OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
internal and through the previously announced pursuit of suitable acquisition
candidates; the successful integration of announced 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, 2020 compared with three months ended November
30, 2019
(Dollar amounts in thousands)
Three Months Ended
November 30, November 30,
2020 2019
% of % of
Amount Revenue Amount Revenue
Revenue, net $ 16,069 100.0 % $ 15,234 100.0 %
Cost of sales 13,234 82.4 % 12,784 83.9 %
Gross profit 2,835 17.6 % 2,450 16.1 %
Selling, general and administrative
expenses 3,059 19.0 % 2,386 15.7 %
Income (loss) from operations (224 ) (1.4 )% 64 0.4 %
Other income (expense), net (54 ) (0.3 )% 12 0.1 %
Income (loss) before income taxes (278 ) (1.7 )% 76 0.5 %
Provision for (benefit from) income
taxes (30 ) (0.2 )% 8 0.1 %
Consolidated net income (loss) (248 ) (1.5 )% 68 0.4 %
Less: Net income (loss) attributable to
noncontrolling interest (1 ) (0.0 )% 6 0.0 %
Net income (loss) attributable to TSR,
Inc. $ (247 ) (1.5 )% $ 62 0.4 %
Page 20
TSR, INC. AND SUBSIDIARIES
Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the quarter ended November 30, 2020 increased
approximately $835,000 or 5.5% from the quarter ended November 30, 2019. Without
revenue of $1,962,000 from the Geneva acquisition, revenue would have decreased
$1,127,000 or 7.4%. Revenue for the current quarter increased due to higher
overall average number of consultants on billing with customers which increased
from 378 for the quarter ended November 30, 2019 to 383 for the quarter ended
November 31, 2020, with Geneva contributing 44 of the 383 average number of
consultants on billing.
We have experienced and continue to experience terminated assignments and a
decrease in demand for new assignments due to the COVID-19 pandemic, which has
led to a lower number of consultant placements and negatively impacted the
Company's revenues. Additionally, the COVID-19 pandemic has created operational
challenges. The start of certain new assignments has been and continues to be
delayed due to delays in obtaining necessary clearances, as many of the agencies
required to be contacted in obtaining the information needed for background
checks have been fully or partially closed. As of November 30, 2020, the Company
had used 100% of the PPP loan funds to fund its payroll and other allowable
expenses. The use of these funds allowed the Company to avoid certain salary
reductions, furloughs and layoffs of employees during the covered period.
Cost of Sales
Cost of sales for the quarter ended November 30, 2020 increased approximately
$450,000 or 3.5% to $13,234,000 from $12,784,000 in the prior year period. The
increase in cost of sales resulted primarily from an increase in consultants on
billing with customers resulting from the Geneva acquisition. Cost of sales as a
percentage of revenue decreased from 83.9% in the quarter ended November 30,
2019 to 82.4% in the quarter ended November 30, 2020. The percentage increase in
cost of sales for the current quarter as compared to the prior year quarter
(3.5% increase) was lower than the percentage increase in revenue for the
current quarter as compared to the prior year quarter (5.5% 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 increased approximately
$673,000 or 28.2% from $2,386,000 in the quarter ended November 30, 2019 to
$3,059,000 in the quarter ended November 30, 2020. The increase in these
expenses primarily resulted from $491,000 in expenses from the newly acquired
Geneva operation. These expenses are expected to decrease going forward as we
combine operations. The Company also incurred approximately $156,000 of expenses
in the quarter related to the acquisition. Additionally, the Company recorded an
asset impairment charge of $137,000 in the current quarter due to the signing of
a subletting agreement for one of its offices. Selling, general and
administrative expenses, as a percentage of revenue, increased from 15.7% in the
quarter ended November 30, 2019 to 19.0% in the quarter ended November 30, 2020.
Other Income (Expense)
Other income (expense) for the quarter ended November 30, 2020 resulted
primarily from interest expense of approximately $52,000 and a mark to market
loss of approximately $2,000 on the Company's marketable equity securities.
Other income for the quarter ended November 30, 2019 resulted primarily from
interest and dividend income of $3,000 and a mark to market gain of
approximately $9,000 on the Company's marketable equity securities.
Income Tax Provision (Benefit)
The income tax benefit included in the Company's results of operations for the
quarters ended November 30, 2020 and 2019 reflects the Company's estimated
effective tax rate for the years ending May 31, 2021 and 2020, respectively.
These rates resulted in a benefit of 10.8% for the quarter ended November 30,
2020 and a provision of 10.5% for the quarter ended November 30, 2019. The
effective tax rates for these periods are not meaningful due to the small amount
of pre-tax income and loss.
Net Income (Loss) Attributable to TSR, Inc.
Net loss attributable to TSR, Inc. was approximately $247,000 in the quarter
ended November 30, 2020 compared to net income of $62,000 in the quarter ended
November 30, 2019. The net loss in the current quarter was primarily
attributable to an increase in selling, general and administrative expenses due
to the Geneva acquisition and the impairment charge resulting from the
subletting of one of the Company's offices.
Page 21
TSR, INC. AND SUBSIDIARIES
Six months ended November 30, 2020 compared with six months ended November 30,
2019
(Dollar amounts in thousands)
Six Months Ended
November 30, November 30,
2020 2019
% of % of
Amount Revenue Amount Revenue
Revenue, net $ 30,583 100.0 % $ 30,180 100.0 %
Cost of sales 25,417 83.1 % 25,455 84.3 %
Gross profit 5,166 16.9 % 4,725 15.7 %
Selling, general and administrative
expenses 5,330 17.4 % 5,575 18.5 %
Loss from operations (164 ) (0.5 )% (850 ) (2.8 )%
Other income (expense), net (116 ) (0.4 )% 19 0.0 %
Loss before income taxes (280 ) (0.9 )% (831 ) (2.8 )%
Benefit from income taxes (35 ) 0.1 % (239 ) 0.8 %
Consolidated net loss (245 ) (0.8 )% (592 ) (2.0 )%
Less: Net income attributable to
noncontrolling interest 5 0.0 % 10 0.0 %
Net loss attributable to TSR, Inc. $ (250 ) (0.8 )% $ (602 ) (2.0 )%
Revenue
Revenue consists primarily of revenue from computer programming consulting
services. Revenue for the six months ended November 30, 2020 increased
approximately $403,000 or 1.3% from the six month period ended November 30,
2019. Without revenue of $1,962,000 from the Geneva acquisition, revenue would
have decreased $1,559,000 or 5.2%. Revenue for the current six months increased
primarily due to higher average billing rates. These increased rates resulted
from placements in higher level positions, not higher rates for similar
positions from the prior year period. The increase in rates overcame a lower
overall average number of consultants on billing with customers which decreased
from 377 for the six months ended November 30, 2019 to 359 for the six months
ended November 30, 2020, with Geneva contributing 22 of the 359 average number
of consultants on billing for the six month period.
We have experienced and continue to experience terminated assignments and a
decrease in demand for new assignments due to the COVID-19 pandemic, which has
led to the lower number of consultant placements and negatively impacted the
Company's revenues. Additionally, the COVID-19 pandemic has created operational
challenges. The start of certain new assignments has been and continues to be
delayed due to delays in obtaining necessary clearances, as many of the agencies
required to be contacted in obtaining the information needed for background
checks have been fully or partially closed. As of November 30, 2020, the Company
had used 100% of the PPP loan funds to fund its payroll and other allowable
expenses. The use of these funds allowed the Company to avoid certain salary
reductions, furloughs and layoffs of employees during the covered period.
Cost of Sales
Cost of sales for the six months ended November 30, 2020 decreased approximately
$38,000 or 0.1% to $25,417,000 from $25,455,000 in the prior year period. The
decrease in cost of sales resulted primarily from a decrease in consultants
placed with customers. Cost of sales as a percentage of revenue decreased from
84.3% in the six months ended November 30, 2019 to 83.1% in the six months ended
November 30, 2020. The percentage decrease in cost of sales for the current
period as compared to the prior year period (0.1% decrease) added to the
percentage increase in revenue for the current period as compared to the prior
year period (1.3% increase), caused an increase in gross margins.
Page 22
TSR, INC. AND SUBSIDIARIES
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
$245,000 or 4.4% from $5,575,000 in the six months ended November 30, 2019 to
$5,330,000 in the six months ended November 30, 2020. The decrease in these
expenses primarily resulted from a decrease of $847,000 in amounts paid for
legal services and advisory from the prior year related to shareholder
litigation and increased costs surrounding our proxy and annual meeting. There
were an additional $491,000 in selling, general and administrative expenses from
the newly acquired Geneva operation in fiscal 2021. The Company also incurred
approximately $278,000 of expenses in the current six month period related to
the acquisition. Additionally, the Company recorded an asset impairment charge
of $137,000 in the current period due to the signing of a subletting agreement
for one of its offices. Selling, general and administrative expenses, as a
percentage of revenue, decreased from 18.5% in the six months ended November 30,
2019 to 17.4% in the six months ended November 30, 2020.
Other Income (Expense)
Other income (expense) for the six months ended November 30, 2020 resulted
primarily from interest expense of approximately $104,000 and a mark to market
loss of approximately $12,000 on the Company's marketable equity securities.
Other income for the six months ended November 30, 2019 resulted primarily from
interest and dividend income of $8,000 and a mark to market gain of
approximately $11,000 on the Company's marketable equity securities.
Income Tax Benefit
The income tax benefit included in the Company's results of operations for the
six months ended November 30, 2020 and 2019 reflects the Company's estimated
effective tax rate for the years ending May 31, 2021 and 2020, respectively.
These rates resulted in a benefit of 12.5% for the six months ended November 30,
2020 and a benefit of 28.8% for the six months ended November 30, 2019. The
effective rate for the current period is not meaningful due to the small amount
of the pre-tax loss.
Net Loss Attributable to TSR, Inc.
Net loss attributable to TSR, Inc. was approximately $250,000 in the six months
ended November 30, 2020 compared to a loss of $602,000 in the six months ended
November 30, 2019. The decrease in net loss was primarily attributable to a
decrease in selling, general and administrative expenses due to the decreased
legal services and advisory fees described above.
Liquidity and Capital Resources
The Company's cash was sufficient to enable it to meet its liquidity
requirements during the six months ended November 30, 2020. The Company expects
that its cash and cash equivalents and the Company's line of credit pursuant to
a Loan and Security Agreement with Access Capital, Inc. 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
line of credit to increase its liquidity as necessary. As of November 30, 2020,
the net borrowings outstanding against this line of credit facility were
approximately $100,000. 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 line of credit facility
as of November 30, 2020 and through the date of this filing. Additionally, in
April 2020, the Company secured a PPP Loan in the amount of $6,659,000. At the
time of application, the Company determined that the loan was necessary in order
to secure the Company's ability to meet its obligations in the face of potential
disruptions in it business operations and the potential inability of its
customers to pay their accounts when due. As of November 30, 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.
While there is no guarantee that the Company will receive forgiveness for any
outstanding amounts under the PPP Loan, it believes that it has acted in
compliance with the terms of the program and plans to seek forgiveness of the
PPP Loan.
At November 30, 2020, the Company had working capital (total current assets in
excess of total current liabilities) of approximately $9,161,000 including cash
and cash equivalents and marketable securities of $7,231,000 as compared to
working capital of $12,239,000 including cash and cash equivalents and
marketable securities of $9,780,000 at May 31, 2020.
Page 23
TSR, INC. AND SUBSIDIARIES
Net cash flow of approximately $987,000 was provided by operations during the
six months ended November 30, 2020 as compared to $1,234,000 of net cash flow
used in operations in the prior year period. The cash provided by operations for
the six months ended November 30, 2020 primarily resulted from an increase in
accounts payable and other payables and accrued expenses of $1,435,000 offset by
the consolidated net loss of $244,000 and increases in accounts receivable and
prepaid expenses of $171,000 and $143,000, respectively. The increase in
accounts payable and accrued expenses primarily resulted from the deferral of
$1,132,000 in payroll taxes as allowed by the Cares Act. The cash used in
operations for the six months ended November 30, 2019 primarily resulted from
the consolidated net loss of $592,000, a decrease in accounts payable and
accrued expenses of $633,000 and an increase in deferred taxes of $252,000,
which were offset, to an extent, by a decrease in accounts receivable of
$376,000.
Net cash used in investing activities of approximately $3,123,000 for the six
months ended November 30, 2020 primarily resulted from the acquisition of Geneva
Consulting Group, Inc. in the amount of $3,100,000. Net cash provided by
investing activities of $247,000 for the six months ended November 30, 2019
primarily resulted from the proceeds of a matured certificate of deposit not
being reinvested.
Net cash used in financing activities of approximately $401,000 during the six
months ended November 30, 2020 resulted from net payments on the Company's line
of credit with Access Capital. Net cash used in financing activities during the
six months ended November 30, 2019 resulted from distributions to the minority
interest of $11,000.
The Company's capital resource commitments at November 30, 2020 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 $532,000 and $847,000, respectively, as of November
30, 2020. The Company intends to finance these commitments primarily from the
Company's available cash and line of credit.
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.
Recently Adopted Accounting Pronouncements
Effective June 1, 2019, the Company adopted ASU No. 2016-02, Leases, which sets
out the principle for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract (i.e., lessees and lessors). The new
standard requires lessees to classify leases as either finance or operating
leases and record a right-of-use asset and a lease liability for all leases with
a term of greater than 12 months regardless of their classification. An
accounting policy election may be made to account for leases with a term of 12
months or less similar to existing guidance for operating leases today. ASU No.
2016-02 supersedes the existing guidance on accounting for leases. In July 2018,
the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements,
which allows for an optional transition method for the adoption of Topic 842.
The two permitted transition methods are now the modified retrospective
approach, which applies the new lease requirements at the beginning of the
earliest period presented, and the optional transition method, which applies the
new lease requirements through a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. ASU 2016-02 is effective
for our fiscal year ended May 31, 2020 and the interim periods within that year.
The Company adopted this standard in the first quarter of fiscal 2020 using the
optional transition method. The Company also elected the practical expedients
that allow us to carry forward the historical lease classification. The Company
has established an inventory of existing leases and implemented a new process of
evaluating the classification of each lease. The financial impact of the
adoption of the new standard at June 1, 2019 increased total assets and total
liabilities by approximately $690,000. The financial impact of the adoption
primarily relates to the capitalization of right-of-use assets and recognition
of lease liabilities related to operating leases.
Critical Accounting Policies
The Securities and Exchange Commission defines "critical accounting policies" as
those that 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, 2020
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.
Other than the consideration of the policies disclosed in Notes 16 and 17 to the
condensed consolidated financial statements regarding the accounting for
goodwill and intangible assets, there have been no changes in the Company's
significant accounting policies as of November 30, 2020.
Page 24
TSR, INC. AND SUBSIDIARIES© Edgar Online, source Glimpses
TSR, INC. 
