Part I. Financial Information
Item 1. Financial Statements
TSR,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
November 30,
2016
|
|
|
May 31,
2016
|
|
ASSETS
|
|
(Unaudited)
|
|
|
(see Note 1)
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,697,065
|
|
|
$
|
4,514,157
|
|
Certificates of deposit and marketable securities
|
|
|
1,538,760
|
|
|
|
1,553,272
|
|
Accounts receivable, net of allowance for doubtful accounts of $185,000
|
|
|
7,065,679
|
|
|
|
7,703,680
|
|
Other receivables
|
|
|
20,537
|
|
|
|
10,853
|
|
Prepaid expenses
|
|
|
218,605
|
|
|
|
99,069
|
|
Prepaid and recoverable income taxes
|
|
|
55,269
|
|
|
|
-
|
|
Deferred income taxes
|
|
|
118,000
|
|
|
|
128,000
|
|
Total Current Assets
|
|
|
13,713,915
|
|
|
|
14,009,031
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $272,795 and $262,076
|
|
|
19,614
|
|
|
|
27,998
|
|
Prepaid expenses
|
|
|
47,228
|
|
|
|
-
|
|
Other assets
|
|
|
49,653
|
|
|
|
49,653
|
|
Deferred income taxes
|
|
|
1,000
|
|
|
|
3,000
|
|
Total Assets
|
|
$
|
13,831,410
|
|
|
$
|
14,089,682
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts and other payables
|
|
$
|
544,869
|
|
|
$
|
723,705
|
|
Accrued expenses and other current liabilities
|
|
|
2,379,379
|
|
|
|
2,634,110
|
|
Income taxes payable
|
|
|
-
|
|
|
|
14,810
|
|
Advances from customers
|
|
|
1,198,937
|
|
|
|
1,245,563
|
|
Total Liabilities
|
|
|
4,123,185
|
|
|
|
4,618,188
|
|
|
|
|
|
|
|
|
|
|
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 3,114,163 shares, 1,962,062 outstanding
|
|
|
31,142
|
|
|
|
31,142
|
|
Additional paid-in capital
|
|
|
5,102,868
|
|
|
|
5,102,868
|
|
Retained earnings
|
|
|
18,085,978
|
|
|
|
17,811,884
|
|
|
|
|
23,219,988
|
|
|
|
22,945,894
|
|
Less: Treasury stock, 1,152,101 shares, at cost
|
|
|
13,514,003
|
|
|
|
13,514,003
|
|
Total TSR, Inc. Equity
|
|
|
9,705,985
|
|
|
|
9,431,891
|
|
Noncontrolling Interest
|
|
|
2,240
|
|
|
|
39,603
|
|
Total Equity
|
|
|
9,708,225
|
|
|
|
9,471,494
|
|
Total Liabilities and Equity
|
|
$
|
13,831,410
|
|
|
$
|
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 and Six Months Ended November 30, 2016 and 2015
(UNAUDITED)
|
|
Three Months Ended
November 30,
|
|
|
Six Months Ended
November 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue, net
|
|
$
|
15,042,789
|
|
|
$
|
15,185,006
|
|
|
$
|
30,285,172
|
|
|
$
|
30,419,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
12,452,751
|
|
|
|
12,679,391
|
|
|
|
25,093,651
|
|
|
|
25,394,583
|
|
Selling, general and administrative expenses
|
|
|
2,344,682
|
|
|
|
2,241,693
|
|
|
|
4,660,422
|
|
|
|
4,473,315
|
|
|
|
|
14,797,433
|
|
|
|
14,921,084
|
|
|
|
29,754,073
|
|
|
|
29,867,898
|
|
Income from operations
|
|
|
245,356
|
|
|
|
263,922
|
|
|
|
531,099
|
|
|
|
551,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
2,682
|
|
|
|
1,920
|
|
|
|
5,418
|
|
|
|
3,749
|
|
Unrealized gain (loss) on marketable securities, net
|
|
|
(952
|
)
|
|
|
4,984
|
|
|
|
2,488
|
|
|
|
248
|
|
Income before income taxes
|
|
|
247,086
|
|
|
|
270,826
|
|
|
|
539,005
|
|
|
|
555,893
|
|
Provision for income taxes
|
|
|
110,000
|
|
|
|
137,000
|
|
|
|
246,000
|
|
|
|
277,000
|
|
Consolidated net income
|
|
|
137,086
|
|
|
|
133,826
|
|
|
|
293,005
|
|
|
|
278,893
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
10,769
|
|
|
|
13,761
|
|
|
|
18,911
|
|
|
|
25,080
|
|
Net income attributable to TSR, Inc.
|
|
$
|
126,317
|
|
|
$
|
120,065
|
|
|
$
|
274,094
|
|
|
$
|
253,813
|
|
Net income per TSR, Inc. common share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.14
|
|
|
$
|
0.13
|
|
Weighted average number common shares outstanding
|
|
|
1,962,062
|
|
|
|
1,962,062
|
|
|
|
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 Six Months Ended November 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,080
|
|
|
|
25,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,800
|
)
|
|
|
(7,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
253,813
|
|
|
|
-
|
|
|
|
253,813
|
|
|
|
-
|
|
|
|
253,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2015
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
17,666,471
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
9,286,478
|
|
|
$
|
87,549
|
|
|
$
|
9,374,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,911
|
|
|
|
18,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(56,274
|
)
|
|
|
(56,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to TSR, Inc
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
274,094
|
|
|
|
-
|
|
|
|
274,094
|
|
|
|
-
|
|
|
|
274,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2016
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
18,085,978
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
9,705,985
|
|
|
$
|
2,240
|
|
|
$
|
9,708,225
|
|
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, 2016 and 2015
(UNAUDITED)
|
|
Six Months Ended
November 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
293,005
|
|
|
$
|
278,893
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,719
|
|
|
|
11,127
|
|
Unrealized gain on marketable securities, net
|
|
|
(2,488
|
)
|
|
|
(248
|
)
|
Deferred income taxes
|
|
|
12,000
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
638,001
|
|
|
|
1,169,514
|
|
Other receivables
|
|
|
(9,684
|
)
|
|
|
(5,573
|
)
|
Prepaid expenses
|
|
|
(166,764
|
)
|
|
|
(49,003
|
)
|
Prepaid and recoverable income taxes
|
|
|
(55,269
|
)
|
|
|
-
|
|
Accounts and other payables and accrued expenses and other current liabilities
|
|
|
(433,567
|
)
|
|
|
(98,056
|
)
|
Income taxes payable
|
|
|
(14,810
|
)
|
|
|
54,000
|
|
Advances from customers
|
|
|
(46,626
|
)
|
|
|
(63,808
|
)
|
Net cash provided by operating activities
|
|
|
224,517
|
|
|
|
1,311,846
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from maturities of marketable securities
|
|
|
1,012,000
|
|
|
|
996,000
|
|
Purchases of marketable securities
|
|
|
(995,000
|
)
|
|
|
(1,282,000
|
)
|
Purchases of equipment and leasehold improvements
|
|
|
(2,335
|
)
|
|
|
(7,609
|
)
|
Net cash provided by (used in) investing activities
|
|
|
14,665
|
|
|
|
(293,609
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Distribution to noncontrolling interest
|
|
|
(56,274
|
)
|
|
|
(7,800
|
)
|
Net cash used in financing activities
|
|
|
(56,274
|
)
|
|
|
(7,800
|
)
|
Net increase in cash and cash equivalents
|
|
|
182,908
|
|
|
|
1,010,437
|
|
Cash and cash equivalents at beginning of period
|
|
|
4,514,157
|
|
|
|
3,669,790
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,697,065
|
|
|
$
|
4,680,227
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow data:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
304,000
|
|
|
$
|
208,000
|
|
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, 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 and six months ended November 30, 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 November 30, 2016 and May 31, 2016:
|
|
|
November 30,
2016
|
|
|
May 31,
2016
|
|
|
Cash in banks
|
|
$
|
4,134,320
|
|
|
$
|
3,974,007
|
|
|
Money market funds
|
|
|
562,745
|
|
|
|
540,150
|
|
|
|
|
$
|
4,697,065
|
|
|
$
|
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
November
30, 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 November 30, 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):
|
November 30, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Certificates of Deposit
|
|
$
|
-
|
|
|
$
|
1,511,000
|
|
|
$
|
-
|
|
|
$
|
1,511,000
|
|
|
Equity Securities
|
|
|
27,760
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,760
|
|
|
|
|
$
|
27,760
|
|
|
$
|
1,511,000
|
|
|
$
|
-
|
|
|
$
|
1,538,760
|
|
|
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
|
|
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 November 30,
2016 and May 31, 2016 are summarized as follows:
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2016
(Unaudited)
|
November 30, 2016
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
1,511,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,511,000
|
|
|
Equity Securities
|
|
|
16,866
|
|
|
|
10,894
|
|
|
|
-
|
|
|
|
27,760
|
|
|
|
|
$
|
1,527,866
|
|
|
$
|
10,894
|
|
|
$
|
-
|
|
|
$
|
1
,538,760
|
|
|
May 31, 2016
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
November
30, 2016
(Unaudited)
During
the six months ended November 30, 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.
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 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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2016
(Unaudited)
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
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 November 30, 2016 compared with three months ended November 30, 2015
|
|
(Dollar amounts in thousands)
|
|
|
|
Three Months Ended
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
Revenue, net
|
|
$
|
15,043
|
|
|
|
100.0
|
%
|
|
$
|
15,185
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
12,453
|
|
|
|
82.8
|
%
|
|
|
12,679
|
|
|
|
83.5
|
%
|
Gross profit
|
|
|
2,590
|
|
|
|
17.2
|
%
|
|
|
2,506
|
|
|
|
16.5
|
%
|
Selling, general and administrative expenses
|
|
|
2,345
|
|
|
|
15.6
|
%
|
|
|
2,242
|
|
|
|
14.8
|
%
|
Income from operations
|
|
|
245
|
|
|
|
1.6
|
%
|
|
|
264
|
|
|
|
1.7
|
%
|
Other income, net
|
|
|
2
|
|
|
|
0.0
|
%
|
|
|
7
|
|
|
|
0.1
|
%
|
Income before income taxes
|
|
|
247
|
|
|
|
1.6
|
%
|
|
|
271
|
|
|
|
1.8
|
%
|
Provision for income taxes
|
|
|
110
|
|
|
|
0.7
|
%
|
|
|
137
|
|
|
|
0.9
|
%
|
Consolidated net income
|
|
|
137
|
|
|
|
0.9
|
%
|
|
|
134
|
|
|
|
0.9
|
%
|
Less: Net income attributable to noncontrolling interest
|
|
|
11
|
|
|
|
0.1
|
%
|
|
|
14
|
|
|
|
0.1
|
%
|
Net income attributable to TSR, Inc.
|
|
$
|
126
|
|
|
|
0.8
|
%
|
|
$
|
120
|
|
|
|
0.8
|
%
|
TSR,
INC. AND SUBSIDIARIES
Revenue
Revenue
consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended November 30, 2016 decreased
$142,000 from the prior year quarter. While the overall average number of consultants on billing with customers increased from
approximately 350 for the quarter ended November 30, 2015 to 368 for the quarter ended November 30, 2016, the average number of
computer programming consultants decreased from 350 for the quarter ended November 30, 2015 to 326 in the quarter ended November
30, 2016. The 368 consultants on billing for the current quarter include 42 administrative workers that the Company placed with
two large customers at billing rates 67.7% 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 November 30, 2016 decreased $226,000 or 1.8% to $12,453,000 from $12,679,000 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 November 30, 2015 to 82.8% in the quarter ended November 30, 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 their pay rates averaged 71.3% 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 $103,000 or 4.6% from $2,242,000 in the quarter ended November
30, 2015 to $2,345,000 in the quarter ended November 30, 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 14.8% in the quarter ended November 30, 2015 to 15.6% in the quarter ended
November 30, 2016 as a result of the additional recruiters hired.
Other
Income
Other
income for the quarter ended November 30, 2016 resulted primarily from interest and dividend income of $3,000 and a mark to market
loss of $1,000 on the Company’s equity securities. Other income for the quarter ended November 30, 2015 resulted primarily
from a mark to market gain 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 November 30, 2016 and 2015 reflect
the Company’s estimated effective tax rate for the years ending May 31, 2017 and 2016, respectively. These rates were 44.5%
for the quarter ended November 30, 2016 and 50.6% for the quarter ended November 30, 2015.
Net
Income Attributable to TSR, Inc.
Net
income attributable to TSR, Inc. increased $6,000 from $120,000 in the quarter ended November 30, 2015 to $126,000 in the quarter
ended November 30, 2016. This increase was primarily attributable to a lower effective income tax rate.
TSR,
INC. AND SUBSIDIARIES
Six
months ended November 30, 2016 compared with six months ended November 30, 2015
|
|
(Dollar amounts in thousands)
|
|
|
|
Six Months Ended
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
Revenue, net
|
|
$
|
30,285
|
|
|
|
100.0
|
%
|
|
$
|
30,420
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
25,094
|
|
|
|
82.8
|
%
|
|
|
25,395
|
|
|
|
83.5
|
%
|
Gross profit
|
|
|
5,191
|
|
|
|
17.2
|
%
|
|
|
5,025
|
|
|
|
16.5
|
%
|
Selling, general and administrative expenses
|
|
|
4,660
|
|
|
|
15.4
|
%
|
|
|
4,473
|
|
|
|
14.7
|
%
|
Income from operations
|
|
|
531
|
|
|
|
1.8
|
%
|
|
|
552
|
|
|
|
1.8
|
%
|
Other income, net.
|
|
|
8
|
|
|
|
0.0
|
%
|
|
|
4
|
|
|
|
0.0
|
%
|
Income before income taxes
|
|
|
539
|
|
|
|
1.8
|
%
|
|
|
556
|
|
|
|
1.8
|
%
|
Provision for income taxes
|
|
|
246
|
|
|
|
0.8
|
%
|
|
|
277
|
|
|
|
0.9
|
%
|
Consolidated net income
|
|
|
293
|
|
|
|
1.0
|
%
|
|
|
279
|
|
|
|
0.9
|
%
|
Less: Net income attributable to noncontrolling interest
|
|
|
19
|
|
|
|
0.1
|
%
|
|
|
25
|
|
|
|
0.1
|
%
|
Net income attributable to TSR, Inc.
|
|
$
|
274
|
|
|
|
0.9
|
%
|
|
$
|
254
|
|
|
|
0.8
|
%
|
Revenue
Revenue
consists primarily of revenue from computer programming consulting services. Revenue for the six months ended November 30, 2016
decreased $135,000 from the prior year period. While the overall average number of consultants on billing with customers increased
from approximately 340 for the six months ended November 30, 2015 to 365 for the six months ended November 30, 2016, the average
number of computer programming consultants decreased from 340 for the six months ended November 30, 2015 to 323 in the six months
ended November 30, 2016. The 365 consultants on billing for the current six month period include 42 administrative workers that
the Company placed with two large customers at billing rates 65.0% 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 six months ended November 30, 2016 decreased $301,000 or 1.2% to $25,094,000 from $25,395,000 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 six months ended November 30, 2015 to 82.8% in the six months ended November 30, 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 their pay rates averaged 69.5% 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 $187,000 or 4.2% from $4,473,000 in the six months ended November
30, 2015 to $4,660,000 in the six months ended November 30, 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 14.7% in the six months ended November 30, 2015 to 15.4% in the six months
ended November 30, 2016 as a result of the additional recruiters hired.
Other
Income
Other
income for the six months ended November 30, 2016 resulted primarily from a mark to market gain of $3,000 on the Company’s
equity securities and interest and dividend income of $5,000. Other income for the six months ended November 30, 2015 resulted
primarily from interest and dividend income of $4,000.
Income
Taxes
The
income tax provision included in the Company’s results of operations for the six month periods ended November 30, 2016 and
2015 reflect the Company’s estimated effective tax rate for the years ending May 31, 2017 and 2016, respectively. These
rates were 45.6% for the six months ended November 30, 2016 and 49.8% for the six months ended November 30, 2015.
Net
Income Attributable to TSR, Inc.
Net
income attributable to TSR, Inc. increased $20,000 from $254,000 in the six months ended November 30, 2015 to $274,000 in the
six months ended November 30, 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 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
November 30, 2016, the Company had working capital (total current assets in excess of total current liabilities) of $9,591,000
including cash and cash equivalents and certificates of deposit and marketable securities of $6,236,000 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 six months ended November 30, 2016, net cash provided by operating activities was $225,000 compared to net cash provided by
operating activities of $1,312,000 for the six months ended November 30, 2015. The cash provided by operating activities in the
six months ended November 30, 2016 resulted primarily from consolidated net income of $293,000 and a decrease in accounts receivable
of $638,000 offset by a decrease in accounts and other payables and accrued expenses and other liabilities of $434,000 and an
increase in prepaid expenses of $167,000. The cash provided by operating activities in the six months ended November 30, 2015
resulted primarily from consolidated net income of $279,000 and a decrease in accounts receivable of $1,170,000 offset by a decrease
in accounts and other payables and accrued expenses and other liabilities of $98,000.
Net
cash provided by investing activities of $15,000 for the six months ended November 30, 2016 primarily resulted from not reinvesting
a certificate of deposit. Net cash used in investing activities of $294,000 for the six months ended November 30, 2015 primarily
resulted from investing in additional certificates of deposit.
In
the six months ended November 30, 2016, net cash used in financing activities resulted from a distribution to the noncontrolling
interest of $56,000, resulting primarily from the distribution of fiscal 2016 earnings from that entity. In the six months ended
November 30, 2015, net cash used in financing activities resulted from a distribution to the noncontrolling interest of $8,000.
The
Company’s capital resource commitments at November 30, 2016 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 November 30, 2016.
TSR,
INC. AND SUBSIDIARIES