The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto presented
elsewhere in this report.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of operations.
There can be no assurance that historical trends in operating results will
continue in the future:
Years Ended May 31,
(Dollar Amounts in Thousands)
2022 2021
% of % of
Amount Revenue Amount Revenue
Revenue, Net $ 97,312 100.0 % $ 68,821 100.0 %
Cost of Sales 81,314 83.6 57,500 83.6
Gross Profit 15,998 16.4 11,321 16.4
Selling, General and Administrative
Expenses 15,619 16.0 11,809 17.1
Income (Loss) from Operations 379 0.4 (488 ) (0.7 )
Other Income (Expense), Net 6,622 6.8 (198 ) (0.3 )
Income (Loss) Before Income Taxes 7,001 7.2 (686 ) (1.0 )
Benefit from Income Taxes (1 ) 0.0 (109 ) (0.1 )
Consolidated Net Income (Loss) 7,002 7.2 (577 ) (0.9 )
Net Income Attributable to
Noncontrolling Interest 73 0.1 24 0.0
Net Income (Loss) Attributable to TSR,
Inc. $ 6,929 7.1 % $ (601 ) (0.9 )%
Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the fiscal year ended May 31, 2022 increased approximately
$28,491,000 or 41.4% from the fiscal year ended May 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 479 for the fiscal year ended May 31, 2021 to 701 for the fiscal year ended
May 31, 2022. There were 335 and 431 IT contractors at May 31, 2021 and 2022,
respectively; while there were 144 and 270 clerical and administrative
contractors at May 31, 2021 and 2022, respectively.
We experienced terminated assignments and a decrease in demand for new
assignments during fiscal 2021 due to the COVID-19 pandemic, which led to the
lower number of consultant placements during the year and negatively impacted
the Company's revenues. Additionally, the COVID-19 pandemic created operational
challenges. The start of certain new assignments was delayed in fiscal 2021 due
to delays in obtaining necessary clearances, as many of the agencies required to
be contacted in obtaining the information needed for background checks were
fully or partially closed. By the end of the first quarter of fiscal 2021, the
Company had used 100% of the $6,659,000 proceeds from the PPP Loan (as defined
in Note 10 to the Consolidated Financial Statements elsewhere in this report) it
received in April 2020 to fund its payroll and other allowable expenses, which
was fully forgiven in July 2021. The use of these proceeds allowed the Company
to avoid certain salary reductions, furloughs and layoffs of employees during
the covered period.
Page 14
Cost of Sales
Cost of sales for the fiscal year ended May 31, 2022 increased approximately
$23,814,000 or 41.4% to $81,314,000 from $57,500,000 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 remained at 83.6% in the fiscal year ended May 31, 2021
and in the fiscal year ended May 31, 2022. The percentage increase in cost of
sales for fiscal 2022 as compared to fiscal 2021 (41.4% increase) was
substantially the same as the percentage increase in revenue for fiscal 2022 as
compared to fiscal 2021 (41.1% increase), causing no change in gross margin
percentage.
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 increased approximately
$3,810,000 or 32.3% from $11,809,000 in the fiscal year ended May 31, 2021 to
$15,619,000 in the fiscal year ended May 31, 2022. The increase in these
expenses primarily resulted from an additional $2,170,000 in selling, general
and administrative expenses for the Geneva accounts, a charge of $580,000 for
the legal settlement with the Company's former Chief Executive officer,
additional non-cash compensation expenses of $329,000 related to the TSR, Inc.
2020 Equity Incentive Plan, and an increase in headcount for our recruiting team
to support the growth in revenue. Selling, general and administrative expenses,
as a percentage of revenue, decreased from 17.1% in the fiscal year ended May
31, 2021 to 16.0% in the fiscal year ended May 31, 2022.
Other Income (Expense)
Other income (expense) for the fiscal year ended May 31, 2022 resulted primarily
from the forgiveness of principal and accrued interest on the PPP Loan of
$6,735,000, offset by net interest expense of approximately $102,000 and a
mark-to-market loss of $10,000 on the Company's marketable equity securities.
Other expense for the fiscal year ended May 31, 2021 resulted primarily from net
interest expense of approximately $193,000 and a mark-to-market loss of
approximately $5,000 on the Company's marketable equity securities.
Income Taxes
The effective income tax rates were less than 0.1% for the fiscal year ended May
31, 2022 and a benefit of 15.9% for the fiscal year ended May 31, 2021. The
effective income tax rate was lower than expected in fiscal 2022 due to the
non-taxable gain on the forgiveness of the PPP Loan principal and accrued
interest.
Net Income (Loss) Attributable to TSR
Net income (loss) attributable to TSR was approximately $6,929,000 in the fiscal
year ended May 31, 2022 compared to a loss of $601,000 in the fiscal year ended
May 31, 2021. The net income in the current fiscal year was primarily
attributable to the forgiveness of principal and accrued interest on the PPP
Loan and increased revenue from additional contractors on billing with clients.
Impact of Inflation and Changing Prices
For the fiscal years ended May 31, 2022 and 2021, inflation and changing prices
did not have a material effect on the Company's revenue or income from
continuing operations. The impact for fiscal 2023 cannot yet be determined.
Page 15
Liquidity, Capital Resources and Changes in Financial Condition
The Company's cash was sufficient to enable it to meet its liquidity
requirements during the fiscal year ended May 31, 2022. The Company expects that
its cash and cash equivalents and the Company's revolving Credit Facility (the
"Credit Facility") pursuant to a Loan and Security Agreement with Access
Capital, Inc. (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 the Credit Facility to
increase its liquidity as necessary. As of May 31, 2022, the net borrowings
outstanding against this Credit Facility were approximately $62,000. The amount
the Company has borrowed fluctuates and, at times, it has utilized the maximum
amount of $2,000,000 available under this facility in the prior fiscal year to
fund its payroll and other obligations. The Company was in compliance with all
covenants under the Credit Facility as of May 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 May 31, 2022, the Company had working capital (total current assets in excess
of total current liabilities) of approximately $10,912,000, including cash and
cash equivalents and marketable securities of $6,526,000, as compared to working
capital of $8,898,000, including cash and cash equivalents and marketable
securities of $7,416,000, at May 31, 2021.
Net cash flow of approximately $2,307,000 was used in operations during the
fiscal year ended May 31, 2022 as compared to $1,304,000 of net cash flow
provided by operations in the prior year. The cash used in operations for the
fiscal year ended May 31, 2022 primarily resulted from consolidated net income
of $7,002,000, non-cash stock-based compensation of $565,000 and an increase in
accounts payable and accrued expenses of $717,000, offset by the forgiveness of
the PPP Loan principal and accrued interest of $6,735,000 and an increase in
accounts receivable of $3,767,000. The cash provided by operations for the
fiscal year ended May 31, 2021 primarily resulted from an increase in accounts
payable and other payables and accrued expenses of $2,798,000 and a decrease in
prepaid and recoverable income taxes of $590,000 offset by the consolidated net
loss of $577,000 and an increase in accounts receivable of $1,824,000. The
increase in accounts payable and accrued expenses primarily resulted from the
deferral of $1,269,000 in payroll taxes as allowed by the CARES Act. One half of
these deferred payroll taxes were due on December 31, 2021 and the second half
on December 31, 2022.
Net cash used in investing activities of approximately $87,000 for the fiscal
year ended May 31, 2022 resulted from purchases of fixed assets. Net cash used
in investing activities of approximately $3,226,000 for the fiscal year ended
May 31, 2021 primarily resulted from the acquisition of Geneva in the amount of
$3,100,000 and purchases of fixed assets of $126,000.
Net cash provided by financing activities of $1,514,000 during the fiscal year
ended May 31, 2022 resulted primarily from the net proceeds of the sales of the
Company's common stock in our at-the-market ("ATM") program of $1,784,000 offset
by payments made for taxes related to vested stock awards of $212,000, net
repayments on the Company's Credit Facility of $31,000 and distributions to the
minority interest of $27,000. Net cash used in financing activities of
approximately $437,000 during the fiscal year ended May 31, 2021 resulted from
net payments on the Company's Credit Facility of $409,000 and distributions to
the minority interest of $28,000.
The Company's capital resource commitments at May 31, 2022 consisted of lease
obligations on its branch and corporate facilities and an accrued legal
settlement payable. The net present value of its future lease and settlement
payments were approximately $707,000 and $598,000, respectively, as of May 31,
2022. The Company intends to finance these commitments primarily from the
Company's available cash and Credit Facility.
Page 16
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 statements 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 estimates and policies are described in
Note 1 to its consolidated financial statements, contained elsewhere in this
report. The Company believes that the following accounting estimates and
policies require the application of management's most difficult, subjective or
complex judgments:
Revenue Recognition
Revenues are recognized as control of the promised service is transferred to
customers, in an amount that reflects the consideration expected in exchange for
the services. Revenues from contract assignments are recognized over time, based
on hours worked by the Company's contract professionals. The performance of the
requested service over time is the single performance obligation for assignment
revenues. Certain customers may receive discounts (e.g., volume discounts,
rebates, prompt-pay discounts) and adjustments to the amounts billed. These
discounts, rebates and adjustments are considered variable consideration. Volume
discounts are the largest component of variable consideration and are estimated
using the most likely amount method prescribed by Accounting Standards
Codification ("ASC") 606, contracts terms and estimates of revenue. Revenues are
recognized net of variable consideration to the extent that it is probable that
a significant reversal of revenues will not occur in subsequent periods. Payment
terms vary and the time between invoicing and when payment is due is not
significant. There are no financing components to the Company's arrangements.
There are no incremental costs to obtain contracts and costs to fulfill
contracts are expensed as incurred. The Company's operations are primarily
located in the United States. The Company recognizes most of its revenue on a
gross basis when it acts as a principal in its transactions. The Company has
direct contractual relationships with its customers, bears the risks and rewards
of its arrangements, and has the discretion to select the contract professionals
and establish the price for the services to be provided. Additionally, the
Company retains control over its contract professionals based on its contractual
arrangements. The Company primarily provides services through its employees and
to a lesser extent, through subcontractors; the related costs are included in
cost of sales. The Company includes billable expenses (out-of-pocket
reimbursable expenses) in revenue and the associated expenses are included in
cost of sales.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred
income tax assets considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. Presently, the
Company believes that it is more likely than not that it will realize the
benefits of its deferred tax assets based primarily on the Company's history of
and projections for taxable income in the future. In the event that actual
results differ from our estimates, or we adjust these estimates in future
periods, we may need to establish a valuation allowance against a portion or all
of our deferred tax assets, which could materially impact our financial position
or results of operations.
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets
acquired. Goodwill is not amortized but is subject to impairment analysis at
least once annually or more frequently upon the occurrence of an event or when
circumstances indicate that the carrying amount of a unit is greater than its
fair value.
Intangible Assets
The Company amortizes its intangible assets over their estimated useful lives
and will review these assets for impairment when there is evidence that events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of these assets is measured by comparing the
carrying amounts to the future undiscounted cash flows the assets are expected
to generate. If intangible assets are considered to be impaired, the impairment
to be recognized equals the amount by which the carrying value of the asset
exceeds its fair market value.
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