Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended November 30, 2017

☐ Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____

Commission File Number: 0-8656

TSR, Inc.

(Exact name of registrant as specified in its charter)

Delaware		13-2635899
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

400 Oser Avenue, Hauppauge, NY 11788

(Address of principal executive offices)

631-231-0333

(Registrant’s telephone number)

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of December 31, 2017, there were 1,962,062 shares of common stock, par value $.01 per share, issued and outstanding.

Page 1

TSR, INC. AND SUBSIDIARIES

INDEX

			Page
			Number

Part I.	Financial Information:

	Item 1.	Financial Statements:

		Condensed Consolidated Balance Sheets – November 30, 2017 and May 31, 2017	3

		Condensed Consolidated Statements of Income – For the three months and six months ended November 30, 2017 and 2016	4

		Condensed Consolidated Statements of Equity – For the six months ended November 30, 2017 and 2016	5

		Condensed Consolidated Statements of Cash Flows – For the six months ended November 30, 2017 and 2016	6

		Notes to Condensed Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 4.	Controls and Procedures	17

Part II.	Other Information		18

	Item 6.	Exhibits	18

Signatures			18

Page 2

Part I. Financial Information

Item 1. Financial Statements

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	November 30, 2017		May 31, 2017
	(Unaudited)		(see Note 1)

ASSETS
Current Assets:
Cash and cash equivalents	$	4,280,903	$	5,723,976
Certificates of deposit and marketable securities		531,872		1,020,888
Accounts receivable, net of allowance for doubtful accounts of $185,000		7,614,471		7,324,291
Other receivables		3,802		18,455
Prepaid expenses		143,995		176,397
Prepaid and recoverable income taxes		-		94,833
Deferred income taxes		-		106,000

Total Current Assets		12,575,043		14,464,840

Equipment and leasehold improvements, net of accumulated depreciation and amortization of $257,825 and $269,069		31,552		20,650
Other assets		49,653		49,653
Deferred income taxes		108,000		-

Total Assets	$	12,764,248	$	14,535,143

LIABILITIES AND EQUITY

Current Liabilities:
Accounts and other payables	$	746,085	$	644,834
Accrued expenses and other current liabilities		2,585,489		2,838,058
Income taxes payable		93,493		-
Dividends payable		-		1,962,062
Advances from customers		1,173,832		1,330,714

Total Liabilities		4,598,899		6,775,668

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		16,486,188		16,118,011
		21,620,198		21,252,021
Less: Treasury stock, 1,152,101 shares, at cost		13,514,003		13,514,003

Total TSR, Inc. Equity		8,106,195		7,738,018
Noncontrolling Interest		59,154		21,457

Total Equity		8,165,349		7,759,475

Total Liabilities and Equity	$	12,764,248	$	14,535,143

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 3

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For The Three Months and Six Months Ended November 30, 2017 and 2016

(UNAUDITED)

	Three Months Ended November 30,					Six Months Ended November 30,
	2017		2016			2017		2016

Revenue, net	$	16,515,596	$	15,042,789		$	33,552,704	$	30,285,172

Cost of sales		13,795,750		12,452,751			27,988,380		25,093,651
Selling, general and administrative expenses		2,287,898		2,344,682			4,855,887		4,660,422

		16,083,648		14,797,433			32,844,267		29,754,073

Income from operations		431,948		245,356			708,437		531,099

Other income (loss):
Interest and dividend income		2,451		2,682			5,153		5,418
Unrealized gain (loss) on marketable securities, net		7,816		(952	)		6,984		2,488

Income before income taxes		442,215		247,086			720,574		539,005
Provision for income taxes		188,000		110,000			306,000		246,000

Consolidated net income		254,215		137,086			414,574		293,005
Less: Net income attributable to noncontrolling interest		27,127		10,769			46,397		18,911

Net income attributable to TSR, Inc.	$	227,088	$	126,317		$	368,177	$	274,094

Net income per TSR, Inc. common share	$	0.12	$	0.06		$	0.19	$	0.14

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.

Page 4

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For The Six Months Ended November 30, 2017 and 2016

(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, 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

Balance at May 31, 2017		3,114,163	$	31,142	$	5,102,868	$	16,118,011		$	(13,514,003	)		$	7,738,018		$	21,457			$	7,759,475

Net income attributable to noncontrolling interest		-		-		-		-			-				-			46,397				46,397

Distribution to noncontrolling interest		-		-		-		-			-				-			(8,700	)			(8,700	)

Net income attributable to TSR, Inc.		-		-		-		368,177			-				368,177			-				368,177

Balance at November 30, 2017		3,114,163	$	31,142	$	5,102,868	$	16,486,188		$	(13,514,003	)		$	8,106,195		$	59,154			$	8,165,349

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 5

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Six Months Ended November 30, 2017 and 2016

(UNAUDITED)

	Six Months Ended November 30,
	2017			2016

Cash flows from operating activities:
Consolidated net income	$	414,574		$	293,005
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Depreciation and amortization		8,421			10,719
Unrealized gain on marketable securities, net		(6,984	)		(2,488	)
Deferred income taxes		(2,000	)		12,000

Changes in operating assets and liabilities:
Accounts receivable		(290,180	)		638,001
Other receivables		14,653			(9,684	)
Prepaid expenses		32,402			(166,764	)
Prepaid and recoverable income taxes		94,833			(55,269	)
Accounts and other payables and accrued expenses and other current liabilities		(151,318	)		(433,567	)
Income taxes payable		93,493			(14,810	)
Advances from customers		(156,882	)		(46,626	)

Net cash provided by operating activities		51,012			224,517

Cash flows from investing activities:
Proceeds from maturities of marketable securities		496,000			1,012,000
Purchases of marketable securities		-			(995,000	)
Purchases of equipment and leasehold improvements		(19,323	)		(2,335	)

Net cash provided by investing activities		476,677			14,665

Cash flows from financing activities:
Cash dividend paid		(1,962,062	)		-
Distribution to noncontrolling interest		(8,700	)		(56,274	)

Net cash used in financing activities		(1,970,762	)		(56,274	)

Net increase (decrease) in cash and cash equivalents		(1,443,073	)		182,908
Cash and cash equivalents at beginning of period		5,723,976			4,514,157

Cash and cash equivalents at end of period	$	4,280,903		$	4,697,065

Supplemental disclosures of cash flow data:
Income taxes paid	$	120,000		$	304,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Page 6

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2017

(Unaudited)

1.	Basis of Presentation

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, 2017, 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, 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, 2018. 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, 2017.

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, 2017 and May 31, 2017:

	November 30, 2017		May 31, 2017

Cash in banks	$	3,691,221	$	4,634,245
Money market funds		589,682		840,731
Certificates of deposit		-		249,000
	$	4,280,903	$	5,723,976

4.	Revenue Recognition

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.

Page 7

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 30, 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 November 30, 2017 and May 31, 2017 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, 2017	Level 1		Level 2		Level 3		Total

Certificates of Deposit	$	-	$	496,000	$	-	$	496,000
Equity Securities		35,872		-		-		35,872
	$	35,872	$	496,000	$	-	$	531,872

May 31, 2017	Level 1		Level 2		Level 3		Total

Certificates of Deposit	$	-	$	992,000	$	-	$	992,000
Equity Securities		28,888		-		-		28,888
	$	28,888	$	992,000	$	-	$	1,020,888

Page 8

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 30, 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 November 30, 2017 and May 31, 2017 are summarized as follows:

November 30, 2017	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Recorded Value
Current
Certificates of Deposit	$	496,000	$	-	$	-	$	496,000
Equity Securities		16,866		19,006		-		35,872
	$	512,866	$	19,006	$	-	$	531,872

May 31, 2017	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Recorded Value
Current
Certificates of Deposit	$	992,000	$	-	$	-	$	992,000
Equity Securities		16,866		12,022		-		28,888
	$	1,008,866	$	12,022	$	-	$	1,020,888

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.

Equity

On May 25, 2017, the Company declared a special cash dividend of $1.00 per common share payable on July 14, 2017 to shareholders of record on June 16, 2017. This dividend totaled $1,962,062. The Company has no current plans to implement a quarterly dividend program or pay any other special cash dividend.

8.	Retirement Arrangement

Joseph F. Hughes, Chairman of the Board, Chief Executive Officer, President and Treasurer, retired on July 5, 2017. The Board of Directors of the Company has elected Christopher Hughes, formerly Senior Vice President of TSR, Inc., to succeed Joseph F. Hughes as Chairman of the Board, Chief Executive Officer, President and Treasurer. Upon his retirement, the Board awarded Joseph F. Hughes a one-time founder’s bonus of $100,000. The Board also approved the continued payment by the Company of the remaining payments under the lease for the automobile used by Joseph F. Hughes until the lease expires in May, 2018. Further, the Board approved the continued payment by the Company for health insurance coverage for Joseph F. Hughes and his spouse under the Company’s executive medical plan until May 31, 2018 and payments in lieu of the insurance coverage for two years thereafter. The total amount of these retirement benefits were accrued in the quarter ended August 31, 2017, resulting in charges amounting to approximately $180,000 which were included in selling, general and administrative expenses for the six months ended November 30, 2017.

Page 9

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2017

(Unaudited)

9.	Deferred Income Taxes

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. The Company adopted ASU 2015-17 in the first quarter of fiscal 2018 on a prospective basis. Accordingly, the Company has classified any deferred tax assets and liabilities as noncurrent beginning with the first quarter of fiscal 2018.

10.	Subsequent Event

In December 2017, the “Tax Cuts and Jobs Act” was signed into law. The federal income tax rate on corporations will be reduced from 35% to 21% effective January 1, 2018. This will begin to affect the Company’s effective income tax rate and income tax provision beginning in the third quarter of fiscal 2018.

11.	Other Matters

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.

12.	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, 2019. The Company expects the impact of the update, if any, to be immaterial on its consolidated financial statements.

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.

Page 10

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2017

(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.

Page 11

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 November 30, 2017 compared with three months ended November 30, 2016

	(Dollar amounts in thousands) Three Months Ended
	November 30, 2017					November 30, 2016
	Amount		% of Revenue			Amount		% of Revenue
Revenue, net	$	16,516		100.0	%	$	15,043		100.0	%
Cost of sales		13,796		83.5	%		12,453		82.8	%
Gross profit		2,720		16.5	%		2,590		17.2	%
Selling, general and administrative expenses		2,288		13.9	%		2,345		15.6	%
Income from operations		432		2.6	%		245		1.6	%
Other income, net		10		0.1	%		2		0.0	%
Income before income taxes		442		2.7	%		247		1.6	%
Provision for income taxes		188		1.1	%		110		0.7	%
Consolidated net income		254		1.6	%		137		0.9	%
Less: Net income attributable to noncontrolling interest		27		0.2	%		11		0.1	%
Net income attributable to TSR, Inc.	$	227		1.4	%	$	126		0.8	%

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TSR, INC. AND SUBSIDIARIES

Revenue

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended November 30, 2017 increased $1,473,000 or 9.8% from the prior year quarter. The overall average number of consultants on billing with customers increased from 368 for the quarter ended November 30, 2016 to 391 for the quarter ended November 30, 2017, while the average number of computer programming consultants increased from 326 for the quarter ended November 30, 2016 to 345 in the quarter ended November 30, 2017. The 391 consultants on billing for the current quarter include 46 administrative (non-IT) workers that the Company placed at the customers’ requests at billing rates 70.3% lower than those charged for computer programming consultants. The 368 consultants on billing for the prior year quarter include 42 administrative (non-IT) workers at billing rates 67.7% lower than those charged for computer programming consultants. The Company charges lower daily billing rates for administrative (non-IT) workers, but also pays lower rates to the administrative (non-IT) workers.

Cost of Sales

Cost of sales for the quarter ended November 30, 2017 increased $1,343,000 or 10.8% to $13,796,000 from $12,453,000 in the prior year period. The increase in cost of sales resulted primarily from an increase in consultants placed with customers. Cost of sales as a percentage of revenue increased from 82.8% in the quarter ended November 30, 2016 to 83.5% in the quarter ended November 30, 2017. The increase in cost of sales as a percentage of revenue was primarily attributable to a decrease in margins on the administrative (non-IT) workers. While administrative (non-IT) workers continue to be placed at higher average mark-ups than the Company’s computer programming consultants, the mark-ups for the current quarter for this group were less than the mark-ups for last year’s quarter. Because their pay rates averaged 72.3% lower than the computer programming consultants, the daily gross profit per worker in dollars is still lower for the administrative (non-IT) 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 decreased approximately $57,000 or 2.4% from approximately $2,345,000 in the quarter ended November 30, 2016 to $2,288,000 in the quarter ended November 30, 2017. The decrease in these expenses primarily resulted from the retirement of the former Chairman offset by increased hiring fees and increased offshore recruiting expenses. Selling, general and administrative expenses, as a percentage of revenue, decreased from 15.6% in the quarter ended November 30, 2016 to 13.9% in the quarter ended November 30, 2017 as a result of the additional revenue outpacing the increase in these expenses.

Other Income

Other income for the quarter ended November 30, 2017 resulted primarily from interest and dividend income of $2,000 and a mark to market gain of $8,000 on the Company’s equity securities. 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.

Income Taxes

The income tax provision included in the Company’s results of operations for the quarters ended November 30, 2017 and November 30, 2016 reflect the Company’s estimated effective tax rate for the years ending May 31, 2018 and 2017, respectively. These rates were 42.5% for the quarter ended November 30, 2017 and 44.5% for the quarter ended November 30, 2016.

Net Income Attributable to TSR, Inc.

Net income attributable to TSR, Inc. increased $101,000 from $126,000 in the quarter ended November 30, 2016 to $227,000 in the quarter ended November 30, 2017. This increase was primarily attributable to an increase in revenue and a decrease in selling, general and administrative expenses.

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Six months ended November 30, 2017 compared with six months ended November 30, 2016

	(Dollar amounts in thousands) Six Months Ended
	November 30, 2017					November 30, 2016
	Amount		% of Revenue			Amount		% of Revenue
Revenue, net	$	33,553		100.0	%	$	30,285		100.0	%
Cost of sales		27,989		83.4	%		25,094		82.8	%
Gross profit		5,564		16.6	%		5,191		17.2	%
Selling, general and administrative expenses		4,856		14.5	%		4,660		15.4	%
Income from operations		708		2.1	%		531		1.8	%
Other income, net		12		0.0	%		8		0.0	%
Income before income taxes		720		2.1	%		539		1.8	%
Provision for income taxes		306		0.9	%		246		0.8	%
Consolidated net income		414		1.2	%		293		1.0	%
Less: Net income attributable to noncontrolling interest		46		0.1	%		19		0.1	%
Net income attributable to TSR, Inc.	$	368		1.1	%	$	274		0.9	%

Revenue

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the six months ended November 30, 2017 increased $3,268,000 or 10.8% from the prior year period. The overall average number of consultants on billing with customers increased from 365 for the six months ended November 30, 2016 to 393 for the six months ended November 30, 2017, while the average number of computer programming consultants increased from 323 for the six months ended November 30, 2016 to 343 in the six months ended November 30, 2017. The 393 consultants on billing for the current six months include 50 administrative (non-IT) workers that the Company placed at the customers’ requests at billing rates 70.5% lower than those charged for computer programming consultants. The 365 consultants on billing for the prior year six months include 42 administrative (non-IT) workers at billing rates 65.0% lower than those charged for computer programming consultants. The Company charges lower daily billing rates for administrative (non-IT) workers, but also pays lower rates to the administrative (non-IT) workers.

Cost of Sales

Cost of sales for the six months ended November 30, 2017 increased $2,895,000 or 11.5% to $27,989,000 from $25,094,000 in the prior year period. The increase in cost of sales resulted primarily from an increase in consultants placed with customers. Cost of sales as a percentage of revenue increased from 82.8% in the six months ended November 30, 2016 to 83.4% in the six months ended November 30, 2017. The increase in cost of sales as a percentage of revenue was primarily attributable to a decrease in margins on the administrative (non-IT) workers. While administrative (non-IT) workers continue to be placed at higher average mark-ups than the Company’s computer programming consultants, the mark-ups for the current six months for this group were less than the mark-ups for last year’s period. Because their pay rates averaged 72.4% lower than the computer programming consultants, the daily gross profit per worker in dollars is still lower for the administrative (non-IT) workers than the computer programming consultants.

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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 approximately $196,000 or 4.2% from approximately $4,660,000 in the six months ended November 30, 2016 to $4,856,000 in the six months ended November 30, 2017. The increase in these expenses primarily resulted from increased professional fees and increased offshore recruiting expenses. Selling, general and administrative expenses, as a percentage of revenue, decreased from 15.4% in the six months ended November 30, 2016 to 14.5% in the six months ended November 30, 2017 as a result of the additional revenue outpacing the increase in these expenses.

Other Income

Other income for the six months ended November 30, 2017 resulted primarily from interest and dividend income of $5,000 and a mark to market gain of $7,000 on the Company’s equity securities. 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.

Income Taxes

The income tax provision included in the Company’s results of operations for the six months ended November 30, 2017 and November 30, 2016 reflect the Company’s estimated effective tax rate for the years ending May 31, 2018 and 2017, respectively. These rates were 42.5% for the six months ended November 30, 2017 and 45.6% for the six months ended November 30, 2016.

Net Income Attributable to TSR, Inc.

Net income attributable to TSR, Inc. increased $94,000 from $274,000 in the six months ended November 30, 2016 to $368,000 in the six months ended November 30, 2017. This increase was primarily attributable to an increase in revenue.

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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 from the issuance of these financial statements. The Company does not maintain a line of credit facility with any banking institution.

At November 30, 2017, the Company had working capital (total current assets in excess of total current liabilities) of $7,976,000 including cash and cash equivalents and certificates of deposit and marketable securities of $4,813,000 as compared to working capital of $7,689,000 including cash and cash equivalents and certificates of deposit and marketable securities of $6,745,000 at May 31, 2017.

For the six months ended November 30, 2017, net cash provided by operating activities was $51,000 compared to net cash provided by operating activities of $225,000 for the six months ended November 30, 2016. The cash provided by operating activities in the six months ended November 30, 2017 resulted primarily from consolidated net income of $414,000 offset by an increase in accounts receivable of $290,000 and a decrease in advances from customers of $157,000. 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.

Net cash provided by investing activities of $477,000 for the six months ended November 30, 2017 primarily resulted from not reinvesting certificates of deposit. Net cash provided in investing activities of $15,000 for the six months ended November 30, 2016 primarily resulted from not reinvesting a certificate of deposit.

In the six months ended November 30, 2017, net cash used in financing activities resulted from the payment of a cash dividend of $1,962,000 and distribution to the noncontrolling interest of $9,000. 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.

The Company’s capital resource commitments at November 30, 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, 2019. The Company expects the impact of the update, if any, to be immaterial on its consolidated financial statements.

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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, 2017 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, 2017.

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 reported completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. Other Information

Item 6.

Exhibits

	(a)	Exhibit 31.1 – Certification by Christopher Hughes pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

		Exhibit 31.2 – Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

		Exhibit 32.1 – Certification by Christopher Hughes pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

		Exhibit 32.2 – Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

		Exhibit 101 – The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Income, (iii) the Statements of Equity, (iv) the Statements of Cash Flows, and (v) the Notes to Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

	TSR Inc.
	(Registrant)

Date: January 9, 2018	/s/ Christopher Hughes
	Christopher Hughes, Chairman of the Board, Chief Executive Officer and President

Date: January 9, 2018	/s/ John G. Sharkey
	John G. Sharkey, Vice President-Finance and Principal Accounting Officer