UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
☒ Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the quarterly period ended November 30, 2023
☐ Transition
report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the transition period from __ to __
Commission
File Number: 001-38838
TSR,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware | | 13-2635899 |
(State or other jurisdiction of
Incorporation or organization) | | (I.R.S. Employer Identification No.) |
400
Oser Avenue, Suite 150, Hauppauge, NY 11788
(Address
of principal executive offices)
631-231-0333
(Registrant’s
telephone number)
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | TSRI | | NASDAQ Capital Market |
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☐ | | Accelerated Filer ☐ |
Non-Accelerated Filer ☒ | | Smaller Reporting Company ☒ |
Emerging Growth Company ☐ | | |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As
of January 11, 2024, there were 2,143,712 shares of common stock, par value $0.01 per share, issued and outstanding.
TSR,
INC. AND SUBSIDIARIES
INDEX
|
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|
Page
Number |
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|
|
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Part I. |
Financial
Information: |
|
|
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|
Item 1. |
Financial
Statements: |
1 |
|
|
|
|
|
|
Condensed Consolidated Balance Sheets – November 30, 2023 and May 31, 2023
| 1 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations – For the three months and six months ended November 30,
2023 and November 30, 2022 |
2 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Equity – For the three months and six months ended November 30, 2023 and November 30, 2022 |
3-4 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows – For the six months ended November 30, 2023 and November
30, 2022 |
5 |
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements |
6 |
|
|
|
|
|
Item 2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations |
14 |
|
|
|
|
|
Item 3. |
Quantitative
and Qualitative Disclosures about Market Risk. |
18 |
|
|
|
|
|
Item 4. |
Controls
and Procedures |
18 |
|
|
|
|
Part
II. |
Other
Information |
19 |
|
|
|
|
|
Item 1. |
Legal
Proceedings |
19 |
|
|
|
|
|
Item 1A. |
Risk
Factors |
19 |
|
|
|
|
|
Item 2. |
Unregistered
Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities. |
19 |
|
|
|
|
|
Item 3. |
Defaults
upon Senior Securities. |
19 |
|
|
|
|
|
Item 4. |
Mine
Safety Disclosures. |
19 |
|
|
|
|
|
Item 5. |
Other
Information. |
19 |
|
|
|
|
|
Item 6. |
Exhibits
|
20 |
|
|
|
|
Signatures |
|
21 |
Part
I. Financial Information
Item
1. Financial Statements
TSR,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
November
30, 2023 and May 31, 2023
| |
November 30, 2023 | | |
May 31, 2023 | |
| |
(Unaudited) | | |
(see Note 1) | |
ASSETS | |
| | |
| |
Current Assets: | |
| | |
| |
Cash and cash equivalents | |
$ | 9,079,280 | | |
$ | 7,382,320 | |
Certificates of deposit and marketable securities | |
| 535,760 | | |
| 515,152 | |
Accounts receivable, net of allowance for doubtful accounts of $181,000 | |
| 11,028,278 | | |
| 12,081,335 | |
Other receivables | |
| 69,309 | | |
| 79,618 | |
Prepaid expenses | |
| 496,630 | | |
| 248,534 | |
Total Current Assets | |
| 21,209,257 | | |
| 20,306,959 | |
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $307,099 and $270,606 | |
| 33,106 | | |
| 69,599 | |
Other assets | |
| 31,761 | | |
| 48,772 | |
Right-of-use assets | |
| 665,407 | | |
| 459,171 | |
Intangible assets, net | |
| 1,255,500 | | |
| 1,333,500 | |
Goodwill | |
| 785,883 | | |
| 785,883 | |
Deferred income taxes | |
| 283,000 | | |
| 344,000 | |
| |
| | | |
| | |
Total Assets | |
$ | 24,263,914 | | |
$ | 23,347,884 | |
LIABILITIES AND EQUITY | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts payable and other payables | |
$ | 1,637,141 | | |
$ | 1,663,990 | |
Accrued expenses and other current liabilities | |
| 3,294,535 | | |
| 3,663,326 | |
Advances from customers | |
| 1,224,138 | | |
| 1,266,993 | |
Income taxes payable | |
| 53,286 | | |
| 11,260 | |
Operating lease liabilities - current | |
| 184,833 | | |
| 150,167 | |
Total Current Liabilities | |
| 6,393,933 | | |
| 6,755,736 | |
Operating lease liabilities, net of current portion | |
| 510,747 | | |
| 342,260 | |
Total Liabilities | |
| 6,904,680 | | |
| 7,097,996 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Equity: | |
| | | |
| | |
TSR, Inc.: | |
| | | |
| | |
Preferred stock, $1 par value, authorized 500,000 shares; none issued | |
| - | | |
| - | |
Common stock, $.01 par value, authorized 12,500,000 shares; issued 3,322,527 shares, 2,143,712 outstanding | |
| 33,226 | | |
| 33,226 | |
Additional paid-in capital | |
| 7,727,796 | | |
| 7,676,742 | |
Retained earnings | |
| 23,218,880 | | |
| 22,212,107 | |
| |
| 30,979,902 | | |
| 29,922,075 | |
| |
| | | |
| | |
Less: Treasury stock, 1,178,815 shares, at cost | |
| 13,726,895 | | |
| 13,726,895 | |
Total TSR, Inc. Equity | |
| 17,253,007 | | |
| 16,195,180 | |
| |
| | | |
| | |
Noncontrolling interest | |
| 106,227 | | |
| 54,708 | |
Total Equity | |
| 17,359,234 | | |
| 16,249,888 | |
| |
| | | |
| | |
Total Liabilities and Equity | |
$ | 24,263,914 | | |
$ | 23,347,884 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the Three Months and Six Months Ended November 30, 2023 and November 30, 2022
(UNAUDITED)
| |
Three
Months Ended November 30, | | |
Six
Months Ended November 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Revenue,
net | |
$ | 21,657,477 | | |
$ | 26,030,816 | | |
$ | 44,170,767 | | |
$ | 52,230,244 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 17,839,415 | | |
| 21,399,606 | | |
| 36,325,994 | | |
| 43,166,518 | |
Selling,
general and administrative expenses | |
| 3,185,104 | | |
| 3,625,172 | | |
| 6,436,865 | | |
| 7,302,777 | |
| |
| 21,024,519 | | |
| 25,024,778 | | |
| 42,762,859 | | |
| 50,469,295 | |
Income
from operations | |
| 632,958 | | |
| 1,006,038 | | |
| 1,407,908 | | |
| 1,760,949 | |
| |
| | | |
| | | |
| | | |
| | |
Other
income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest
income (expense), net | |
| 27,022 | | |
| (16,670 | ) | |
| 23,776 | | |
| (35,838 | ) |
Unrealized
gain (loss) on marketable securities, net | |
| 7,648 | | |
| (1,480 | ) | |
| 10,608 | | |
| (11,480 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income
before income taxes | |
| 667,628 | | |
| 987,888 | | |
| 1,442,292 | | |
| 1,713,631 | |
Provision
for income taxes | |
| 181,000 | | |
| 301,000 | | |
| 384,000 | | |
| 519,000 | |
| |
| | | |
| | | |
| | | |
| | |
Consolidated
net income | |
| 486,628 | | |
| 686,888 | | |
| 1,058,292 | | |
| 1,194,631 | |
Less:
Net income attributable to noncontrolling interest | |
| 26,643 | | |
| 13,055 | | |
| 51,519 | | |
| 26,052 | |
| |
| | | |
| | | |
| | | |
| | |
Net
income attributable to TSR, Inc. | |
$ | 459,985 | | |
$ | 673,833 | | |
$ | 1,006,773 | | |
$ | 1,168,579 | |
Basic
net income per TSR, Inc. common share | |
$ | 0.21 | | |
$ | 0.31 | | |
$ | 0.47 | | |
$ | 0.55 | |
Diluted
net income per TSR, Inc. common share | |
$ | 0.20 | | |
$ | 0.30 | | |
$ | 0.45 | | |
$ | 0.52 | |
Basic
weighted average number of common shares outstanding | |
| 2,143,712 | | |
| 2,139,861 | | |
| 2,143,712 | | |
| 2,143,155 | |
Diluted
weighted average number of common shares outstanding | |
| 2,250,118 | | |
| 2,232,332 | | |
| 2,248,851 | | |
| 2,234,473 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY
For
the Three Months and Six Months Ended November 30, 2022
(UNAUDITED)
| |
Shares of
common stock | | |
Common
stock | | |
Additional
paid-in capital | | |
Retained
earnings | | |
Treasury
stock | | |
TSR, Inc.
equity | | |
Non-
controlling interest | | |
Total
equity | |
Balance
at May 31, 2022 | |
| 3,298,549 | | |
$ | 32,986 | | |
$ | 7,473,866 | | |
$ | 20,470,042 | | |
$ | (13,514,003 | ) | |
$ | 14,462,891 | | |
$ | 69,674 | | |
$ | 14,532,565 | |
Net
income attributable to noncontrolling interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 12,997 | | |
| 12,997 | |
Non-cash
stock compensation | |
| - | | |
| - | | |
| 69,216 | | |
| - | | |
| - | | |
| 69,216 | | |
| - | | |
| 69,216 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
income attributable to TSR, Inc. | |
| - | | |
| - | | |
| - | | |
| 494,746 | | |
| - | | |
| 494,746 | | |
| - | | |
| 494,746 | |
Balance at August
31, 2022 | |
| 3,298,549 | | |
| 32,986 | | |
| 7,543,082 | | |
| 20,964,788 | | |
| (13,514,003 | ) | |
| 15,026,853 | | |
| 82,671 | | |
| 15,109,524 | |
Net
income attributable to noncontrolling interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 13,055 | | |
| 13,055 | |
Purchases
of treasury stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| (116,426 | ) | |
| (116,426 | ) | |
| - | | |
| (116,426 | ) |
Non-cash
stock compensation | |
| - | | |
| - | | |
| 69,216 | | |
| - | | |
| - | | |
| 69,216 | | |
| - | | |
| 69,216 | |
Net
income attributable to TSR, Inc. | |
| - | | |
| - | | |
| - | | |
| 673,833 | | |
| - | | |
| 673,833 | | |
| - | | |
| 673,833 | |
Balance
at November 30, 2022 | |
| 3,298,549 | | |
$ | 32,986 | | |
$ | 7,612,298 | | |
$ | 21,638,621 | | |
$ | (13,630,429 | ) | |
$ | 15,653,476 | | |
$ | 95,726 | | |
$ | 15,749,202 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY
For
the Three Months and Six Months Ended November 30, 2023
(UNAUDITED)
| |
Shares
of common stock | | |
Common
stock | | |
Additional
paid-in capital | | |
Retained
earnings | | |
Treasury
stock | | |
TSR,
Inc. equity | | |
Non-
controlling interest | | |
Total
equity | |
Balance
at May 31, 2023 | |
| 3,322,527 | | |
$ | 33,226 | | |
$ | 7,676,742 | | |
$ | 22,212,107 | | |
$ | (13,726,895 | ) | |
$ | 16,195,180 | | |
$ | 54,708 | | |
$ | 16,249,888 | |
Net
income attributable to noncontrolling interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 24,876 | | |
| 24,876 | |
Non-cash
stock compensation | |
| - | | |
| - | | |
| 25,527 | | |
| - | | |
| - | | |
| 25,527 | | |
| - | | |
| 25,527 | |
Net
income attributable to TSR, Inc. | |
| - | | |
| - | | |
| - | | |
| 546,788 | | |
| - | | |
| 546,788 | | |
| - | | |
| 546,788 | |
Balance
at August 31, 2023 | |
| 3,322,527 | | |
| 33,226 | | |
| 7,702,269 | | |
| 22,758,895 | | |
| (13,726,895 | ) | |
| 16,767,495 | | |
| 79,584 | | |
| 16,847,079 | |
Net
income attributable to noncontrolling interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 26,643 | | |
| 26,643 | |
Non-cash
stock compensation | |
| - | | |
| - | | |
| 25,527 | | |
| - | | |
| - | | |
| 25,527 | | |
| - | | |
| 25,527 | |
Net
income attributable to TSR, Inc. | |
| - | | |
| - | | |
| - | | |
| 459,985 | | |
| - | | |
| 459,985 | | |
| - | | |
| 459,985 | |
Balance
at November 30, 2023 | |
| 3,322,527 | | |
$ | 33,226 | | |
$ | 7,727,796 | | |
$ | 23,218,880 | | |
$ | (13,726,895 | ) | |
$ | 17,253,007 | | |
$ | 106,227 | | |
$ | 17,359,234 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
The Six Months Ended November 30, 2023 and November 30, 2022
(UNAUDITED)
| |
Six
Months Ended November 30, | |
| |
2023 | | |
2022 | |
Cash flows from operating activities: | |
| | |
| |
Consolidated
net income | |
$ | 1,058,292 | | |
$ | 1,194,631 | |
Adjustments
to reconcile consolidated net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation
and amortization | |
| 114,493 | | |
| 123,269 | |
Unrealized
(gain) loss on marketable securities, net | |
| (10,608 | ) | |
| 11,480 | |
Deferred
income taxes | |
| 61,000 | | |
| 437,000 | |
Non-cash
lease recovery | |
| (3,083 | ) | |
| (20,724 | ) |
Non-cash
stock-based compensation expense | |
| 51,054 | | |
| 138,432 | |
| |
| | | |
| | |
Changes
in operating assets and liabilities: | |
| | | |
| | |
Accounts
receivable | |
| 1,053,057 | | |
| 868,689 | |
Other
receivables | |
| 10,309 | | |
| (38,240 | ) |
Prepaid
expenses | |
| (248,096 | ) | |
| (129,599 | ) |
Prepaid
and recoverable income taxes | |
| - | | |
| 31,795 | |
Other
assets | |
| 17,011 | | |
| 14,498 | |
Accounts
payable, other payables, accrued expenses and other current liabilities | |
| (395,640 | ) | |
| (193,375 | ) |
Income
taxes payable | |
| 42,026 | | |
| 5,730 | |
Advances
from customers | |
| (42,855 | ) | |
| 37,501 | |
Legal
settlement payable | |
| - | | |
| (597,566 | ) |
Net
cash provided by operating activities | |
| 1,706,960 | | |
| 1,883,521 | |
| |
| | | |
| | |
Cash
flows from investing activities: | |
| | | |
| | |
Purchases of certificates
of deposit | |
| (500,000 | ) | |
| (500,000 | ) |
Maturities of certificates
of deposit | |
| 490,000 | | |
| - | |
Purchases
of equipment and leasehold improvements | |
| - | | |
| (3,584 | ) |
Net
cash used in investing activities | |
| (10,000 | ) | |
| (503,584 | ) |
| |
| | | |
| | |
Cash
flows from financing activities: | |
| | | |
| | |
Net
repayments on credit facility | |
| - | | |
| (61,882 | ) |
Purchases
of treasury stock | |
| - | | |
| (116,426 | ) |
Net
cash used in financing activities | |
| - | | |
| (178,308 | ) |
Net
increase in cash and cash equivalents | |
| 1,696,960 | | |
| 1,201,629 | |
Cash
and cash equivalents at beginning of period | |
| 7,382,320 | | |
| 6,490,158 | |
Cash
and cash equivalents at end of period | |
$ | 9,079,280 | | |
$ | 7,691,787 | |
| |
| | | |
| | |
Supplemental
disclosures of cash flow data: | |
| | | |
| | |
Income
taxes paid | |
$ | 306,000 | | |
$ | 44,000 | |
Interest
paid | |
$ | 52,000 | | |
$ | 37,000 | |
| |
| |
|
Supplemental disclosures of non-cash information: | |
| |
|
Right-of-use asset obtained in exchange for lease liabilities | |
$ | 298,000 | | |
$ | — | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2023
(Unaudited)
The
accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries. Unless otherwise
stated or the context otherwise requires, the terms “we,” “us,” “our,” and the “Company”
refer to TSR, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of May 31, 2023, which has been derived from audited financial statements, and the unaudited
interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
applying to interim financial information and with the instructions to Form 10-Q of Regulation S-X of the Securities and Exchange Commission
(the “SEC”). Accordingly, certain information and footnote disclosures required by accounting principles generally accepted
in the United States of America and normally included in the Company’s annual financial statements have been condensed or omitted.
These condensed consolidated interim financial statements as of and for the three months and six months ended November 30, 2023 are unaudited;
however, in the opinion of management, such statements include all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented.
The results of operations for the interim periods presented are not necessarily indicative of the results that might be expected for
future interim periods or for the full year ending May 31, 2024. These condensed consolidated interim financial statements should be
read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended May 31, 2023.
| Recent | Accounting Pronouncements |
In
June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-13, Financial
Instruments – Credit Losses (Topic 326) (“ASU 2016-13”), which requires financial assets to be presented at the
net amount to be collected, with an allowance for credit losses to be deducted from the amortized cost basis of the financial asset such
that the net carrying value of the asset is presented as the amount expected to be collected. Under ASU 2016-13, the entity’s statement
of operations is required to reflect the measurement of credit losses for newly recognized financial assets, as well as expected increases
or decreases in expected credit losses that have taken place during the period. For public business entities, ASU 2016-013 is effective
for fiscal years beginning after December 15, 2022. The Company adopted ASU No. 2016-13 on June 1, 2023 and the adoption of this update
did not have a significant impact on the Company’s condensed consolidated financial statements.
2. | Net Income Per Common Share |
Basic
net income per common share is computed by dividing net income available to common stockholders of TSR, Inc. by the weighted average
number of common shares outstanding during the reporting period, excluding the effects of any potentially dilutive securities. During
the quarter ended February 28, 2021, the Company granted time and performance vesting restricted stock awards under its 2020 Equity Incentive
Plan (see Note 13 for further information). Diluted earnings per share gives effect to all potentially dilutive common shares outstanding
during the reporting period. The common stock equivalents associated with these restricted stock awards of 106,406, 92,471, 105,139,
and 70,816 have been included for dilutive shares outstanding for the three and six months ended November 30, 2023 and 2022, respectively.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2023
(Unaudited)
3. | Cash and Cash Equivalents |
The
Company considers short-term highly liquid investments with original maturities of three months or less at the time of purchase to be
cash equivalents. Cash and cash equivalents were comprised of the following as of November 30, 2023 and May 31, 2023:
| |
November 30,
2023 | | |
May
31, 2023 | |
Cash in banks | |
$ | 4,143,248 | | |
$ | 7,010,568 | |
Certificates of deposit | |
| 1,517,745 | | |
| - | |
Money market funds | |
| 3,418,287 | | |
| 371,752 | |
| |
$ | 9,079,280 | | |
$ | 7,382,320 | |
4. | Fair Value of Financial Instruments |
Accounting
Standards Codification (“ASC”) Topic 825, Financial Instruments, requires disclosure of the fair value of certain
financial instruments. For cash and cash equivalents, accounts receivable, accounts and other payables, accrued liabilities and advances
from customers, the amounts presented in the condensed consolidated financial statements approximate fair value because of the short-term
maturities of these instruments.
5. | Certificates of Deposit and Marketable
Securities |
The
Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments,
into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical
assets or liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall
within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
Investments
recorded in the accompanying condensed consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:
| ● | Level
1 - These are investments where values are based on unadjusted quoted prices for identical
assets in an active market the Company has the ability to access. |
| ● | Level
2 - These are investments where values are based on quoted market prices that are not active
or model derived valuations in which all significant inputs are observable in active markets. |
| ● | Level
3 - These are investments where values are derived from techniques in which one or more significant
inputs are unobservable. |
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2023
(Unaudited)
The
following are the major categories of assets measured at fair value on a recurring basis as of November 30, 2023 and May 31, 2023 using
quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable
inputs (Level 3):
November
30, 2023 | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Certificates of Deposit | |
$ | 500,000 | | |
$ | - | | |
$ | - | | |
$ | 500,000 | |
Equity Securities | |
| 35,760 | | |
| - | | |
| - | | |
| 35,760 | |
| |
$ | 535,760 | | |
$ | - | | |
$ | - | | |
$ | 535,760 | |
May 31, 2023 | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Certificates of Deposit | |
$ | 490,000 | | |
$ | - | | |
$ | - | | |
$ | 490,000 | |
Equity Securities | |
| 25,152 | | |
| - | | |
| - | | |
| 25,152 | |
| |
$ | 515,152 | | |
$ | - | | |
$ | - | | |
$ | 515,152 | |
Based
upon the Company’s intent and ability to hold its certificates of deposit to maturity (which range up to twelve (12) months at
purchase), such securities have been classified as held-to-maturity and are carried at amortized cost, which approximates market value.
The Company’s equity securities are classified as trading securities, which are carried at fair value, as determined by quoted
market prices, which is a Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included
in earnings. The Company’s marketable securities at November 30, 2023 and May 31, 2023 are summarized as follows:
November
30, 2023 | |
Amortized
Cost | | |
Gross
Unrealized
Holding
Gains | | |
Gross
Unrealized
Holding
Losses | | |
Recorded
Value | |
Certificates of Deposit | |
$ | 500,000 | | |
$ | - | | |
$ | - | | |
$ | 500,000 | |
Equity Securities | |
| 16,866 | | |
| 18,894 | | |
| - | | |
| 35,760 | |
| |
$ | 516,866 | | |
$ | 18,894 | | |
$ | - | | |
$ | 535,760 | |
May
31, 2023 | |
Amortized
Cost | | |
Gross
Unrealized Holding Gains | | |
Gross
Unrealized Holding Losses | | |
Recorded
Value | |
Certificates of Deposit | |
$ | 490,000 | | |
$ | - | | |
$ | - | | |
$ | 490,000 | |
Equity Securities | |
| 16,866 | | |
| 8,286 | | |
| - | | |
| 25,152 | |
| |
$ | 506,866 | | |
$ | 8,286 | | |
$ | - | | |
$ | 515,152 | |
The
Company’s investments in marketable securities consist primarily of investments in equity securities. Market values were determined
for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company
reviews factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer,
and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery
in market values.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2023
(Unaudited)
From
time to time, the Company is party to various lawsuits, some involving material amounts. Management is not aware of any lawsuits that
would have a material adverse impact on the consolidated financial position of the Company except for the litigation disclosed elsewhere
in this report, including in Notes 9 and 11 to the condensed consolidated financial statements.
The
Company leases the space for its offices in Hauppauge, New York and Edison, New Jersey. Under ASC 842, at contract inception we determine
whether the contract is or contains a lease and whether the lease should be classified as an operating or finance lease. Operating leases
are in right-of-use assets and operating lease liabilities are in our condensed consolidated balance sheets.
The
Company’s leases for its offices are classified as operating leases.
The
lease agreements for Hauppauge, New York and Edison, New Jersey expire on December 31, 2026 and May 31, 2027, respectively, and do not
include any renewal options.
In
addition to the monthly base amounts in the lease agreements, the Company is required to pay real estate taxes and operating expenses
during the lease terms.
For
the three months ended November 30, 2023 and 2022, the Company’s operating lease expense for these leases was $69,686 and $63,905,
respectively. For the six months ended November 30, 2023 and 2022, the Company’s operating lease expense for these leases was $136,908
and $148,882, respectively. These expenses were all included in selling, general and administrative expenses.
As
there are no explicit rates provided in our leases, the Company’s incremental borrowing rate was used based on the information
available as of the commencement date in determining the present value of the future lease payments. Future minimum lease payments under
non-cancellable operating leases as of November 30, 2023 are as follows:
Twelve Months Ending November 30, | |
| |
2024 | |
$ | 233,748 | |
2025 | |
| 240,956 | |
2026 | |
| 247,558 | |
2027 | |
| 74,998 | |
Total undiscounted operating lease payments | |
| 797,260 | |
Less imputed interest | |
| 101,680 | |
Present value of operating lease payments | |
$ | 695,580 | |
The
following table sets forth the right-of-use assets and operating lease liabilities as of November 30, 2023:
Assets | |
| |
Right-of-use assets, net | |
$ | 665,407 | |
Liabilities | |
| | |
Current operating lease liabilities | |
$ | 184,833 | |
Long-term operating lease liabilities | |
| 510,747 | |
Total operating lease liabilities | |
$ | 695,580 | |
The weighted average remaining lease
term for the Company’s operating leases is 3.3 years. The weighted average incremental borrowing rate was 8.43%.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2023
(Unaudited)
On
November 27, 2019, TSR closed on a revolving credit facility (the “Credit Facility”) pursuant to a Loan and Security Agreement
with Access Capital, Inc. (the “Lender”) which provides funding to TSR, Inc. and its direct and indirect subsidiaries, TSR
Consulting Services, Inc., Logixtech Solutions, LLC and Eurologix, S.A.R.L., each of which, together with TSR, Inc., is a borrower under
the Credit Facility. Each of the borrowers has provided a security interest to the Lender in all of their respective assets to secure
amounts borrowed under the Credit Facility.
TSR,
Inc. expects to utilize the Credit Facility for working capital and general corporate purposes. The maximum amount that may be advanced
under the Credit Facility at any time shall not exceed $2,000,000.
Advances
under the Credit Facility accrue interest at a rate per annum equal to (x) the “base rate” or “prime rate” announced
by Citibank, N.A. from time to time, which shall be increased or decreased, as the case may be, in an amount equal to each increase or
decrease in such “base rate” or “prime rate,” plus (y) 1.75%. The prime rate as of November 30, 2023 was 8.50%,
indicating an interest rate of 10.25% on the Credit Facility. The initial term of the Credit Facility is five years, which shall automatically
renew for successive five-year periods unless either TSR or the Lender gives written notice to the other of termination at least 60 days
prior to the expiration date of the then-current term.
TSR,
Inc. is obliged to satisfy certain financial covenants and minimum borrowing requirements under the Credit Facility, and to pay certain
fees, including prepayment fees, and provide certain financial information to the Lender. The Company was in compliance with all covenants
at November 30, 2023.
As
of November 30, 2023, the net payments exceeded borrowings outstanding against the Credit Facility resulting in a receivable from the
Lender of $55,811 which is included in “Other receivables” on the condensed consolidated balance sheet. The amount the Company
has borrowed fluctuates and, at times, it has utilized the maximum amount of $2,000,000 available under the facility to fund its payroll
and other obligations.
9. | Legal Settlement with Investor |
On
April 1, 2020, the Company entered into a binding term sheet (“Term Sheet”) with Zeff Capital, L.P. (“Zeff”)
pursuant to which it agreed, among other things, to pay Zeff an amount of $900,000 over a period of three years in cash or cash and stock
in settlement of expenses incurred by Zeff during its solicitations in 2018 and 2019 in connection with the annual meetings of the Company,
the costs incurred in connection with the litigation initiated by and against the Company as well as negotiation, execution and enforcement
of the Settlement and Release Agreement, dated as of August 30, 2019, by and between the Company, Zeff and certain other parties. In
exchange for certain releases, the Term Sheet called for a cash payment of $300,000 on June 30, 2021, a second cash payment of $300,000
on June 30, 2022 and a third payment of $300,000 also on June 30, 2022, which could be paid in cash or common stock at the Company’s
option. There was no interest due on these payments. The Company accrued $818,000, the estimated
present value of these payments using an effective interest rate of 5%, in the quarter ended February 29, 2020, as the events relating
to the expense occurred prior to such date. The $300,000 payment due on June 30, 2021, was paid when due. The two cash payments of $300,000
each were made by June 30, 2022 in full satisfaction of the settlement.
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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2023
(Unaudited)
Intangible
assets are as follows:
| |
May 31, | | |
| | |
November 30, | |
| |
2023 | | |
Amortization | | |
2023 | |
Database (estimated life 5 years) | |
$ | 103,500 | | |
$ | 23,000 | | |
$ | 80,500 | |
Trademark (estimated life 3 years) | |
| 5,000 | | |
| 5,000 | | |
| - | |
Customer relationships (estimated life 15 years) | |
| 1,225,000 | | |
| 50,000 | | |
| 1,175,000 | |
Total | |
$ | 1,333,500 | | |
$ | 78,000 | | |
$ | 1,255,500 | |
No
instances of triggering events or impairment indicators were identified at November 30, 2023.
11. | Related Party Transactions |
On
January 5, 2021, the members of the Board of Directors of TSR, Inc. other than Robert Fitzgerald approved providing a waiver to QAR Industries,
Inc. for its contemplated acquisition of shares owned by Fintech Consulting LLC under the Company’s prior Amended and Restated
Rights Agreement so that a distribution date would not occur as a result of the acquisition. QAR Industries, Inc. and Fintech Consulting
LLC were both principal stockholders of the Company, each owning more than 5% of the Company’s outstanding common stock prior to
the consummation of the acquisition. Robert Fitzgerald is the President and majority stockholder of QAR Industries, Inc. The other directors
of the Company are not affiliated with QAR Industries, Inc.
On
February 3, 2021, the acquisition was completed and QAR Industries, Inc. purchased 348,414 shares of TSR, Inc. common stock from Fintech
Consulting LLC at a price of $7.25 per share. At the same time, Bradley M. Tirpak, Chairman of TSR, Inc., purchased 27,586 shares of
the Company’s common stock from Fintech Consulting LLC at a price of $7.25 per share.
On December
1, 2021, Fintech Consulting LLC (the “Plaintiff”) filed a complaint against the Company in the United States District
Court for the District of New Jersey, related to the foregoing transaction. The named defendants in the complaint were the Company, QAR
Industries, Inc., Robert E. Fitzgerald, a director and a stockholder of QAR Industries, Inc., and Bradley Tirpak (the “defendants”).
The complaint purported to assert claims against the Defendants under state law and Section 10(b) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) in connection with a Share Purchase Agreement, dated January 31, 2021, by and between
the Plaintiff, as the seller of shares of the Company’s common stock, and QAR Industries, Inc. and Mr. Tirpak, as the purchasers
of such shares (the “SPA”). The Plaintiff sought (i) judgment declaring the transactions represented by the SPA null and
void and for the return of the shares; (ii) judgment cancelling the SPA and returning the shares in exchange for return of the purchase
price; (iii) judgment unwinding the transaction; (iv) compensatory damages; (v) punitive damages; (vi) pre-judgment interest; (vii) costs
of the lawsuit including attorneys’ fees; and (viii) such other relief as the Court may find appropriate. The Plaintiff filed its
first amended complaint on March 2, 2022 which the Defendants moved to dismiss on April 19, 2022. On December 7, 2022, the court granted
the Defendants’ motion and dismissed the New Jersey Action on jurisdictional grounds.
Following
the dismissal of the original lawsuit, the Plaintiff filed another complaint relating to the SPA against the Defendants on January 12,
2023, in the Court of Chancery of the State of Delaware (the “Delaware Chancery Action”), asserting claims and seeking relief
substantially similar to that which was asserted and sought in the preceding lawsuit. The Delaware Chancery Action was dismissed without
prejudice by the court on January 23, 2023.
On
January 22, 2023, The Plaintiff filed a complaint against the Company in the United States District Court for the District of Delaware
(the “Delaware Federal Action”). The Delaware Federal Action, in sum and substance, asserted claims and sought relief substantially
similar to that contained in both the New Jersey Action and the Delaware Chancery Action.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2023
(Unaudited)
Although
the Company believed the Delaware Federal Action described above to be without merit, to avoid the time and expense of litigation, the
Company negotiated with the Plaintiff to settle this matter pursuant to a settlement agreement and release dated April 24, 2023. An amount
of $75,000 was paid in the fourth quarter of fiscal year 2023 to settle this matter. Upon the payment of the settlement amount (i) the
Plaintiff forever released and discharged the Defendants from any and all claims or liability of any nature whatsoever; (ii) the Defendants
forever released and discharged the Plaintiff from any and all claims or liability of any nature whatsoever that relate to the Delaware
Federal Action or the SPA; and (iii) the Plaintiff filed a Stipulation of Dismissal with Prejudice on April 27, 2023.
The
Company has provided placement services for an entity in which a Board of Director of the Company is the former CEO. There were no revenues
for such services in the three months ended November 30, 2023, and 2022. Revenues for such services in the six months ended November
30, 2023, and 2022 were approximately $17,000 and $36,000, respectively. There were no amounts outstanding as accounts receivable from
this entity as of November 30, 2023, or November 30, 2022.
Our
certificate of incorporation, as amended, authorizes the issuance of up to 12,500,000 shares of common stock, $0.01 par
value per share.
On
October 8, 2021, the Company filed an automatic shelf registration statement on Form S-3 (File No. 333-260152) (the “2021 TSRI
Shelf”) which contains (i) a base prospectus, which covers the offering, issuance and sale by the Company of up to $5,000,000 in
the aggregate of shares of common stock from time to time in one or more offerings; and (ii) a sales agreement prospectus, which covers
the offering, issuance and sale by the Company of up to $4,167,000 in the aggregate of shares of common stock that may be issued and
sold from time to time under an at-the-market sales agreement (the “2021 ATM”) by and between the Company and A.G.P./Alliance
Global Partners, as sales agent (the “2021 Agent”). The $4,167,000 of common stock that may be offered, issued and sold under
the sales agreement prospectus is included in the $5,000,000 of shares of common stock that may be offered, issued and sold by the Company
under the base prospectus. Upon termination of the sales agreement, any portion of the $4,167,000 included in the sales agreement prospectus
that is not sold pursuant to the sales agreement will be available for sale in other offerings pursuant to the base prospectus and if
no shares are sold under the agreement, the full $4,167,000 of securities may be sold in other offerings pursuant to the base prospectus.
Under the 2021 ATM, we pay the 2021 Agent a commission rate equal to 3.0% of the gross sales price per share of all shares sold
through the 2021 Agent under the sales agreement.
During
the fiscal year ended May 31, 2022, we sold an aggregate of 142,500 shares of common stock pursuant to the 2021 ATM for total
gross proceeds of $1,965,623 at an average selling price of $13.79 per share, resulting in net proceeds of $1,783,798 after deducting
$181,825 in commissions and other transactions costs. There were no shares sold during the quarters or six months ended November 30,
2023 and 2022.
The
2021 TSRI Shelf is currently our only active shelf-registration statement. We may offer TSR, Inc. common stock registered under the 2021
TSRI Shelf from time to time in response to market conditions or other circumstances if we believe such a plan of financing is in the
best interests of our stockholders. We believe that the 2021 TSRI Shelf provides us with the flexibility to raise additional capital
to finance our operations as needed, however, there is no assurance we will be successful in doing so.
13. | Stock-based Compensation Expense |
On
January 28, 2021, the Company granted 108,333 shares in time vesting restricted stock awards and 69,167 shares in time and performance
vesting restricted stock awards to officers, directors and key employees under the TSR, Inc. 2020 Equity Incentive Plan (the “Plan”).
The time vesting shares vest in tranches at the one-, two- and three-year anniversaries of the grants (“service condition”).
These shares had a grant date fair value of $826,000 based on the closing price of the Company’s common stock on the day prior
to the grants. The associated compensation expense is recognized on a straight-line basis over the time between grant date and the date
the shares vest (the “service period”).
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2023
(Unaudited)
The
time and performance vesting shares also vest in tranches at or after the two- and three-year anniversaries of the grants. The performance
condition is defined in the grant agreements and relates to the market price of the Company’s common stock over a stated period
of time (“market condition”). These shares had a grant date value of $262,000 based on the closing price of the Company’s
common stock on the day prior to the grants discounted by an estimated forfeiture rate of 40-60%. The Company took into account the historical
volatility of its common stock to assess the probability of satisfying the market condition. The associated compensation expense is recognized
on a straight-line basis between the time the achievement of the performance criteria is deemed probable and the time the shares may
vest. The market condition for the shares that vest on the two-year anniversary was met in October 2021. During the quarters ended November
30, 2023 and 2022, $25,527 and $69,216, respectively, have been recorded as stock-based compensation expense and included in selling,
general and administrative expenses. During the six months ended November 30, 2023 and 2022, $51,054 and $138,432, respectively, have
been recorded as stock-based compensation expense and included in selling, general and administrative expenses. As of November 30, 2023,
there is approximately $17,018 of unearned compensation expense that will be expensed through January 2024; 142,666 stock awards expected
to vest; 82,499 awards vested to date, of which 16,635 were forfeited to pay taxes applicable to the stock awards.
14. | Stock Repurchase Program |
On
September 12, 2022, the Board of Directors authorized a stock repurchase program of up to $500,000 of the Company’s outstanding
common stock, par value $0.01 per share. The stock repurchase program commenced two business days after the filing of the related Form
8-K and is authorized for twelve (12) months following the commencement date.
The
shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions,
or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program
will be determined by the Board of Directors at its discretion and will depend on a number of factors, including the market price of
the Company’s stock, general market and economic conditions, and applicable legal and contractual requirements. The Company has
no obligation or commitment to repurchase all or any portion of the shares covered by this authorization.
During
the quarter and six months ended November 30, 2022, 14,817 shares of the Company’s common stock were repurchased at an aggregate
cost of $116,426. No shares were repurchased in the quarter and six months ended November 30, 2023.
TSR, INC. AND
SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
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 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 the SEC. 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, 2023 compared with three months ended November 30, 2022:
| |
(Dollar amounts in thousands) Three Months Ended | |
| |
November 30, 2023 | | |
November 30, 2022 | |
| |
Amount | | |
% of Revenue | | |
Amount | | |
% of Revenue | |
Revenue, net | |
$ | 21,657 | | |
| 100.0 | % | |
$ | 26,031 | | |
| 100.0 | % |
Cost of sales | |
| 17,839 | | |
| 82.4 | % | |
| 21,400 | | |
| 82.2 | % |
Gross profit | |
| 3,818 | | |
| 17.6 | % | |
| 4,631 | | |
| 17.8 | % |
Selling, general and administrative expenses | |
| 3,185 | | |
| 14.7 | % | |
| 3,625 | | |
| 13.9 | % |
Income from operations | |
| 633 | | |
| 2.9 | % | |
| 1,006 | | |
| 3.9 | % |
Other income (expense), net | |
| 35 | | |
| 0.2 | % | |
| (18 | ) | |
| (0.1 | )% |
Income before income taxes | |
| 668 | | |
| 3.1 | % | |
| 988 | | |
| 3.8 | % |
Provision for income taxes | |
| 181 | | |
| 0.9 | % | |
| 301 | | |
| 1.2 | % |
Consolidated net income | |
| 487 | | |
| 2.2 | % | |
| 687 | | |
| 2.6 | % |
Less: Net income attributable to noncontrolling interest | |
| 27 | | |
| 0.1 | % | |
| 13 | | |
| 0.0 | % |
Net income attributable to TSR, Inc. | |
$ | 460 | | |
| 2.1 | % | |
$ | 674 | | |
| 2.6 | % |
TSR,
INC. AND SUBSIDIARIES
Revenue
Revenue
consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended November 30, 2023, decreased
approximately $4,374,000 or 16.8% from the quarter ended November 30, 2022, primarily due to a decrease in clerical and administrative
contractors placed with customers. The average number of consultants on billing with customers decreased from 693 for the quarter ended
November 30, 2022 to 519 for the quarter ended November 30, 2023. There were an average of 471 and 435 IT contractors for the quarters
ended November 30, 2022 and 2023, respectively, while there were an average of 222 and 84 clerical and administrative contractors for
the quarters ended November 30, 2022 and 2023, respectively. Customers using our clerical and administrative contractors have decreased
their spending by terminating assignments early and hiring our contractors directly at a greater rate than usual.
Cost of
Sales
Cost
of sales for the quarter ended November 30, 2023, decreased approximately $3,561,000 or 16.6% to $17,839,000 from $21,400,000 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 was 82.2% in the quarter ended November 30, 2022 and 82.4% in the quarter ended November 30, 2023. The increase
in cost of sales as a percentage of revenue was due, in part, from a reduction of full time placement fee revenue to $56,000 in the quarter
ended November 30, 2023 from $159,000 in the quarter ended November 30, 2022.
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 $440,000 or 12.1% from $3,625,000 in the quarter ended November
30, 2022, to $3,185,000 in the quarter ended November 30, 2023. The decrease in these expenses primarily resulted from a decrease of
$190,000 from a reduction of both onshore and offshore recruiting in line with the decrease in new placement opportunities with customers,
reduced legal fees of $47,000 and reduced costs associated with the upgrading of internal systems of $22,000. Additionally, the Company
incurred non-cash compensation expenses of $26,000 in the quarter ended November 30, 2023, and $69,000 in the quarter ended November
30, 2022, related to the Plan. Selling, general and administrative expenses, as a percentage of revenue increased from 13.9% in the quarter
ended November 30, 2022, to 14.7% in the quarter ended November 30, 2023.
Other
Income (Expense)
Other
income for the quarter ended November 30, 2023 resulted primarily from net interest income of $27,000 and a mark to market gain of approximately
$8,000 on the Company’s marketable equity securities. 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.
Income
Tax Provision
The
income tax provision included in the Company’s results of operations for the quarters ended November 30, 2023 and 2022 reflect
the Company’s estimated effective tax rate for the fiscal years ending May 31, 2024 and 2023, respectively. These rates resulted
in a provision of 27.1% for the quarter ended November 30, 2023 and a provision of 30.5% for the quarter ended November 30, 2022.
Net Income
Attributable to TSR, Inc.
Net
income attributable to TSR, Inc. was approximately $460,000 in the quarter ended November 30, 2023 compared to $674,000 in the quarter
ended November 30, 2022. The decrease in net income from the prior year quarter was primarily attributable to the decrease in clerical
and administrative contractors placed with customers.
Impact
of Inflation and Changing Prices
For
the quarters ended November 30, 2023 and 2022, inflation and changing prices did not have a material effect on the Company’s revenue
or income from continuing operations.
TSR,
INC. AND SUBSIDIARIES
Six months
ended November 30, 2023 compared with six months ended November 30, 2022:
| |
(Dollar amounts in thousands) Six Months Ended | |
| |
November 30, 2023 | | |
November 30, 2022 | |
| |
Amount | | |
% of Revenue | | |
Amount | | |
% of Revenue | |
Revenue, net | |
$ | 44,171 | | |
| 100.0 | % | |
$ | 52,230 | | |
| 100.0 | % |
Cost of sales | |
| 36,326 | | |
| 82.2 | % | |
| 43,166 | | |
| 82.6 | % |
Gross profit | |
| 7,845 | | |
| 17.8 | % | |
| 9,064 | | |
| 17.4 | % |
Selling, general and administrative expenses | |
| 6,437 | | |
| 14.6 | % | |
| 7,303 | | |
| 14.0 | % |
Income from operations | |
| 1,408 | | |
| 3.2 | % | |
| 1,761 | | |
| 3.4 | % |
Other income (expense), net | |
| 34 | | |
| 0.1 | % | |
| (47 | ) | |
| (0.1 | )% |
Income before income taxes | |
| 1,442 | | |
| 3.3 | % | |
| 1,714 | | |
| 3.3 | % |
Provision for income taxes | |
| 384 | | |
| 0.9 | % | |
| 519 | | |
| 1.0 | % |
Consolidated net income | |
| 1,058 | | |
| 2.4 | % | |
| 1,195 | | |
| 2.3 | % |
Less: Net income attributable to noncontrolling interest | |
| 51 | | |
| 0.1 | % | |
| 26 | | |
| 0.1 | % |
Net income attributable to TSR, Inc. | |
$ | 1,007 | | |
| 2.3 | % | |
$ | 1,169 | | |
| 2.2 | % |
Revenue
Revenue
consists primarily of revenue from computer programming consulting services. Revenue for the six months ended November 30, 2023, decreased
approximately $8,059,000 or 15.4% from the six months ended November 30, 2022, primarily due to a decrease in clerical and administrative
contractors placed with customers. The average number of consultants on billing with customers decreased from 686 for the six months
ended November 30, 2022 to 519 for the six months ended November 30, 2023. There were an average of 467 and 436 IT contractors for the
quarters ended November 30, 2022 and 2023, respectively, while there were an average of 219 and 83 clerical and administrative contractors
for the quarters ended November 30, 2022 and 2023, respectively. Customers using our clerical and administrative contractors have decreased
their spending by terminating assignments early and hiring our contractors directly at a greater rate than usual.
Cost of
Sales
Cost
of sales for the six months ended November 30, 2023, decreased approximately $6,840,000 or 15.8% to $36,326,000 from $43,166,000 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 82.6% in the six months ended November 30, 2022, to 82.2% in the six months ended November
30, 2023. Cost of sales decreased at a higher rate than revenue when comparing the six months ended November 30, 2023, to the prior year
period, causing an increase in gross margins. The change in the business mix towards having a higher percentage of IT contractors yielded
the increase 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 decreased approximately $866,000 or 11.9% from $7,303,000 in the six months ended
November 30, 2022, to $6,437,000 in the six months ended November 30, 2023. The decrease in these expenses primarily resulted from a
decrease of $355,000 from a reduction of both onshore and offshore recruiting in line with the decrease in new placement opportunities
with customers, reduced legal fees of $102,000 and reduced costs associated with the upgrading of internal systems of $58,000. Additionally,
the Company incurred non-cash compensation expenses of $52,000 in the six months ended November 30, 2023, and $138,000 in the six months
ended November 30, 2022, related to the Plan. Selling, general and administrative expenses, as a percentage of revenue increased from
14.0% in the six months ended November 30, 2022, to 14.6% in the six months ended November 30, 2023.
TSR,
INC. AND SUBSIDIARIES
Other
Income (Expense)
Other
income for the six months ended November 30, 2023 resulted primarily from net interest income of $24,000 and a mark to market gain of
approximately $11,000 on the Company’s marketable equity securities. 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.
Income
Tax Provision
The
income tax provision included in the Company’s results of operations for the six months ended November 30, 2023 and 2022 reflect
the Company’s estimated effective tax rate for the fiscal years ending May 31, 2024 and 2023, respectively. These rates resulted
in a provision of 26.6% for the six months ended November 30, 2023 and a provision of 30.3% for the six months ended November 30, 2022.
Net Income
Attributable to TSR, Inc.
Net
income attributable to TSR, Inc. was approximately $1,007,000 in the six months ended November 30, 2023 compared to $1,169,000 in the
six months ended November 30, 2022. The decrease in net income from the prior year period was primarily attributable to the decrease
in clerical and administrative contractors placed with customers.
Impact
of Inflation and Changing Prices
For
the six months ended November 30, 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 ended November 30, 2023. The Company
expects that its cash and cash equivalents and the Company’s 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 condensed consolidated 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, 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 of November 30, 2023, and through the date of this filing.
At November 30, 2023, the Company had working
capital (total current assets in excess of total current liabilities) of approximately $14,815,000, including cash and cash equivalents
and marketable securities of $9,615,000 as compared to working capital of $13,551,000, including cash and cash equivalents and marketable
securities of $7,897,000 at May 31, 2023.
Net
cash flow of approximately $1,707,000 was provided by operations during the six months ended November 30, 2023, as compared to $1,884,000
of net cash provided by operations in the prior year period. The cash provided by operations for the six months ended November 30, 2023,
primarily resulted from consolidated net income of $1,058,000, and a decrease in accounts receivable of $1,053,000, offset by a decrease
in accounts payable and accrued expenses of $396,000 and an increase in prepaid expenses of $248,000. The cash provided by operations
for the six months ended November 30, 2022, primarily resulted from consolidated net income of $1,195,000 and 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.
Net
cash used in investing activities of approximately $10,000 for the six months ended November 30, 2023 primarily resulted from purchases
of certificates of deposit in excess of maturing certificates of deposit. 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.
There
was no cash provided by or used in financing activities during the six months ended November 30, 2023. 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.
The
Company’s capital resource commitments at November 30, 2023 consisted of lease obligations on its branch and corporate facilities.
The net present value of its future lease payments were approximately $398,000 as of November 30, 2023. The Company intends to finance
these commitments primarily from the Company’s available cash and Credit Facility.
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
Exchange 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. These critical accounting estimates were discussed in the Company’s
May 31, 2023 Annual Report on Form 10-K in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” under the caption “Critical Accounting Estimates”.
The
Company’s significant accounting policies are described in Note 1 to the Company’s consolidated financial statements, contained
in its May 31, 2023, Annual Report on Form 10-K, as filed with the SEC. 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 Exchange Act.
There
have been no changes in the Company’s significant accounting policies or critical accounting estimates as of November 30, 2023.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
As
a smaller reporting company, we are not required to provide the information called for by this Item.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures. The Company conducted an evaluation, under the supervision and with the participation of the principal executive
officer and principal accounting officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based on this evaluation, the principal executive officer and principal accounting officer concluded
that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
Internal
Control Over Financial Reporting. There was no change in the Company’s internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
TSR,
INC. AND SUBSIDIARIES
Part
II. Other Information
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
We
operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition
or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q,
you should carefully consider the factors in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report
on Form 10-K for the fiscal year ended May 31, 2023, as filed with the SEC. We are not aware of any material updates to the risk factors
described in our previously filed Annual Report on Form 10-K.
Item
2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item
3. Defaults upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information
None.
TSR,
INC. AND SUBSIDIARIES
Item
6. Exhibits
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
Date: January 11, 2024 |
/s/
Thomas Salerno |
|
Thomas Salerno, Chief Executive Officer, President,
Treasurer and Principal Executive Officer |
|
|
Date: January 11, 2024 |
/s/ John G.
Sharkey |
|
John G. Sharkey, Sr. Vice President, Chief Financial
Officer, Secretary, Principal Financial Officer and Principal Accounting Officer |
Page
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CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John G. Sharkey, Sr. Vice
President, Chief Financial Officer and Principal Accounting Officer, certify that:
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TSR,
Inc. (the “Company”) on Form 10-Q for the quarter ended November 30, 2023 as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, Thomas Salerno, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The foregoing certification is incorporated solely
for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other
purpose.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TSR,
Inc. (the “Company”) on Form 10-Q for the quarter ended November 30, 2023 as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, John G. Sharkey, Principal Accounting Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The foregoing certification is incorporated solely
for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other
purpose.