NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February
28, 2017
(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 and nine months ended February 28, 2017 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 (Loss) Per Common Share
|
Basic
net income (loss) per common share is computed by dividing net income (loss) 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 February 28, 2017 and May 31, 2016:
|
|
|
February 28,
2017
|
|
|
May 31,
2016
|
|
|
Cash in banks
|
|
$
|
4,083,962
|
|
|
$
|
3,974,007
|
|
|
Money market funds
|
|
|
814,660
|
|
|
|
540,150
|
|
|
|
|
$
|
4,898,622
|
|
|
$
|
4,514,157
|
|
The
Company’s contract computer programming 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
February
28, 2017
(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 February 28, 2017 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):
|
February 28, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
-
|
|
|
$
|
1,262,000
|
|
|
$
|
-
|
|
|
$
|
1,262,000
|
|
|
Equity Securities
|
|
|
28,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,960
|
|
|
|
|
$
|
28,960
|
|
|
$
|
1,262,000
|
|
|
$
|
-
|
|
|
$
|
1,290,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
February
28, 2017
(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 February 28,
2017 and May 31, 2016 are summarized as follows:
|
February 28, 2017
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
|
Certificates of Deposit
|
|
$
|
1,262,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,262,000
|
|
|
Equity Securities
|
|
|
16,866
|
|
|
|
12,094
|
|
|
|
-
|
|
|
|
28,960
|
|
|
|
|
$
|
1,278,866
|
|
|
$
|
12,094
|
|
|
$
|
-
|
|
|
$
|
1,290,960
|
|
|
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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February
28, 2017
(Unaudited)
During
the nine months ended February 28, 2017 and February 29, 2016, 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.
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 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 periods beginning after December 15, 2016 and for interim periods within those annual periods. This ASU 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.
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 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 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 operations. There can be no assurance that trends in operating results will continue in the future:
Three
months ended February 28, 2017 compared with three months ended February 29, 2016
|
|
(Dollar amounts in thousands)
Three Months Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
Revenue, net
|
|
$
|
15,390
|
|
|
|
100.0
|
%
|
|
$
|
15,075
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
12,988
|
|
|
|
84.4
|
%
|
|
|
12,770
|
|
|
|
84.7
|
%
|
Gross profit
|
|
|
2,402
|
|
|
|
15.6
|
%
|
|
|
2,305
|
|
|
|
15.3
|
%
|
Selling, general and administrative expenses
|
|
|
2,521
|
|
|
|
16.4
|
%
|
|
|
2,319
|
|
|
|
15.4
|
%
|
Loss from operations
|
|
|
(119
|
)
|
|
|
(0.8
|
)%
|
|
|
(14
|
)
|
|
|
(0.1
|
)%
|
Other income (expense), net
|
|
|
4
|
|
|
|
0.0
|
%
|
|
|
(2
|
)
|
|
|
(0.0
|
)%
|
Loss before income taxes
|
|
|
(115
|
)
|
|
|
(0.8
|
)%
|
|
|
(16
|
)
|
|
|
(0.1
|
)%
|
Benefit for income taxes
|
|
|
(58
|
)
|
|
|
(0.4
|
)%
|
|
|
(7
|
)
|
|
|
(0.0
|
)%
|
Consolidated net loss
|
|
|
(57
|
)
|
|
|
(0.4
|
)%
|
|
|
(9
|
)
|
|
|
(0.1
|
)%
|
Less: Net income attributable to noncontrolling interest
|
|
|
11
|
|
|
|
0.1
|
%
|
|
|
15
|
|
|
|
0.1
|
%
|
Net loss attributable to TSR, Inc.
|
|
$
|
(68
|
)
|
|
|
(0.5
|
)%
|
|
$
|
(24
|
)
|
|
|
(0.2
|
)%
|
TSR,
INC. AND SUBSIDIARIES
Revenue
Revenue
consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended February 28, 2017 increased
$315,000 or 2.1% from the prior year quarter. The overall average number of consultants on billing with customers increased from
357 for the quarter ended February 29, 2016 to 394 for the quarter ended February 28, 2017, while the average number of computer
programming consultants decreased from 357 for the quarter ended February 29, 2016 to 328 in the quarter ended February 28, 2017.
The 394 consultants on billing for the current quarter include 66 administrative workers that the Company placed with two large
customers at billing rates 70.1% lower than those charged for computer programming consultants. The Company did not make any placements
of administrative workers in the prior year quarter. 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. 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 February 28, 2017 increased $218,000 or 1.7% to $12,988,000 from $12,770,000 in the prior year
quarter. The increase in cost of sales resulted primarily from an increase in consultants placed with customers. The placement
of lower paid administrative workers at two major customers offset the reduction in the average number of computer programming
consultants placed with customers. Cost of sales as a percentage of revenue decreased from 84.7% in the quarter ended February
29, 2016 to 84.4% in the quarter ended February 28, 2017. 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 their pay rates averaged 73.1% lower than the computer programming consultants, 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 $202,000 or 8.7% from $2,319,000 in the quarter ended February
29, 2016 to $2,521,000 in the quarter ended February 28, 2017. The increase in these expenses primarily resulted from hiring additional
recruiters and increases in other related expenses to support the administrative placement opportunities. Selling, general and
administrative expenses, as a percentage of revenue, increased from 15.4% in the quarter ended February 29, 2016 to 16.4% in the
quarter ended February 28, 2017 as a result of the additional recruiters hired.
Other
Income (Expense)
Other
income for the quarter ended February 28, 2017 resulted primarily from interest and dividend income of $3,000 and a mark to market
gain of $1,000 on the Company’s equity securities. Other expense for the quarter ended February 29, 2016 resulted primarily
from a mark to market loss of $4,000 on the Company’s equity securities and interest and dividend income of $2,000.
Income
Taxes
The
income tax benefit included in the Company’s results of operations for the quarters ended February 28, 2017 and February
29, 2016 reflect the Company’s estimated effective tax rate for the years ending May 31, 2017 and 2016, respectively. These
rates were (50.4)% for the quarter ended February 28, 2017 and (43.8)% for the quarter ended February 29, 2016.
Net
Loss Attributable to TSR, Inc.
Net
loss attributable to TSR, Inc. increased $44,000 from $24,000 in the quarter ended February 29, 2016 to $68,000 in the quarter
ended February 28, 2017. This increase was attributable to an increase in selling, general and administrative expenses primarily
related to the placement of administrative workers.
TSR,
INC. AND SUBSIDIARIES
Nine
months ended February 28, 2017 compared with nine months ended February 29, 2016
|
|
(Dollar amounts in thousands)
Nine Months Ended
|
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
Revenue, net
|
|
$
|
45,675
|
|
|
|
100.0
|
%
|
|
$
|
45,495
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
38,082
|
|
|
|
83.4
|
%
|
|
|
38,165
|
|
|
|
83.9
|
%
|
Gross profit
|
|
|
7,593
|
|
|
|
16.6
|
%
|
|
|
7,330
|
|
|
|
16.1
|
%
|
Selling, general and administrative expenses
|
|
|
7,181
|
|
|
|
15.7
|
%
|
|
|
6,792
|
|
|
|
14.9
|
%
|
Income from operations
|
|
|
412
|
|
|
|
0.9
|
%
|
|
|
538
|
|
|
|
1.2
|
%
|
Other income, net
|
|
|
12
|
|
|
|
0.0
|
%
|
|
|
2
|
|
|
|
0.0
|
%
|
Income before income taxes
|
|
|
424
|
|
|
|
0.9
|
%
|
|
|
540
|
|
|
|
1.2
|
%
|
Provision for income taxes
|
|
|
188
|
|
|
|
0.4
|
%
|
|
|
270
|
|
|
|
0.6
|
%
|
Consolidated net income
|
|
|
236
|
|
|
|
0.5
|
%
|
|
|
270
|
|
|
|
0.6
|
%
|
Less: Net income attributable to noncontrolling interest
|
|
|
30
|
|
|
|
0.1
|
%
|
|
|
40
|
|
|
|
0.1
|
%
|
Net income attributable to TSR, Inc.
|
|
$
|
206
|
|
|
|
0.4
|
%
|
|
$
|
230
|
|
|
|
0.5
|
%
|
Revenue
Revenue
consists primarily of revenue from computer programming consulting services. Revenue for the nine months ended February 28, 2017
increased $180,000 from the prior year period. The overall average number of consultants on billing with customers increased from
351 for the nine months ended February 29, 2016 to 374 for the nine months ended February 28, 2017, while the average number of
computer programming consultants decreased from 351 for the nine months ended February 29, 2016 to 324 in the nine months ended
February 28, 2017. The 374 consultants on billing for the current nine month period include 50 administrative workers that the
Company placed with two large customers at billing rates 66.7% lower than those charged for computer programming consultants.
The Company did not make any placements of administrative workers in the prior year period. The Company made these placements
of administrative workers in the current period at the customers’ specific requests. The Company charges lower daily billing
rates for administrative workers, but also pays lower rates to the administrative workers. 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 nine months ended February 28, 2017 decreased $83,000 or 0.2% to $38,082,000 from $38,165,000 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 83.9% in the nine months ended February 29, 2016 to 83.4% in the nine months ended February 28, 2017. 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 their pay rates averaged 70.7% lower than
the computer programming consultants, the daily gross profit in dollars is still lower for the administrative workers than the
computer programming consultants.
TSR,
INC. AND SUBSIDIARIES
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities
costs, management and corporate overhead. These expenses increased $389,000 or 5.7% from $6,792,000 in the nine months ended February
29, 2016 to $7,181,000 in the nine months ended February 28, 2017. The increase in these expenses primarily resulted from hiring
additional recruiters and increases in other related expenses to support the administrative placement opportunities. Selling,
general and administrative expenses, as a percentage of revenue, increased from 14.9% in the nine months ended February 29, 2016
to 15.7% in the nine months ended February 28, 2017 as a result of the additional recruiters hired.
Other
Income
Other
income for the nine months ended February 28, 2017 resulted primarily from a mark to market gain of $4,000 on the Company’s
equity securities and interest and dividend income of $8,000. Other income for the nine months ended February 29, 2016 resulted
primarily from interest and dividend income of $6,000 and a mark to market loss of $4,000 on the Company’s equity securities.
Income
Taxes
The
income tax provision included in the Company’s results of operations for the nine month periods ended February 28, 2017
and February 29, 2016 reflect the Company’s estimated effective tax rate for the years ending May 31, 2017 and 2016, respectively.
These rates were 44.3% for the nine months ended February 28, 2017 and 50.0% for the nine months ended February 29, 2016.
Net
Income Attributable to TSR, Inc.
Net
income attributable to TSR, Inc. decreased $24,000 from $230,000 in the nine months ended February 29, 2016 to $206,000 in the
nine months ended February 28, 2017. This decrease was attributable to an increase in selling, general and administrative expenses
primarily related to the placement of administrative workers.
TSR,
INC. AND SUBSIDIARIES
Liquidity
and Capital Resources
The
Company expects that its cash and cash equivalents, certificates of deposit and marketable securities and cash flow provided by
operations will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for at least the
next 12 months. The Company does not maintain a line of credit facility with any banking institution.
At
February 28, 2017, the Company had working capital (total current assets in excess of total current liabilities) of $9,545,000
including cash and cash equivalents and certificates of deposit and marketable securities of $6,190,000 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 nine months ended February 28, 2017, net cash provided by operating activities was $186,000 compared to net cash provided
by operating activities of $324,000 for the nine months ended February 29, 2016. The cash provided by operating activities in
the nine months ended February 28, 2017 resulted primarily from consolidated net income of $236,000 and a decrease in accounts
receivable of $962,000 offset by a decrease in accounts and other payables and accrued expenses and other liabilities of $700,000,
an increase in prepaid expenses of $147,000 and an increase in prepaid and recoverable income taxes of $157,000. The cash provided
by operating activities in the nine months ended February 29, 2016 resulted primarily from consolidated net income of $270,000
and a decrease in accounts receivable of $203,000 offset by a decrease in advances from customers of $148,000.
Net
cash provided by investing activities of $260,000 for the nine months ended February 28, 2017 primarily resulted from not reinvesting
a certificate of deposit until after the end of the period. Net cash used in investing activities of $294,000 for the nine months
ended February 29, 2016 primarily resulted from investing in additional certificates of deposit of $285,000 and the purchase of
fixed assets of $9,000.
In
the nine months ended February 28, 2017, net cash used in financing activities resulted from a distribution to the noncontrolling
interest of $61,000, resulting primarily from the distribution of fiscal 2016 earnings from that entity. In the nine months ended
February 29, 2016, net cash used in financing activities resulted from a distribution to the noncontrolling interest of $88,000.
The
Company’s capital resource commitments at February 28, 2017 consisted of lease obligations on its branch and corporate facilities.
The Company intends to finance these lease commitments from cash flows 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 periods beginning after December 15, 2016 and interim periods within those annual periods. This ASU 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
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
Securities and Exchange Commission defines “critical accounting policies” as those that require the application of
management’s most difficult subjective or complex judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain and may change in subsequent periods.
The
Company’s significant accounting policies are described in Note 1 to the Company’s consolidated financial statements,
contained in its May 31, 2016 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. The Company believes
that those accounting policies require the application of management’s most difficult, subjective or complex judgments.
There have been no changes in the Company’s significant accounting policies as of February 28, 2017.