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 November 30, 2022 compared with three months ended November
30, 2021:
(Dollar amounts in thousands)
Three Months Ended
November 30, November 30,
2022 2021
% of % of
Amount Revenue Amount Revenue
Revenue, net $ 26,031 100.0 % $ 23,864 100.0 %
Cost of sales 21,400 82.2 % 19,816 83.0 %
Gross profit 4,631 17.8 % 4,048 17.0 %
Selling, general and administrative
expenses 3,625 13.9 % 3,633 15.2 %
Income from operations 1,006 3.9 % 415 1.8 %
Other expense, net (18 ) (0.1 )% (32 ) (0.2 )%
Income before income taxes 988 3.8 % 383 1.6 %
Provision for income taxes 301 1.2 % 128 0.5 %
Consolidated net income 687 2.6 % 255 1.1 %
Less: Net income attributable to
noncontrolling interest 13 0.0 % 12 0.1 %
Net income attributable to TSR, Inc. $ 674 2.6 % $ 243 1.0 %
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TSR, INC. AND SUBSIDIARIES
Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the quarter ended November 30, 2022 increased
approximately $2,167,000 or 9.1% from the quarter ended November 30, 2021,
primarily due to organic growth and expanded activity with clients. The average
number of consultants on billing with customers decreased from 715 for the
quarter ended November 30, 2021 to 693 for the quarter ended November 30, 2022.
However, IT contractors increased from 426 to 471 IT contractors at November 30,
2022; while clerical and administrative contractors decreased from 289 to 222 at
November 30, 2022. The change in the business mix to the higher revenue IT
contractors yielded the net increase in revenue.
Cost of Sales
Cost of sales for the quarter ended November 30, 2022 increased approximately
$1,584,000 or 8.0% to $21,400,000 from $19,816,000 in the prior year period. The
increase in cost of sales resulted primarily from an increase in higher cost IT
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 83.0% in the quarter ended
November 30, 2021 to 82.2% in the quarter ended November 30, 2022. Revenue grew
at a higher rate than cost of sales when comparing the quarter ended November
30, 2022 to the prior year quarter, 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 $8,000
or 0.2% from $3,633,000 in the quarter ended November 30, 2021 to $3,625,000 in
the quarter ended November 30, 2022. The decrease in these expenses primarily
resulted from non-cash compensation expenses of $69,000 in the quarter ended
November 30, 2022 compared with $177,000 in the quarter ended November 30, 2021
related to the Plan, offset by an increase in legal fees of $61,000. Selling,
general and administrative expenses, as a percentage of revenue decreased from
15.2% in the quarter ended November 30, 2021 to 13.9% in the quarter ended
November 30, 2022.
Other Expense
Other expense for the quarter ended November 30, 2022 resulted primarily from
net interest expense of $17,000 and a mark to market loss of approximately
$1,000 on the Company's marketable equity securities. Other income for the
quarter ended November 30, 2021 resulted primarily from net interest expense of
approximately $28,000 and a mark to market loss of approximately $4,000 on the
Company's marketable equity securities.
Income Tax Provision
The income tax provision included in the Company's results of operations for the
quarters ended November 30, 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 30.5% for the quarter ended
November 30, 2022 and a provision of 33.4% for the quarter ended November 30,
2021.
Net Income Attributable to TSR, Inc.
Net income attributable to TSR, Inc. was approximately $674,000 in the quarter
ended November 30, 2022 compared to $243,000 in the quarter ended November 30,
2021. The increase in net income over the prior year quarter was primarily
attributable to the increase in revenue and gross margin.
Impact of inflation and Changing Prices
For the quarters ended November 30, 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
Six months ended November 30, 2022 compared with six months ended November 30,
2021:
(Dollar amounts in thousands)
Six Months Ended
November 30, November 30,
2022 2021
% of % of
Amount Revenue Amount Revenue
Revenue, net $ 52,230 100.0 % $ 46,730 100.0 %
Cost of sales 43,166 82.6 % 38,871 83.2 %
Gross profit 9,064 17.4 % 7,859 16.8 %
Selling, general and administrative
expenses 7,303 14.0 % 7,799 16.7 %
Income from operations 1,761 3.4 % 60 0.1 %
Other income (expense), net (47 ) (0.1 )% 6,667 14.3 %
Income before income taxes 1,714 3.3 % 6,727 14.4 %
Provision for income taxes 519 1.0 % 13 0.0 %
Consolidated net income 1,195 2.3 % 6,714 14.4 %
Less: Net income attributable to
noncontrolling interest 26 0.1 % 69 0.2 %
Net income attributable to TSR, Inc. $ 1,169 2.2 % $ 6,645 14.2 %
Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the six months ended November 30, 2022 increased
approximately $5,500,000 or 11.8% from the six months ended November 30, 2021,
primarily due to organic growth and expanded activity with TSR clients. The
average number of consultants on billing with customers decreased from 687 for
the six months ended November 30, 2021 to 686 for the six months ended November
30, 2022. However, the average number of IT consultants increased from 414 to
467 for the six months ended November 30, 2022, while the average number of
clerical and administrative contractors decreased from 273 to 219 for the six
months ended November 30, 2022. The change in the business mix to the higher
revenue IT contractors yielded the net increase in revenue.
Cost of Sales
Cost of sales for the six months ended November 30, 2022 increased approximately
$4,295,000 or 11.0% to $43,166,000 from $38,871,000 in the prior year period.
The increase in cost of sales resulted primarily from an increase in higher cost
IT 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 83.2% in the six months
ended November 30, 2021 to 82.6% in the six months ended November 30, 2022.
Revenue grew at a higher rate than cost of sales when comparing the six months
ended November 30, 2022 to the prior year period, 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
$496,000 or 6.4% from $7,799,000 in the six months ended November 30, 2021 to
$7,303,000 in the six months ended November 30, 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 $138,000 in the six
months ended November 30, 2022 and $354,000 in the six months ended November 30,
2021 related to the Plan. These reductions were offset by an increase in
recruiting costs of approximately $260,000 and a decrease in legal fees of
$135,000. Selling, general and administrative expenses, as a percentage of
revenue, decreased from 16.7% in the six months ended November 30, 2021 to 14.0%
in the six months ended November 30, 2022.
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TSR, INC. AND SUBSIDIARIES
Other Income (Expense)
Other expense for the six months ended November 30, 2022 resulted primarily from
net interest expense of $36,000 and a mark to market loss of approximately
$11,000 on the Company's marketable equity securities. Other income for the six
months ended November 30, 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 $62,000 and a mark to market loss of approximately
$6,000 on the Company's marketable equity securities.
Income Tax Provision
The income tax provision included in the Company's results of operations for the
six months ended November 30, 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 30.3% for the six months
ended November 30, 2022 and a provision of 0.2% for the six months ended
November 30, 2021. The effective rate for the six months ended November 30, 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 $1,169,000 in the six
months ended November 30, 2022 compared to $6,645,000 in the six months ended
November 30, 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 six months ended November 30, 2022 and 2021, inflation and changing
prices did not have a material effect on the Company's revenue or income from
continuing operations.
Liquidity and Capital Resources
The Company's cash was sufficient to enable it to meet its liquidity
requirements during the quarter ended November 30, 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 November 30, 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 November 30, 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 November 30, 2022, the Company had working capital (total current assets in
excess of total current liabilities) of approximately $12,710,000, including
cash and cash equivalents and marketable securities of $8,216,000 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 $1,884,000 was provided by operations during the
six months ended November 30, 2022 as compared to $952,000 of net cash used in
operations in the prior year period. The cash provided by operations for the six
months ended November 30, 2022 primarily resulted from consolidated net income
of $1,195,000, a decrease in accounts receivable of $869,000 offset by a
decrease in accounts payable and accrued expenses of $193,000, a decrease in
legal settlement payable of $598,000 and an increase in prepaid expenses of
$130,000. The cash used in operations for the six months ended November 30, 2021
primarily resulted from consolidated net income of $6,714,000 and an increase in
accounts payable and other payables and accrued expenses of $127,000, offset by
the forgiveness of the PPP Loan principal and accrued interest of $6,735,000, an
increase in accounts receivable of $1,112,000 and a decrease in legal settlement
payable of $284,000.
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TSR, INC. AND SUBSIDIARIES
Net cash used in investing activities of approximately $504,000 for the six
months ended November 30, 2022 primarily resulted from purchases of certificates
of deposit of $500,000 and purchases of fixed assets of $4,000. Net cash used in
investing activities of $75,000 for the six months ended November 30, 2021
primarily resulted from purchases of fixed assets.
Net cash used in financing activities during the six months ended November 30,
2022 of $178,000 primarily resulted from purchases of treasury stock of $116,000
and from net repayments under the Company's Credit Facility of $62,000. Net cash
used in financing activities of approximately $76,000 during the six months
ended November 30, 2021 resulted from net payments on the Company's Credit
Facility of $49,000 and a distribution of the minority interest of $27,000.
The Company's capital resource commitments at November 30, 2022 consisted of
lease obligations on its branch and corporate facilities. The net present value
of its future lease payments were approximately $582,000 as of November 30,
2022. The Company intends to finance these commitments primarily from the
Company's available cash and Credit Facility.
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 November 30, 2022.
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TSR, INC. 