TSR, INC. 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; 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 theSecurities 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 endedFebruary 28, 2023 compared with three months endedFebruary 28, 2022 : (Dollar amounts in thousands) Three Months Ended February 28, February 28, 2023 2022 Amount % of Revenue Amount % of Revenue Revenue, net$ 24,257 100.0 %$ 24,383 100.0 % Cost of sales 20,267 83.6 % 20,590 84.4 % Gross profit 3,990 16.4 % 3,793 15.6 % Selling, general and administrative expenses 3,769 15.5 % 3,830 15.7 % Income (loss) from operations 221 0.9 % (37 ) (0.1 )% Other expense, net (13 ) (0.0 )% (21 ) (0.1 )% Income (loss) before income taxes 208 0.9 % (58 ) (0.2 )% Provision for (benefit from) income taxes 110 0.5 % (14 ) 0.0 % Consolidated net income (loss) 98 0.4 % (44 ) (0.2 )% Less: Net income attributable to noncontrolling interest 18 0.1 % 3 0.0 % Net income (loss) attributable to TSR, Inc.$ 80 0.3 %$ (47 ) (0.2 )% 14 TSR, INC. AND SUBSIDIARIES Revenue
Revenue consists primarily of revenue from computer programming consulting services. Revenue for the quarter endedFebruary 28, 2023 decreased approximately$126,000 or 0.5% from the quarter endedFebruary 28, 2022 , primarily due to decreased activity with clients for clerical and administrative contractors. The average number of consultants on billing with customers decreased from 721 for the quarter endedFebruary 28, 2022 to 640 for the quarter endedFebruary 28, 2023 . However, IT contractors increased from 443 to 467 IT contractors atFebruary 28, 2023 ; while clerical and administrative contractors decreased from 278 to 173 atFebruary 28, 2023 . The change in the business mix toward the higher revenue IT contractors mitigated much of the
decrease in revenue. Cost of Sales Cost of sales for the quarter endedFebruary 28, 2023 decreased approximately$323,000 or 1.6% to$20,267,000 from$20,590,000 in the prior year period. The decrease in cost of sales resulted primarily from a decrease in consultants placed with customers, primarily clerical and administrative contractors. Cost of sales as a percentage of revenue decreased from 84.4% in the quarter endedFebruary 28, 2022 to 83.6% in the quarter endedFebruary 28, 2023 . Revenue decreased at a lower rate than cost of sales when comparing the quarter endedFebruary 28, 2023 to the prior year quarter, causing an increase in gross margins. The IT contractors added have a higher gross margin than the clerical and administrative staff that decreased.
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$61,000 or 1.6% from$3,830,000 in the quarter endedFebruary 28, 2022 to$3,769,000 in the quarter endedFebruary 28, 2023 . The decrease in these expenses primarily resulted from non-cash compensation expenses of$55,000 in the quarter endedFebruary 28, 2023 compared with$141,000 in the quarter endedFebruary 28, 2022 related to the Plan and from a decrease in legal fees of$55,000 , offset by an accrual for a legal settlement of$75,000 in the current quarter. Selling, general and administrative expenses, as a percentage of revenue decreased from 15.7% in the quarter endedFebruary 28, 2022 to 15.5% in the quarter endedFebruary 28, 2023 . Other Expense Other expense for the quarter endedFebruary 28, 2023 resulted primarily from net interest expense of$9,000 and a mark-to-market loss of approximately$4,000 on the Company's marketable equity securities. Other income for the quarter endedFebruary 28, 2022 resulted primarily from net interest expense of approximately$20,000 and a mark-to-market loss of approximately$1,000 on the Company's marketable equity securities. Income Tax Provision The income tax provision (benefit) included in the Company's results of operations for the quarters endedFebruary 28, 2023 and 2022 reflect the Company's estimated effective tax rate for the fiscal years endingMay 31, 2023 and 2022, respectively. These rates resulted in a provision of 52.9% for the quarter endedFebruary 28, 2023 and a benefit of 24.1% for the quarter endedFebruary 28, 2022 .
Net Income Attributable to TSR
Net income attributable to TSR was approximately$80,000 in the quarter endedFebruary 28, 2023 compared to a net loss of$47,000 in the quarter endedFebruary 28, 2022 . The increase in net income over the prior year quarter was primarily attributable to the increase in gross margin and a decrease in selling, general and administrative expenses.
Impact of Inflation and Changing Prices
For the quarters ended
15
TSR, INC. AND SUBSIDIARIES
Nine months ended February 28, 2023 compared with nine months ended February 28,
2022 :
(Dollar amounts in thousands)
Nine Months Ended
February 28, February 28,
2023 2022
% of % of
Amount Revenue Amount Revenue
Revenue, net $ 76,487 100.0 % $ 71,113 100.0 %
Cost of sales 63,434 82.9 % 59,462 83.6 %
Gross profit 13,053 17.1 % 11,651 16.4 %
Selling, general and administrative
expenses 11,072 14.5 % 11,628 16.3 %
Income from operations 1,981 2.6 % 23 0.1 %
Other income (expense), net (60 ) (0.1 )% 6,646 9.3 %
Income before income taxes 1,921 2.5 % 6,669 9.4 %
Provision for (benefit from) income
taxes 629 0.8 % (1 ) 0.0 %
Consolidated net income 1,292 1.7 % 6,670 9.4 %
Less: Net income attributable to
noncontrolling interest 44 0.1 % 72 0.1 %
Net income attributable to TSR, Inc. $ 1,248 1.6 % $ 6,598 9.3 % Revenue
Revenue consists primarily of revenue from computer programming consulting services. Revenue for the nine months endedFebruary 28, 2023 increased approximately$5,374,000 or 7.6% from the nine months endedFebruary 28, 2022 , primarily due to growth in higher priced IT contractors offsetting decreases in clerical and administrative contractors. The average number of consultants on billing with customers decreased from 698 for the nine months endedFebruary 28, 2022 to 671 for the nine months endedFebruary 28, 2023 . However, the average number of IT consultants increased from 424 to 467 for the nine months endedFebruary 28, 2023 , while the average number of clerical and administrative contractors decreased from 274 to 203 for the nine months endedFebruary 28, 2023 . The change in the business mix toward the higher revenue IT contractors yielded the net increase in revenue. Cost of Sales Cost of sales for the nine months endedFebruary 28, 2023 increased approximately$3,972,000 or 6.7% to$63,434,000 from$59,462,000 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 organic growth. Cost of sales as a percentage of revenue decreased from 83.6% in the nine months endedFebruary 28, 2022 to 82.9% in the nine months endedFebruary 28, 2023 . Revenue grew at a higher rate than cost of sales when comparing the nine months endedFebruary 28, 2023 to the prior year period, causing an increase in gross margins. The IT contractors added have a higher gross margin than the clerical and administrative staff that decreased.
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$556,000 or 4.8% from$11,628,000 in the nine months endedFebruary 22, 2022 to$11,072,000 in the nine months endedFebruary 28, 2023 . 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$193,000 in the nine months endedFebruary 28, 2023 and$496,000 in the nine months endedFebruary 28, 2022 related to the Plan. These reductions were offset by an increase in recruiting costs of approximately$251,000 . Selling, general and administrative expenses, as a percentage of revenue, decreased from 16.3% in the nine months endedFebruary 28, 2022 to 14.4% in the nine months endedFebruary 28, 2023 . 16TSR, INC. AND SUBSIDIARIES Other Income (Expense) Other expense for the nine months endedFebruary 28, 2023 resulted primarily from net interest expense of$45,000 and a mark-to-market loss of approximately$15,000 on the Company's marketable equity securities. Other income for the nine months endedFebruary 28, 2022 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$81,000 and a mark-to-market loss of approximately$2,000 on the Company's marketable equity securities. Income Tax Provision The income tax provision (benefit) included in the Company's results of operations for the nine months endedFebruary 28, 2023 and 2022 reflect the Company's estimated effective tax rate for the fiscal years endingMay 31, 2023 and 2022, respectively. These rates resulted in a provision of 32.7% for the nine months endedFebruary 28, 2023 and a benefit of less than 1% for the nine months endedFebruary 28, 2022 . The effective rate for the nine months endedFebruary 28, 2022 is low because of the non-taxable gain on the forgiveness of the PPP Loan principal and interest, combined with low taxable income.
Net Income Attributable to TSR
Net income attributable to TSR was approximately$1,248,000 in the nine months endedFebruary 28, 2023 compared to$6,598,000 in the nine months endedFebruary 28, 2022 . The net income in the prior year period was primarily attributable to the forgiveness of principal and interest on the PPP Loan.
Impact of Inflation and Changing Prices
For the nine months endedFebruary 28, 2023 and 2022, 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 endedFebruary 28, 2023 . 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 condensed consolidated financial statements. Utilizing its accounts receivable as collateral, the Company has secured this Credit Facility to increase its liquidity as necessary. As ofFebruary 28, 2023 , 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 ofFebruary 28, 2023 and through the date of this filing. Additionally, inApril 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 ofAugust 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 inJuly 2021 .
AtFebruary 28, 2023 , the Company had working capital (total current assets in excess of total current liabilities) of approximately$12,848,000 , including cash and cash equivalents and marketable securities of$8,580,000 as compared to working capital of$10,912,000 , including cash and cash equivalents and marketable securities of$6,526,000 atMay 31, 2022 . Net cash flow of approximately$2,393,000 was provided by operations during the nine months endedFebruary 28, 2023 as compared to$2,472,000 of net cash used in operations in the prior year period. The cash provided by operations for the nine months endedFebruary 28, 2023 primarily resulted from consolidated net income of$1,292,000 , a decrease in accounts receivable of$1,848,000 offset by a decrease in accounts payable and accrued expenses of$926,000 , a decrease in legal settlement payable of$598,000 and a decrease in deferred income taxes of$493,000 . The cash used in operations for the nine months endedFebruary 28, 2022 primarily resulted from consolidated net income of$6,670,000 , offset by the forgiveness of the PPP Loan principal and accrued interest of$6,735,000 , an increase in accounts receivable of$2,758,000 and a decrease in legal settlement payable of$277,000 . 17TSR, INC. AND SUBSIDIARIES Net cash used in investing activities of approximately$996,000 for the nine months endedFebruary 28, 2023 primarily resulted from purchases of certificates of deposit of$990,000 and purchases of fixed assets of$6,000 . Net cash used in investing activities of$81,000 for the nine months endedFebruary 28, 2022 primarily resulted from purchases of fixed assets. Net cash used in financing activities during the nine months endedFebruary 28, 2023 of$318,000 primarily resulted from purchases of treasury stock of$180,000 , distributions of the minority interest of$75,000 and from net repayments under the Company's Credit Facility of$62,000 . Net cash provided by financing activities of approximately$1,669,000 during the nine months endedFebruary 28, 2022 resulted from net proceeds from sales of the Company's common stock in our ATM program of$1,821,000 offset by payments made for taxes related to vested stock awards of$92,000 , net payments on the Company's Credit Facility of$33,000 and distributions of the minority interest of$27,000 . The Company's capital resource commitments atFebruary 28, 2023 consisted of lease obligations on its branch and corporate facilities. The net present value of its future lease payments was approximately$538,000 as ofFebruary 28, 2023 . 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 itsMay 31, 2022 Annual Report on Form 10-K, as filed with theSecurities 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 ofFebruary 28, 2023 .
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