' performance: Qtr ended Qtr ended July 31, 2020 July 31, 2019 Working capital (current assets - current liabilities)$ 40,103,000 $ 38,750,000 Current ratio (current assets / current liabilities) 11.485 17.882 Quick ratio ((cash + current investments + AR) / current liabilities) 9.953 15.622 New Product Development
The Company and its' engineering department perpetually work to develop enhancements to current 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 various stages of the development process include:
? A new face plate for our pool alarms is nearing completion. The innovative design is slim in style and will also allow the homeowner to change the plate to match their décor. ? An updated version of the pool access alarm is currently going through electrical listing testing. Since the COVID-19 pandemic has happened, not much testing has progressed 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 looking into 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 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. ? In the next months we are introducing a couple of new security products. First, the 2707 Series are triple high biased magnetic reed contacts for high security and are available in SPDT and DPDT models. These contacts are resistant to magnetic tamper and defeat. They are used in applications such as airports, biotechnology labs, manufacturing plants, banks, military bases and energy-generation facilities. Secondly, the 3040 Panic Switch contains screw terminals and uses an actuating lever which can be triggered with only the tip of the finger. It can be installed under a counter or desk or any similar place. The 3040CT uses 12' extreme temperature rated wire for installation in refrigerators and freezers. Both models have a latching LED indicating when the switch is activated and automatically resets when the lever is closed and is fully re-armed. Latching LED and UL Listed versions are planned to follow. ? We have launched our new GR1840 Oval Metal Door Channel Magnet. This is a direct replacement for the obsolete Interlogix magnet. This magnet fits into the top channel of a metal door and does not require drilling into the door core. We have also paired this with several of our ¾" and 1" steel door contacts. ? There have been several new products that have been introduced for our cable and wiring tools segment. First, a 12" adjustable hole cutter which compliments the popular 10" hole cutter. Using a standard drill, this tool allows you to drill various size holes in the ceiling for speakers and canned lights. The dust bin which buts against the ceiling keeps the ceiling material and dust enclosed making for a clean, time saving installation. Secondly, the lighted Bullnose tips come in a variety of colors; red, green and blue to go along with the standard clear lights. These colored lights are placed on FiberFuse wire running rods which allows easy location of the rod ends in dark places such as attics and crawlspaces. The rods can be color coded for wire paths running into different rooms. Larger batteries add to the longevity of these new lights. 21
Other Information
In addition to researching 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
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There are no other new accounting pronouncements that are expected to have a significant impact on our financial statements.
22GEORGE RISK INDUSTRIES, INC. PART I. FINANCIAL INFORMATION
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