Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and the notes to such financial
statements.
Forward-Looking Statements
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements concerning
the Company's plans, future prospects and the Company's future cash flow
requirements are forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projections in the forward-looking statements due to known and
unknown risks and uncertainties, including but not limited to the following: the
statements concerning the success of the Company's plan for growth, both
internally and through the previously announced pursuit of suitable acquisition
candidates; the successful integration of announced and completed acquisitions
and any anticipated benefits therefrom; the impact of adverse economic
conditions on client spending which has a negative impact on the Company's
business, which includes, but is not limited to, the current adverse economic
conditions associated with the COVID-19 global health pandemic and the
associated financial crisis, stay-at-home and other orders, which may
significantly reduce client spending and which may have a negative impact on the
Company's business; risks relating to the competitive nature of the markets for
contract computer programming services; the extent to which market conditions
for the Company's contract computer programming services will continue to
adversely affect the Company's business; the concentration of the Company's
business with certain customers; uncertainty as to the Company's ability to
maintain its relations with existing customers and expand its business; the
impact of changes in the industry, such as the use of vendor management
companies in connection with the consultant procurement process; the increase in
customers moving IT operations offshore; the Company's ability to adapt to
changing market conditions; the risks, uncertainties and expense of the legal
proceedings to which the Company is a party; and other risks and uncertainties
set forth in the Company's filings with the Securities and Exchange Commission.
The Company is under no obligation to publicly update or revise forward-looking
statements.
Results of Operations
The following table sets forth, for the periods indicated, certain financial
information derived from the Company's condensed consolidated statements of
operations. There can be no assurance that trends in operating results will
continue in the future.
Three months ended August 31, 2022 compared with three months ended August 31,
2021:
(Dollar amounts in thousands)
Three Months Ended
August 31, August 31,
2022 2021
% of % of
Amount Revenue Amount Revenue
Revenue, net $ 26,199 100.0 % $ 22,866 100.0 %
Cost of sales 21,767 83.1 % 19,056 83.3 %
Gross profit 4,432 16.9 % 3,810 16.7 %
Selling, general and administrative
expenses 3,677 14.0 % 4,165 18.2 %
Income (loss) from operations 755 2.9 % (355 ) (1.5 )%
Other income (expense), net (29 ) (0.1 )% 6,699 29.3 %
Income before income taxes 726 2.8 % 6,344 27.8 %
Provision for (benefit from) income
taxes 218 0.8 % (115 ) (0.5 )%
Consolidated net income 508 2.0 % 6,459 28.3 %
Less: Net income attributable to
noncontrolling interest 13 0.1 % 57 0.2 %
Net income attributable to TSR, Inc. $ 495 1.9 % $ 6,402 28.1 %
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TSR, INC. AND SUBSIDIARIES
Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the quarter ended August 31, 2022 increased approximately
$3,333,000 or 14.6% from the quarter ended August 31, 2021, primarily due to new
business development, organic growth and expanded activity with Geneva clients.
The average number of consultants on billing with customers increased from 659
for the quarter ended August 31, 2021 to 680 for the quarter ended August 31,
2022. There were 403 and 464 IT contractors at August 31, 2021 and 2022,
respectively; while there were 256 and 216 clerical and administrative
contractors at August 31, 2021 and 2022, respectively.
Cost of Sales
Cost of sales for the quarter ended August 31, 2022 increased approximately
$2,711,000 or 14.2% to $21,767,000 from $19,056,000 in the prior year period.
The increase in cost of sales resulted primarily from an increase in consultants
placed with customers, primarily from the new business development activity,
organic growth and expanded activity with Geneva clients. Cost of sales as a
percentage of revenue decreased from 83.3% in the quarter ended August 31, 2021
to 83.1% in the quarter ended August 31, 2022. The percentage increase in cost
of sales for the quarter ended August 31, 2022 as compared to the prior year
period (14.2% increase) was lower than the percentage increase in revenue for
the quarter ended August 31, 2022 as compared to the prior year period (14.6%
increase), causing an increase in gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of expenses
relating to account executives, technical recruiters, facilities costs,
management and corporate overhead. These expenses decreased approximately
$488,000 or 11.7% from $4,165,000 in the quarter ended August 31, 2021 to
$3,677,000 in the quarter ended August 31, 2022. The decrease in these expenses
primarily resulted from a charge of $580,000 for the legal settlement with the
former Chief Executive Officer in the prior year period. Additionally, the
Company incurred non-cash compensation expenses of $69,000 in the quarter ended
August 31, 2022 and $177,000 in the quarter ended August 31, 2021 related to the
Plan. Selling, general and administrative expenses, as a percentage of revenue
decreased from 18.2% in the quarter ended August 31, 2021 to 14.0% in the
quarter ended August 31, 2022.
Other Income (Expense)
Other expense for the quarter ended August 31, 2022 resulted primarily from net
interest expense of $19,000 and a mark to market loss of approximately $10,000
on the Company's marketable equity securities. Other income for the quarter
ended August 31, 2021 resulted primarily from income of $6,735,000 from the
forgiveness of principal and interest on the PPP Loan offset by net interest
expense of approximately $34,000 and a mark to market loss of approximately
$2,000 on the Company's marketable equity securities.
Income Tax Provision (Benefit)
The income tax provision (benefit) included in the Company's results of
operations for the quarters ended August 31, 2022 and 2021 reflect the Company's
estimated effective tax rate for the fiscal years ending May 31, 2023 and 2022,
respectively. These rates resulted in a provision of 30.0% for the quarter ended
August 31, 2022 and a benefit of 1.8% for the quarter ended August 31, 2021. The
effective rate for the quarter ended August 31, 2021 is low because of the
non-taxable gain on the forgiveness of the PPP Loan principal and interest.
Net Income Attributable to TSR, Inc.
Net income attributable to TSR, Inc. was approximately $495,000 in the quarter
ended August 31, 2022 compared to $6,402,000 in the quarter ended August 31,
2021. The net income in the prior year quarter was primarily attributable to the
forgiveness of principal and interest on the PPP Loan.
Impact of inflation and Changing Prices
For the quarter ended August 31, 2022 and 2021, inflation and changing prices
did not have a material effect on the Company's revenue or income from
continuing operations.
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TSR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
The Company's cash was sufficient to enable it to meet its liquidity
requirements during the quarter ended August 31, 2022. The Company expects that
its cash and cash equivalents and the Company's Credit Facility pursuant to a
Loan and Security Agreement with the Lender will be sufficient to provide the
Company with adequate resources to meet its liquidity requirements for the
12-month period following the issuance of these financial statements. Utilizing
its accounts receivable as collateral, the Company has secured this Credit
Facility to increase its liquidity as necessary. As of August 31, 2022, the
Company had no net borrowings outstanding against this Credit Facility. The
amount the Company has borrowed fluctuates and, at times, it has utilized the
maximum amount of $2,000,000 available under this facility to fund its payroll
and other obligations. The Company was in compliance with all covenants under
the Credit Facility as of August 31, 2022 and through the date of this filing.
Additionally, in April 2020, the Company secured a PPP Loan in the amount of
$6,659,000 to meet its obligations in the face of potential disruptions in its
business operations and the potential inability of its customers to pay their
accounts when due. As of August 31, 2020, the Company had used 100% of the PPP
Loan funds to fund its payroll and for other allowable expenses under the PPP
Loan. The use of these funds allowed the Company to avoid certain salary
reductions, furloughs and layoffs of employees during the period. The Company
applied for PPP Loan forgiveness and its application for forgiveness was
accepted and approved; the PPP Loan and accrued interest were fully forgiven in
July 2021.
At August 31, 2022, the Company had working capital (total current assets in
excess of total current liabilities) of approximately $11,750,000, including
cash and cash equivalents and marketable securities of $7,775,000 as compared to
working capital of $10,912,000, including cash and cash equivalents and
marketable securities of $6,526,000 at May 31, 2022.
Net cash flow of approximately $1,323,000 was provided by operations during the
quarter ended August 31, 2022 as compared to $323,000 of net cash provided by
operations in the prior year period. The cash provided by operations for the
quarter ended August 31, 2022 primarily resulted from consolidated net income of
$508,000, a decrease in accounts receivable of $746,000 and an increase in
accounts payable and accrued expenses of $300,000 offset by a decrease in legal
settlement payable of $598,000. The cash provided by operations for the quarter
ended August 31, 2021 primarily resulted from consolidated net income of
$6,459,000 and an increase in accounts payable and other payables and accrued
expenses of $1,312,000, offset by the forgiveness of the PPP Loan principal and
accrued interest of $6,735,000, an increase in accounts receivable of $549,000
and a decrease in legal settlement payable of $291,000.
Net cash used in investing activities of approximately $2,000 for the quarter
ended August 31, 2022 primarily resulted from purchases of fixed assets. Net
cash used in investing activities of $28,000 for the quarter ended August 31,
2021 primarily resulted from purchases of fixed assets.
Net cash used in financing activities during the quarter ended August 31, 2022
of $62,000 primarily resulted from net repayments under the Company's Credit
Facility. Net cash used in financing activities of approximately $60,000 during
the quarter ended August 31, 2021 resulted from net payments on the Company's
Credit Facility of $58,000 and a distribution of the minority interest of
$2,000.
The Company's capital resource commitments at August 31, 2022 consisted of lease
obligations on its branch and corporate facilities. The net present value of its
future lease payments were approximately $625,000 as of August 31, 2022. The
Company intends to finance these commitments primarily from the Company's
available cash and Credit Facility.
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TSR, INC. AND SUBSIDIARIES
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Critical Accounting Estimates
The Securities Act regulations define "critical accounting estimates" as those
estimates made in accordance with generally accepted accounting principles that
involve a significant level of estimation uncertainty and have had or are
reasonably likely to have a material impact on the financial condition or
results of operations of the registrant. These estimates require the application
of management's most difficult subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to the
Company's consolidated financial statements, contained in its May 31, 2022
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission. The Company believes that those accounting policies require the
application of management's most difficult, subjective or complex judgments and
are thus considered critical accounting estimates under the Securities Act.
There have been no changes in the Company's significant accounting policies as
of August 31, 2022.
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TSR, INC. 
