☒ Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
☐ Transition report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
(Former name, former address
and former fiscal year, if changed since last report)
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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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
and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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 September 30, 2016, there were 1,962,062 shares of common stock, par
value $.01 per share, issued and outstanding.
TSR, INC. AND SUBSIDIARIES
Part I.
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Financial Information
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|
|
|
Item 1. Financial Statements
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TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
August 31,
2016
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May 31,
2016
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ASSETS
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(Unaudited)
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|
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(see Note 1)
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|
Current Assets:
|
|
|
|
|
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Cash and cash equivalents
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|
$
|
4,536,726
|
|
|
$
|
4,514,157
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|
Certificates of deposit and marketable securities
|
|
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1,557,712
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|
|
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1,553,272
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Accounts receivable, net of allowance for doubtful accounts of $185,000
|
|
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7,820,156
|
|
|
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7,703,680
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Other receivables
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|
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14,116
|
|
|
|
10,853
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Prepaid expenses
|
|
|
177,677
|
|
|
|
99,069
|
|
Deferred income taxes
|
|
|
123,000
|
|
|
|
128,000
|
|
Total Current Assets
|
|
|
14,229,387
|
|
|
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14,009,031
|
|
|
|
|
|
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|
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Equipment and leasehold improvements, net of accumulated depreciation and amortization of $267,435 and $262,076
|
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22,639
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|
|
|
27,998
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Other assets
|
|
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49,653
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|
|
|
49,653
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|
Deferred income taxes
|
|
|
2,000
|
|
|
|
3,000
|
|
Total Assets
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$
|
14,303,679
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|
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$
|
14,089,682
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LIABILITIES AND EQUITY
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Current Liabilities:
|
|
|
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|
|
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Accounts and other payables
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$
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617,747
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|
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$
|
723,705
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Accrued expenses and other current liabilities
|
|
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2,723,585
|
|
|
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2,634,110
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Income taxes payable
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75,731
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|
|
|
14,810
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Advances from customers
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|
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1,263,853
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|
|
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1,245,563
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Total Liabilities
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|
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4,680,916
|
|
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4,618,188
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Commitments and contingencies
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Equity:
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|
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TSR, Inc.:
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Preferred stock, $1 par value, authorized 500,000 shares; none issued
|
|
|
-
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|
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-
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Common stock, $.01 par value, authorized 12,500,000 shares; issued 3,114,163 shares,
1,962,062 outstanding
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31,142
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|
|
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31,142
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Additional paid-in capital
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|
|
5,102,868
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5,102,868
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Retained earnings
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17,959,661
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|
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17,811,884
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|
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23,093,671
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22,945,894
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Less: Treasury stock, 1,152,101 shares, at cost
|
|
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13,514,003
|
|
|
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13,514,003
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Total TSR, Inc. Equity
|
|
|
9,579,668
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|
|
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9,431,891
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Noncontrolling Interest
|
|
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43,095
|
|
|
|
39,603
|
|
Total Equity
|
|
|
9,622,763
|
|
|
|
9,471,494
|
|
Total Liabilities and Equity
|
|
$
|
14,303,679
|
|
|
$
|
14,089,682
|
|
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For The Three Months Ended August 31, 2016 and 2015
(UNAUDITED)
|
|
Three Months Ended
|
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August 31,
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2016
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|
|
2015
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Revenue, net
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$
|
15,242,383
|
|
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$
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15,234,788
|
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Cost of sales
|
|
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12,640,900
|
|
|
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12,715,192
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Selling, general and administrative expenses
|
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2,315,740
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2,231,622
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|
|
|
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14,956,640
|
|
|
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14,946,814
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Income from operations
|
|
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285,743
|
|
|
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287,974
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|
|
|
|
|
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Other income (expense):
|
|
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Interest and dividend income
|
|
|
2,736
|
|
|
|
1,829
|
|
Unrealized gain (loss) on marketable securities, net.
|
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3,440
|
|
|
|
(4,736
|
)
|
Income before income taxes
|
|
|
291,919
|
|
|
|
285,067
|
|
Provision for income taxes
|
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|
136,000
|
|
|
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140,000
|
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Consolidated net income
|
|
|
155,919
|
|
|
|
145,067
|
|
Less: Net income attributable to noncontrolling interest.
|
|
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8,142
|
|
|
|
11,319
|
|
Net income attributable to TSR, Inc.
|
|
$
|
147,777
|
|
|
$
|
133,748
|
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Net income per TSR, Inc. common share
|
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$
|
0.08
|
|
|
$
|
0.07
|
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Weighted average number of common shares outstanding
|
|
|
1,962,062
|
|
|
|
1,962,062
|
|
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 Ended August
31, 2016 and 2015
(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, 2015
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
17,412,658
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
9,032,665
|
|
|
$
|
70,269
|
|
|
$
|
9,102,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,319
|
|
|
|
11,319
|
|
Net income attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
133,748
|
|
|
|
-
|
|
|
|
133,748
|
|
|
|
-
|
|
|
|
133,748
|
|
Balance at August 31, 2015
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
17,546,406
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
9,166,413
|
|
|
$
|
81,588
|
|
|
$
|
9,248,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance at May 31, 2016
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
17,811,884
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
9,431,891
|
|
|
$
|
39,603
|
|
|
$
|
9,471,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,142
|
|
|
|
8,142
|
|
Distribution to
noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,650
|
)
|
|
|
(4,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147,777
|
|
|
|
-
|
|
|
|
147,777
|
|
|
|
-
|
|
|
|
147,777
|
|
Balance at August 31, 2016
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
17,959,661
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
9,579,668
|
|
|
$
|
43,095
|
|
|
$
|
9,622,763
|
|
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 Three Months Ended August 31, 2016 and 2015
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
August 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
155,919
|
|
|
$
|
145,067
|
|
Adjustments to reconcile consolidated net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,359
|
|
|
|
5,539
|
|
Unrealized (gain) loss from marketable securities, net
|
|
|
(3,440
|
)
|
|
|
4,736
|
|
Deferred income taxes.
|
|
|
6,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(116,476
|
)
|
|
|
(450,826
|
)
|
Other receivables
|
|
|
(3,263
|
)
|
|
|
(2,504
|
)
|
Prepaid expenses
|
|
|
(78,608
|
)
|
|
|
10,180
|
|
Accounts and other payables and accrued expenses and other current liabilities
|
|
|
(16,483
|
)
|
|
|
170,785
|
|
Income taxes payable
|
|
|
60,921
|
|
|
|
110,500
|
|
Advances from customers
|
|
|
18,290
|
|
|
|
(77,007
|
)
|
Net cash provided by (used in) operating activities
|
|
|
28,219
|
|
|
|
(78,530
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from maturities of marketable securities
|
|
|
248,000
|
|
|
|
498,000
|
|
Purchases of marketable securities
|
|
|
(249,000
|
)
|
|
|
(498,000
|
)
|
Purchases of equipment and leasehold improvements
|
|
|
-
|
|
|
|
(5,822
|
)
|
Net cash used in investing activities
|
|
|
(1,000
|
)
|
|
|
(5,822
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling interest
|
|
|
(4,650
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(4,650
|
)
|
|
|
-
|
|
Net increase (decrease) in cash and cash equivalents.
|
|
|
22,569
|
|
|
|
(84,352
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
4,514,157
|
|
|
|
3,669,790
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,536,726
|
|
|
$
|
3,585,438
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow data:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
69,000
|
|
|
$
|
25,000
|
|
The accompanying notes are an
integral part of these unaudited condensed consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August
31, 2016
(Unaudited)
The
accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries (the “Company”).
All significant inter-company balances and transactions have been eliminated in consolidation. The condensed balance sheet as
of May 31, 2016, 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. 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 ended August 31, 2016 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, 2017. 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, 2016.
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. The Company had no stock options or other common stock equivalents outstanding during any
of the periods presented.
3.
|
Cash
and Cash Equivalents
|
The
Company considers short-term highly liquid investments with 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 August 31, 2016 and May 31, 2016:
|
|
|
August 31,
2016
|
|
|
May 31,
2016
|
|
|
Cash in banks
|
|
$
|
3,996,593
|
|
|
$
|
3,974,007
|
|
|
Money market funds
|
|
|
540,133
|
|
|
|
540,150
|
|
|
|
|
$
|
4,536,726
|
|
|
$
|
4,514,157
|
|
The
Company’s contract computer programming and administrative services are generally provided under time and materials arrangements
with its customers. Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic 605,
“Revenue Recognition,” when persuasive evidence of an arrangement exists, the services have been rendered, the price
is fixed or determinable, and collectability is reasonably assured. These conditions occur when a customer agreement is effected
and the consultant performs the authorized services. Revenue is recorded net of all discounts and processing fees. Advances from
customers represent amounts received from customers prior to the Company’s provision of the related services and credit
balances from overpayments.
Reimbursements
received by the Company for out-of-pocket expenses are characterized as revenue.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August
31, 2016
(Unaudited)
5.
|
Certificates
of Deposit and Marketable Securities
|
The
Company has characterized its investments in certificates of deposit and 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.
|
The
following are the major categories of assets measured at fair value on a recurring basis as of August 31, 2016 and May 31, 2016
using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant
unobservable inputs (Level 3):
|
August 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Certificates of Deposit
|
|
$
|
-
|
|
|
$
|
1,529,000
|
|
|
$
|
-
|
|
|
$
|
1,529,000
|
|
|
Equity Securities
|
|
|
28,712
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,712
|
|
|
|
|
$
|
28,712
|
|
|
$
|
1,529,000
|
|
|
$
|
-
|
|
|
$
|
1,557,712
|
|
|
May 31, 2016
|
|
|
Level 1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
|
|
Total
|
|
|
Certificates of Deposit
|
|
$
|
-
|
|
|
$
|
1,528,000
|
|
|
$
|
-
|
|
|
$
|
1,528,000
|
|
|
Equity Securities
|
|
|
25,272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,272
|
|
|
|
|
$
|
25,272
|
|
|
$
|
1,528,000
|
|
|
$
|
-
|
|
|
$
|
1,553,272
|
|
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August
31, 2016
(Unaudited)
Based
upon the Company’s intent and ability to hold its certificates of deposit to maturity (which maturities range up to twelve
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 certificates of deposit and marketable securities at August 31,
2016 and May 31, 2016 are summarized as follows:
|
August 31, 2016
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
|
Certificates of Deposit
|
|
$
|
1,529,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,529,000
|
|
|
Equity Securities
|
|
|
16,866
|
|
|
|
11,846
|
|
|
|
-
|
|
|
|
28,712
|
|
|
|
|
$
|
1,545,866
|
|
|
$
|
11,846
|
|
|
$
|
-
|
|
|
$
|
1,557,712
|
|
|
May 31, 2016
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
|
Certificates of Deposit
|
|
$
|
1,528,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,528,000
|
|
|
Equity Securities
|
|
|
16,866
|
|
|
|
8,406
|
|
|
|
-
|
|
|
|
25,272
|
|
|
|
|
$
|
1,544,866
|
|
|
$
|
8,406
|
|
|
$
|
-
|
|
|
$
|
1,553,272
|
|
The
Company’s investments in marketable securities consist primarily of investments in certificates of deposit and 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.
6.
|
Fair
Value of Financial Instruments
|
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.
During
the three months ended August 31, 2016 and 2015, the Company did not purchase any shares of its common stock. As of April 7, 2016,
the previously announced repurchase plan was terminated with 56,318 shares remaining available for purchase.
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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August
31, 2016
(Unaudited)
9
.
|
Recent
Accounting Pronouncements
|
In
May 2014, the FASB issued an update to ASC 606, “Revenue from Contracts with Customers.” This update to ASC 606 provides
a five-step process to determine when and how revenue is recognized. The core principle of the guidance is that a company should
recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration
to be received in exchange for those goods or services. This update to ASC 606 will also result in enhanced disclosures about
revenue, providing guidance for transactions that were not previously addressed comprehensively, and improving guidance for multiple-element
arrangements. This update to ASC 606 is effective for the Company beginning in the fiscal year ending May 31, 2018. The Company
expects the impact of the update, if any, to be immaterial on its consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,”
which applies to the classification of deferred tax assets and liabilities. The update eliminates the requirement to classify
deferred tax assets and liabilities as noncurrent or current within a classified statement of financial position. This ASU is
effective for annual and interim periods beginning after December 15, 2016 and should be applied prospectively with early adoption
permitted at the beginning of an interim or annual reporting period. The Company will classify any deferred tax assets and liabilities
as noncurrent beginning with the first quarter of fiscal 2018.
In
January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities.” The amendments in this update require all equity investments to be measured at fair value
with changes in the fair value recognized through net income. The amendments in this update also require an entity to present
separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change
in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the
fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to disclose
the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the
requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed
for financial instruments measured at amortized cost on the balance sheet for public business entities. This update is effective
for the Company in the fiscal year ending May 31, 2019. The Company is currently evaluating the impact, if any, of this update
on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This update includes a lease accounting model that
recognizes two types of leases – finance leases and operating leases. The standard requires that a lessee recognize on the
balance sheet assets and liabilities relating to leases with terms of more than 12 months. The recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease.
This update is effective for the Company in the fiscal year ending May 31, 2020. The Company is currently evaluating the impact,
if any, of this update on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Consideration (Topic 606).” This update contains
guidance on principal versus agent assessments when a third party is involved in providing goods or services to a customer. It
specifies that an entity is a principal, and thus records revenue on a gross basis, if it controls a good or service before transferring
the good or service to the customer. An entity is an agent, and thus records revenue on a net basis, if it arranges for a good
or service to be provided by another entity. This update is effective for the Company in the fiscal year ending May 31, 2019.
The Company is currently evaluating the impact, if any, of this update on its consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August
31, 2016
(Unaudited)
In
April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing (Topic 606).” This update
provides more detailed guidance, including additional implementation guidance and examples in the following key areas such as
identifying performance obligations and licenses of intellectual property. This update is effective for the Company in the fiscal
year ending May 31, 2019. The Company is currently evaluating the impact, if any, of this update on its consolidated financial
statements.
In
May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients (Topic 606).” This update
provides certain clarifications to reduce potential diversity and to simplify the standard. The amendments in ASU 2016-12 clarify
the following key areas: assessing collectibilty; presenting sales taxes and other similar taxes collected from customers; noncash
consideration; contract modifications at transition; completed contracts at transition; and disclosing the accounting change in
the period of adoption. This update is effective for the Company in the fiscal year ending May 31, 2019. The Company is currently
evaluating the impact, if any, of this update on its consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part
I.
|
Financial
Information
|
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 success of the Company’s plan for internal growth; the impact of adverse economic conditions 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 contract computer consulting services 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; 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 income. There can be no assurance that trends in operating results will continue in the future:
Three
months ended August 31, 2016 compared with three months ended August 31, 2015
|
|
(Dollar
amounts in thousands)
Three
Months Ended
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
Revenue, net
|
|
$
|
15,242
|
|
|
|
100.0
|
%
|
|
$
|
15,235
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
12,641
|
|
|
|
82.9
|
%
|
|
|
12,715
|
|
|
|
83.5
|
%
|
Gross profit
|
|
|
2,601
|
|
|
|
17.1
|
%
|
|
|
2,520
|
|
|
|
16.5
|
%
|
Selling, general and administrative expenses
|
|
|
2,315
|
|
|
|
15.2
|
%
|
|
|
2,232
|
|
|
|
14.6
|
%
|
Income from operations
|
|
|
286
|
|
|
|
1.9
|
%
|
|
|
288
|
|
|
|
1.9
|
%
|
Other income (expense), net
|
|
|
6
|
|
|
|
0.0
|
%
|
|
|
(3
|
)
|
|
|
0.0
|
%
|
Income before income taxes
|
|
|
292
|
|
|
|
1.9
|
%
|
|
|
285
|
|
|
|
1.9
|
%
|
Provision for income taxes
|
|
|
136
|
|
|
|
0.9
|
%
|
|
|
140
|
|
|
|
0.9
|
%
|
Consolidated net income
|
|
|
156
|
|
|
|
1.0
|
%
|
|
|
145
|
|
|
|
1.0
|
%
|
Less: Net income attributable to noncontrolling interest
|
|
|
8
|
|
|
|
0.0
|
%
|
|
|
11
|
|
|
|
0.1
|
%
|
Net income attributable to TSR, Inc.
|
|
$
|
148
|
|
|
|
1.0
|
%
|
|
$
|
134
|
|
|
|
0.9
|
%
|
TSR,
INC. AND SUBSIDIARIES
Revenue
Revenue
consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended August 31, 2016 increased
$7,000 from the prior year quarter. This increase in revenue resulted from the average number of consultants on billing with customers
increasing from approximately 345 for the quarter ended August 31, 2015 to 362 for the quarter ended August 31, 2016. The 362
consultants on billing for the current quarter include approximately 45 administrative workers that the Company placed with two
large customers at billing rates lower than those charges for computer programming consultants. The Company did not make any placements
of administrative workers in the prior year quarter; however, the Company made these placements of administrative workers in the
current quarter at the customers’ specific requests. The Company charges lower daily billing rates for administrative workers,
but also pays lower rates to the administrative workers. As a result of the reduced billing rates for the administrative worker
placements, the average daily rates charged for the consultants on billing with customers decreased approximately 11.8% in the
current quarter compared with the prior year quarter. The Company has not yet determined whether it will provide administrative
placements on a more widespread basis in the future.
Cost
of Sales
Cost
of sales for the quarter ended August 31, 2016, decreased $74,000 or 0.6% to $12,641,000 from $12,715,000 in the prior year period.
The decrease in cost of sales resulted primarily from a reduction of computer programming consultants placed with customers, offset
by the placement of lower paid administrative workers at two major customers. Cost of sales as a percentage of revenue decreased
from 83.5% in the quarter ended August 31, 2015 to 82.9% in the quarter ended August 31, 2016. The decrease in cost of sales as
a percentage of revenue was primarily attributable to the placement of administrative workers at higher average markups than the
Company’s computer programming consultants. However, because of their lower pay rates, the daily gross profit in dollars
is still lower for the administrative workers than the computer programming consultants.
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 $83,000 or 3.7% from $2,232,000 in the quarter ended August
31, 2015 to $2,315,000 in the quarter ended August 31, 2016. The increase in these expenses primarily resulted from hiring additional
recruiters to support the administrative placement opportunities. The Company expects selling, general and administrative expenses
to continue to increase as more recruiters and sales executives are hired to stimulate growth. Selling, general and administrative
expenses, as a percentage of revenue, increased from 14.6% in the quarter ended August 31, 2015 to 15.2% in the quarter ended
August 31, 2016 as a result of the additional recruiters hired.
Other
Income
Other
income for the quarter ended August 31, 2016 resulted primarily from a mark to market gain of $3,000 on the Company’s equity
securities and interest and dividend income of $3,000. Other income for the quarter ended August 31, 2015 resulted primarily from
a mark to market loss of $5,000 on the Company’s equity securities and interest and dividend income of $2,000.
Income
Taxes
The
income tax provision included in the Company’s results of operations for the quarters ended August 31, 2016 and 2015 reflect
the Company’s estimated effective tax rate for the years ending May 31, 2017 and 2016, respectively. These rates were 46.6%
for the quarter ended August 31, 2016 and 49.1% for the quarter ended August 31, 2015.
Net
Income Attributable to TSR, Inc.
Net
income attributable to TSR, Inc. increased $14,000 from $134,000 in the quarter ended August 31, 2015 to $148,000 in the quarter
ended August 31, 2016. This increase was primarily attributable to a lower effective income tax rate.
TSR,
INC. AND SUBSIDIARIES
Liquidity
and Capital Resources
The
Company expects that its cash and marketable securities will be sufficient to provide the Company with adequate resources to meet
its liquidity requirements for at least the next 12 months.
At
August 31, 2016, the Company had working capital (total current assets in excess of total current liabilities) of $9,548,000 including
cash and cash equivalents and certificates of deposit and marketable securities of $6,094,000 as compared to working capital of
$9,391,000 including cash and cash equivalents and certificates of deposit and marketable securities of $6,067,000 at May 31,
2016.
For
the three months ended August 31, 2016, net cash provided by operating activities was $28,000 compared to net cash used in operating
activities of $79,000 for the three months ended August 31, 2015. The cash provided by operating activities in the three months
ended August 31, 2016 resulted primarily from consolidated net income of $156,000, offset by an increase in accounts receivable
of $116,000. The cash used in operating activities in the three months ended August 31, 2015 resulted primarily from an increase
in accounts receivable of $451,000, offset by consolidated net income of $145,000 and an increase in accounts and other payables
and accrued expenses and other current liabilities of $171,000. The increase in accounts receivable was attributable to the fact
that a monthly payment from a large customer was received immediately after the end of the quarter. The increase in accounts and
other payables and accrued expenses and other liabilities was attributable to an increase in accrued consultant payroll.
Net
cash used in investing activities of $1,000 for the three months ended August 31, 2016 resulted primarily from the purchase of
a certificate of deposit in excess of the maturing certificate of deposit. Net cash used in investing activities of $6,000 for
the three months ended August 31, 2015 resulted primarily from the purchase of fixed assets.
Net
cash used in financing activities resulted from distributions to the noncontrolling interest of $5,000 in the three months ended
August 31, 2016. There were no such transactions in the three months ended August 31, 2015.
The
Company’s capital resource commitments at August 31, 2016 consisted of lease obligations on its branch and corporate facilities.
The Company intends to satisfy these lease commitments from cash flow provided by operations, available cash and short-term marketable
securities.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued an update to ASC 606, “Revenue from Contracts with Customers.” This update to ASC 606 provides
a five-step process to determine when and how revenue is recognized. The core principle of the guidance is that a company should
recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration
to be received in exchange for those goods or services. This update to ASC 606 will also result in enhanced disclosures about
revenue, providing guidance for transactions that were not previously addressed comprehensively, and improving guidance for multiple-element
arrangements. This update to ASC 606 is effective for the Company beginning in the fiscal year ending May 31, 2018. The Company
expects the impact of the update, if any, to be immaterial on its consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,”
which applies to the classification of deferred tax assets and liabilities. The update eliminates the requirement to classify
deferred tax assets and liabilities as noncurrent or current within a classified statement of financial position. This ASU is
effective for annual and interim periods beginning after December 15, 2016 and should be applied prospectively with early adoption
permitted at the beginning of an interim or annual reporting period. The Company will classify any deferred tax assets and liabilities
as noncurrent beginning with the first quarter of fiscal 2018.
TSR,
INC. AND SUBSIDIARIES
In
January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities.” The amendments in this update require all equity investments to be measured at fair value
with changes in the fair value recognized through net income. The amendments in this update also require an entity to present
separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change
in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the
fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to disclose
the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the
requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed
for financial instruments measured at amortized cost on the balance sheet for public business entities. This update is effective
for the Company in the fiscal year ending May 31, 2019. The Company is currently evaluating the impact, if any, of this update
on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This update includes a lease accounting model that
recognizes two types of leases – finance leases and operating leases. The standard requires that a lessee recognize on the
balance sheet assets and liabilities relating to leases with terms of more than 12 months. The recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease.
This update is effective for the Company in the fiscal year ending May 31, 2020. The Company is currently evaluating the impact,
if any, of this update on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Consideration (Topic 606).” This update contains
guidance on principal versus agent assessments when a third party is involved in providing goods or services to a customer. It
specifies that an entity is a principal, and thus records revenue on a gross basis, if it controls a good or service before transferring
the good or service to the customer. An entity is an agent, and thus records revenue on a net basis, if it arranges for a good
or service to be provided by another entity. This update is effective for the Company in the fiscal year ending May 31, 2019.
The Company is currently evaluating the impact, if any, of this update on its consolidated financial statements.
In
April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing (Topic 606).” This update
provides more detailed guidance, including additional implementation guidance and examples in the following key areas such as
identifying performance obligations and licenses of intellectual property. This update is effective for the Company in the fiscal
year ending May 31, 2019. The Company is currently evaluating the impact, if any, of this update on its consolidated financial
statements.
In
May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients (Topic 606).” This update
provides certain clarifications to reduce potential diversity and to simplify the standard. The amendments in ASU 2016-12 clarify
the following key areas: assessing collectibilty; presenting sales taxes and other similar taxes collected from customers; noncash
consideration; contract modifications at transition; completed contracts at transition; and disclosing the accounting change in
the period of adoption. This update is effective for the Company in the fiscal year ending May 31, 2019. The Company is currently
evaluating the impact, if any, of this update on its consolidated financial statements.
Critical
Accounting Policies
The
SEC 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, 2016 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. There have been no changes in the
Company’s significant accounting policies as of August 31, 2016.
TSR,
INC. AND SUBSIDIARIES
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 Securities Exchange Act of 1934, as amended (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 are 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.