TSRI TSR INC

 

 

 

TSR AT A GLANCE

 

TSR is engaged in the business of providing contract computer programming services to its customers. The Company provides its customers with technical computer personnel to supplement their in-house information technology (“IT”) capabilities. TSR’s customers for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets. With more than 40 years of experience in the information services business, TSR is positioned to fulfill virtually any information technology temporary staffing contract requirement. Extensive recruiting efforts are employed to create and maintain a database of highly qualified professionals who are well-versed in the latest technological advances. TSR’s professional staff has extensive experience across a broad range of industries from telecommunications and pharmaceuticals to banking and insurance.

 

 

FINANCIAL HIGHLIGHTS

(Amounts in Thousands, Except Per Share Data)

 

		May 31, 2018				May 31, 2017				May 31, 2016				May 31, 2015				May 31, 2014
Revenue, Net		$	64,990			$	62,573			$	60,998			$	57,403			$	49,530
Income From Operations			909				562				839				432				25
Net Income (Loss) Attributable to TSR, Inc.			486				268				399				193				(86	)
Basic Net Income (Loss) Per TSR, Inc. Common Share			0.25				0.14				0.20				0.10				(0.04	)
Working Capital			8,113				7,689				9,391				8,986				8,706
Total Assets			13,372				14,535				14,090				14,051				13,563
Total TSR, Inc. Equity			8,224				7,738				9,432				9,033				8,840
Book Value Per TSR, Inc. Common Share (Total TSR Equity Divided by Common Shares Outstanding)			4.19				3.94				4.81				4.60				4.51
Cash Dividends Declared Per TSR, Inc. Common Share		$	0.00			$	1.00			$	0.00			$	0.00			$	0.00

 

 

LETTER FROM THE CHAIRMAN

 

Dear Stockholders:

 

My first full year as Chairman and CEO of TSR has been a rewarding one in several respects.

 

Overall, for the year ended May 31st, the Company’s net revenue increased 3.9% from last year to $64.99 million. Net income attributable to TSR increased 81% from $268,000 in the prior year to $486,000 in the current year. Additionally, net income per share increased from $0.14 to $0.25 per share.

 

We attribute these increases in net income and net income per share to the increase in revenue and to a decrease in selling, general and administrative expenses compared with the prior year, resulting primarily from consolidating certain management responsibilities following the retirement of our former chairman, which decrease was offset, to an extent, by additional investments in recruiting resources.

 

Here’s the new normal for the IT staffing industry:

 

●

IT talent is scarce in certain categories

●

Economic uncertainty reverberates among many clients

●

There is unremitting pressure to squeeze margins by some customers

 

Throughout it all, TSR continues to strive to outcompete in the marketplace.

 

The three fundamental pillars of the IT staffing business continue to be: sales and marketing; recruiting; and administrative or “back office” capabilities. At TSR, we don’t believe that our “back office” performs a separate and isolated function – it is imperative that all three groups work together as a team. This approach helps make us nimble and smarter in a world where speed to market is just the first cost of entry. But then top quality and right fit trump all.

 

Serving customers is our primary focus. This includes assisting our existing clients, many of whom we have served for decades, and new clients, whom we cultivate by learning and understanding their needs. This year we had particular success in growing our business across several industries.

 

Computer technologies and IT needs continue to evolve and increase rapidly worldwide. TSR’s ability to adapt and evolve for more than 40 years has been the cornerstone for our success. We will continue to pivot as needed to be among the leading service providers for architects and developers in many nascent IT areas. This includes: cloud based computing, mobile based financial technology, robotic process automation, information security, ethical hacking, and penetration testing. Delivering talent in these and other new technologies as they develop will fuel our growth.

 

As always, we remain relentless in our dedication to listening closely to our customers and their needs, and working smartly on their behalf. We believe that this dedication will best serve all of our stockholders.

 

I thank you for your ongoing support.

 

	Sincerely
	/s/ Chris Hughes
	Chris Hughes
	President

 

 

TSR INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

May 31, 2018 and 2017

 

 

		2018				2017
Current assets:
Cash and cash equivalents		$	5,323,437			$	5,723,976
Certificates of deposit and marketable securities			537,160				1,020,888
Accounts receivable:
Trade, net of allowance for doubtful accounts of $185,000 in 2018 and 2017			7,227,823				7,324,291
Other			2,094				18,455
			7,229,917				7,342,746
Prepaid expenses			98,344				176,397
Prepaid and recoverable income taxes			28,214				94,833
Deferred income taxes			-				106,000
Total Current Assets			13,217,072				14,464,840
Equipment and leasehold improvements, at cost:
Equipment			100,980				98,889
Furniture and fixtures			111,107				111,107
Automobiles			19,323				19,665
Leasehold improvements			60,058				60,058
			291,468				289,719
Less accumulated depreciation and amortization			263,742				269,069
			27,726				20,650
Other assets			49,653				49,653
Deferred income taxes			78,000				-
Total Assets		$	13,372,451			$	14,535,143
LIABILITIES AND EQUITY
Current liabilities:
Accounts and other payables		$	559,428			$	644,834
Accrued expenses and other current liabilities:
Salaries, wages and commissions			3,136,023				2,699,686
Other			196,990				138,372
			3,333,013				2,838,058
Dividends payable			-				1,962,062
Advances from customers			1,211,232				1,330,714
Total Liabilities			5,103,673				6,775,668
Commitments and contingencies
Equity:
TSR, Inc.
Preferred stock, $1.00 par value, authorized 500,000 shares; none issued			-				-
Common stock, $0.01 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			16,604,219				16,118,011
			21,738,229				21,252,021
Less:  Treasury stock, 1,152,101 shares, at cost			13,514,003				13,514,003
Total TSR, Inc. Equity			8,224,226				7,738,018
Noncontrolling Interest			44,552				21,457
Total Equity			8,268,778				7,759,475
Total Liabilities and Equity		$	13,372,451			$	14,535,143

 

See accompanying notes to consolidated financial statements.

 

 

TSR INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended May 31, 2018 and 2017

 

 

		2018				2017
Revenue, net		$	64,989,995			$	62,572,585
Cost of sales			54,609,095				52,326,521
Selling, general and administrative expenses			9,471,523				9,683,601
			64,080,618				62,010,122
Income from operations			909,377				562,463
Other income:
Interest and dividend income			12,381				10,888
Unrealized gain from marketable securities, net			15,272				3,616
			27,653				14,504
Income before income taxes			937,030				576,967
Provision for income taxes			381,000				263,000
Consolidated net income			556,030				313,967
Less: Net income attributable to noncontrolling interest			69,822				45,778
Net income attributable to TSR, Inc.		$	486,208			$	268,189
Net income per TSR, Inc. common share		$	0.25			$	0.14
Weighted average number of common shares outstanding			1,962,062				1,962,062

 

See accompanying notes to consolidated financial statements.

 

 

TSR INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

Years ended May 31, 2018 and 2017

 

 

		Shares of common stock				Common stock				Additional paid-in capital				Retained earnings				Treasury stock				TSR Inc. equity				Non- controlling interest				Total equity
Balance at June 1, 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			-				-				-				-				-				-				45,778				45,778
Distribution to noncontrolling interest			-				-				-				-				-				-				(63,924	)			(63,924	)
Cash dividend declared			-				-				-				(1,962,062	)			-				(1,962,062	)			-				(1,962,062	)
Net income attributable to TSR, Inc.			-				-				-				268,189				-				268,189				-				268,189
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			-				-				-				-				-				-				69,822				69,822
Distribution to noncontrolling interest			-				-				-				-				-				-				(46,727	)			(46,727	)
Net income attributable to TSR, Inc.			-				-				-				486,208				-				486,208				-				486,208
Balance at May 31, 2018			3,114,163			$	31,142			$	5,102,868			$	16,604,219			$	(13,514,003	)		$	8,224,226			$	44,552			$	8,268,778

 

See accompanying notes to consolidated financial statements.

 

 

TSR INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended May 31, 2018 and 2017

 

 

		2018				2017
Cash flows from operating activities:
Consolidated net income		$	556,030			$	313,967
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Depreciation and amortization			14,339				19,976
Unrealized gain from marketable securities, net			(15,272	)			(3,616	)
Deferred income taxes			28,000				25,000
Changes in operating assets and liabilities:
Accounts receivable-trade			96,468				379,389
Other receivables			16,361				(7,602	)
Prepaid expenses			78,053				(77,328	)
Prepaid and recoverable income taxes			66,619				(94,833	)
Accounts and other payables and accrued expenses and other current liabilities			409,549				125,077
Income taxes payable			-				(14,810	)
Advances from customers			(119,482	)			85,151
Net cash provided by operating activities			1,130,665				750,371
Cash flows from investing activities:
Proceeds from maturities of marketable securities			992,000				2,523,000
Purchases of marketable securities			(493,000	)			(1,987,000	)
Purchases of equipment and leasehold improvements			(21,415	)			(12,628	)
Net cash provided by investing activities			477,585				523,372
Cash flows from financing activities:
Cash dividend paid			(1,962,062	)			-
Distributions to noncontrolling interest			(46,727	)			(63,924	)
Net cash used in financing activities			(2,008,789	)			(63,924	)
Net increase (decrease) in cash and cash equivalents			(400,539	)			1,209,819
Cash and cash equivalents at beginning of year			5,723,976				4,514,157
Cash and cash equivalents at end of year		$	5,323,437			$	5,723,976
Supplemental disclosures of cash flow data:
Income taxes paid		$	286,000			$	348,000
Non-cash:
Dividends declared and payable		$	-			$	1,962,000

 

See accompanying notes to consolidated financial statements.

 

 

TSR INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2018 and 2017

 

(1)

Summary of Significant Accounting Policies

 

(a)

Business, Nature of Operations and Customer Concentrations

TSR, Inc. and Subsidiaries (the “Company”) are primarily engaged in providing contract computer programming services to commercial customers located primarily in the Metropolitan New York area. The Company provides its customers with technical computer personnel to supplement their in-house information technology (“IT”) capabilities. In addition, beginning in fiscal 2017, the Company has provided and continues to provide administrative (non-IT) workers on a contract basis to two of its existing customers. In fiscal 2018, three customers each accounted for more than 10% of the Company’s consolidated revenue, constituting a combined 48.7%. The largest of these constituted 20.7% of consolidated revenue. In fiscal 2017, three customers each accounted for more than 10% of the Company’s consolidated revenue, constituting a combined 44.9%. The largest of these constituted 19.4% of consolidated revenue. The accounts receivable balances associated with the Company’s largest customers were $3,692,000 for three customers at May 31, 2018 and $3,340,000 for three customers at May 31, 2017. The Company operates in one business segment, contract staffing services.

 

(b)

Principles of Consolidation

The consolidated financial statements include the accounts of TSR, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

(c)

Revenue Recognition

The Company’s contract computer programming and administrative staffing 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 collectibility 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 completion of the related services and credit balances from overpayments.

 

Reimbursements received by the Company for out-of-pocket expenses are characterized as revenue.

 

(d)

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 May 31, 2018 and 2017:

 

			2018				2017
	Cash in banks		$	4,723,700			$	4,634,245
	Money market funds			599,737				840,731
	Certificates of deposit			-				249,000
			$	5,323,437			$	5,723,976

 

(e)

Certificates of Deposit and Marketable Securities

The Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

Investments recorded in the accompanying consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:

 

Level 1 - These are investments where values are based on unadjusted quoted prices for identical assets in an active market the Company has the ability to access.

 

Level 2 - These are investments where values are based on quoted market prices that are not active or model derived valuations in which all significant inputs are observable in active markets.

 

Level 3 - These are investments where values are derived from techniques in which one or more significant inputs are unobservable.

 

 

TSR INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2018 and 2017

 

The following are the major categories of assets measured at fair value on a recurring basis as of May 31, 2018 and 2017 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

 

			Level 1				Level 2				Level 3				Total
	May 31, 2018
	Certificates of deposit		$	-			$	493,000			$	-			$	493,000
	Equity securities			44,160				-				-				44,160
			$	44,160			$	493,000			$	-			$	537,160
			Level 1				Level 2				Level 3				Total
	May 31, 2017
	Certificates of deposit		$	-			$	992,000			$	-			$	992,000
	Equity securities			28,888				-				-				28,888
			$	28,888			$	992,000			$	-			$	1,020,888

 

Based upon the Company’s intent and ability to hold its certificates of deposit to maturity (which maturities range up to 12 months at purchase), such securities have been classified as held-to-maturity and are carried at amortized cost, which approximates market value. The Company’s equity securities are classified as trading securities, which are carried at fair value, as determined by quoted market prices, which is a Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings. The Company’s certificates of deposit and marketable securities at May 31, 2018 and 2017 are summarized as follows:

 

	May 31, 2018		Amortized Cost				Gross Unrealized Holding Gains				Gross Unrealized Holding Losses				Recorded Value
	Current
	Certificates of deposit		$	493,000			$	-			$	-			$	493,000
	Equity securities			16,866				27,294				-				44,160
			$	509,866			$	27,294			$	-			$	537,160
	May 31, 2017
	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.

 

(f)

Accounts Receivable and Credit Policies:

 

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, management considers many factors in estimating its general allowance, including historical data, experience, customer types, creditworthiness and economic trends. From time-to-time, management may adjust its assumptions for anticipated changes in any of those or other factors expected to affect collectibility.

 

 

TSR INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2018 and 2017

 

(g)

Depreciation and Amortization

 

Depreciation and amortization of equipment and leasehold improvements has been computed using the straight-line method over the following useful lives:

 

	Equipment		3 years
	Furniture and fixtures		3 years
	Automobiles		3 years
	Leasehold improvements		Lesser of lease term or useful life

 

(h)

Net Income Per Common Share

Basic net income per common share is computed by dividing 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 the fiscal years ended May 31, 2018 or 2017.

 

(i)

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial reporting and tax bases of the Company’s assets and liabilities at enacted rates expected to be in effect when such amounts are realized or settled. The effect of enacted tax law or rate changes is reflected in income in the period of enactment.

 

(j)

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 consolidated financial statements approximate fair value because of the short-term maturities of these instruments.

 

(k)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not limited to, provisions for doubtful accounts receivable and assessments of the recoverability of the Company’s deferred tax assets. Actual results could differ from those estimates.

 

(l)

Long-Lived Assets

The Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its fair value.

 

(m)

Impact of New Accounting Standards

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 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 and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company adopted this guidance in the first quarter of fiscal 2018. The Company’s deferred tax assets and liabilities have been classified as noncurrent.

 

 

TSR INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2018 and 2017

 

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 expects the impact of the update, if any, to be immaterial 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 expects the impact of the update, if any, to be immaterial 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 collectibility; 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 expects the impact of the update, if any, to be immaterial on its consolidated financial statements.

 

(n)

Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, certificates of deposit, marketable securities and accounts receivable. The Company places its cash equivalents with high-credit quality financial institutions and brokerage houses. The Company has substantially all of its cash in four bank accounts. At times, such amounts may exceed federally insured limits. The Company holds its marketable securities in brokerage accounts. The Company has not experienced losses in any such accounts. The Company’s accounts receivable represent 43 accounts with open balances as of May 31, 2018. As a percentage of revenue, the three largest customers among these 43 accounts consisted of 51.1% of the net accounts receivable balance at May 31, 2018.

 

 

TSR INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2018 and 2017

 

(2)

Income Taxes

 

A reconciliation of the provision for income taxes computed at the federal statutory rates of 28.6% (blended) for fiscal 2018 and 34.0% for fiscal 2017 to the reported amounts is as follows:

 

			2018								2017
			Amount				%				Amount				%
	Amounts at statutory federal tax rate		$	268,000				28.6	%		$	196,000				34.0	%
	Noncontrolling interest			(20,000	)			(2.1	)			(16,000	)			(2.8	)
	State and local taxes, net of federal income tax effect			83,000				8.9				56,000				9.7
	Effect of rate change on deferred asset			32,000				3.4				-				-
	Non-deductible expenses and other			18,000				1.9				27,000				4.7
			$	381,000				40.7	%		$	263,000				45.6	%

 

The components of the provision for income taxes are as follows:

 

				Federal				State				Total
	2018:	Current		$	236,000			$	117,000			$	353,000
		Deferred			28,000				-				28,000
				$	264,000			$	117,000			$	381,000
	2017:	Current		$	170,000			$	68,000			$	238,000
		Deferred			8,000				17,000				25,000
				$	178,000			$	85,000			$	263,000

 

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets at May 31, 2018 and 2017 are as follows:

 

			2018				2017
	Allowance for doubtful accounts receivable		$	53,000			$	75,000
	Accrued compensation and other accrued expenses			37,000				38,000
	Equipment and leasehold improvement depreciation and amortization			(3,000	)			(4,000	)
	Acquired client relationships			(1,000	)			2,000
	Unrealized gains			(8,000	)			(5,000	)
	Total deferred income tax assets		$	78,000			$	106,000

 

The Company believes that it is more likely than not that it will realize the benefits of its deferred tax assets based primarily on the Company’s history of and projections for taxable income in the future.

 

 

TSR INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2018 and 2017

 

The Company recognizes interest and penalties associated with tax matters as selling, general and administrative expenses and includes accrued interest and penalties with accrued and other liabilities in the consolidated balance sheets.

 

In the third quarter of fiscal 2018, the Company revised its estimated annual effective income tax rate to reflect a change in the federal statutory corporate income tax rate from 34% to 21%, resulting from legislation that was enacted on December 22, 2017. The rate change is administratively effective at the beginning of our fiscal year 2018, using a blended rate for the annual period. As a result, the blended statutory rate for the fiscal year ending May 31, 2018 is 28.6%.

 

In addition, the Company was required in the current year to recognize the change related to adjusting the deferred tax asset to reflect the new corporate tax rate. As a result, income tax expense reported for the year ended May 31, 2018 was adjusted to reflect the effects of the change in the tax law and resulting in a decrease in income tax expense of $21,000. This amount comprises a reduction of $53,000 in income tax expense for the year ended May 31, 2018 related to the lower corporate rate and a charge of $32,000 from the application of the newly enacted reduced rates to the existing net deferred tax asset balances.

 

In the third quarter of fiscal 2018, the Company discovered it had not filed required information returns related to a foreign bank account opened by a subsidiary in fiscal 2016 with contributions totaling approximately $25,000. The Company has accrued an expense of $30,000 with a charge to selling, general and administrative expenses for potential penalties that may be assessed. The Company will monitor this reserve periodically to determine if it is more-likely–than–not that penalties will be assessed. Changes to the reserve may occur due to changes in judgment, abatement, negotiation or expiration of the statute of limitations on the returns.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefit as follows:

 

			Amount
	Balance at June 1, 2017		$	-
	Additions based on tax positions related to current year			-
	Additions for tax positions of prior years			30,000
	Reductions for tax positions of prior years			-
	Settlements			-
	Balance at May 31, 2018		$	30,000

 

The Company’s federal and state income tax returns prior to fiscal year 2015 are closed.

 

(3)	Commitments and Contingencies

 

A summary of noncancellable long-term operating lease commitments for facilities as of May 31, 2018 follows:

 

	Fiscal Year		Amount
	2019		$	342,000
	2020			241,000
	2021			209,000
	2022			161,000
	2023			41,000
	thereafter			-
	Total		$	994,000

 

Total rent expenses under all lease agreements amounted to $369,000 and $372,000 in fiscal 2018 and 2017, respectively.

 

The Company has entered into employment agreements with two of its executive officers expiring in 2020 and 2022, respectively. The total remaining payments under these agreements is $1,900,000 at May 31, 2018.

 

From time-to-time, the Company is party to various lawsuits, some involving substantial amounts. Management is not aware of any lawsuits that would have a material adverse impact on the consolidated financial position of the Company.

 

 

TSR INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2018 and 2017

 

(4)	Stockholder’s 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.

 

(5)	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 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 of the lease for the automobile used by Joseph F. Hughes until the lease expired 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. Joseph F. Hughes and his spouse have remained on the executive medical plan subsequent to May 31, 2018 at the Company’s expense in lieu of the direct payments to them for this coverage, saving the Company a small amount monthly. The total amount of these retirement benefits were accrued in the quarter ended August 31, 2017, resulting in charges amounting to $180,000, which were included in selling, general and administrative expenses for fiscal 2018.

 

(6)	Subsequent Event

 

Through an amendment to filings with the United States Securities and Exchange Commission on Schedule 13D by Joseph F. Hughes and Winifred M. Hughes, the Company has been informed that on July 20, 2018, Zeff Capital, LP, QAR Industries, Inc. and Fintech Consulting LLC entered an agreement to purchase 819,491 shares of the Company’s Common Stock (the “Shares”) which were held by Joseph F. Hughes and Winifred M. Hughes. Joseph F. Hughes is the former Chairman and Chief Executive Officer of the Company. The Shares were sold in a privately negotiated transaction for a purchase price of $6.25 per share, or $5,121,819 in the aggregate, and the Shares collectively represent 41.8% of the Company’s issued and outstanding Common Stock. It had also been disclosed that Zeff Capital, LP owned 77,615 shares of the Company’s Common Stock, which represented approximately 4.0% of the Company’s issued and outstanding Common Stock. Each of the purchasers of the Shares has significant voting power on all matters subject to a vote of the Company’s stockholders.

 

Prior to the sale of the Shares by Joseph F. Hughes and Winifred M. Hughes to Zeff Capital, LP, QAR Industries, Inc. and Fintech Consulting LLC described above, the Company had received a letter on June 25, 2018 from James Hughes on behalf of Joseph F. Hughes and Winifred M. Hughes, in which Joseph F. Hughes and Winifred M. Hughes requested that the Board pursue a sale of the Company. On July 9, 2018, by resolution, the Board established a Special Committee of the Board to review this request, and to consider and evaluate other strategic alternatives available to the Company in the context of that review, including (a) potential opportunities for a sale of the Company by way of merger, consolidation, sale of equity securities (including the Company’s outstanding Common Stock), sale of all or substantially all of the Company’s assets, or other strategic transactions; (b) recapitalization of the Company; (c) the sale or exchange of the shares of Common Stock held (at that time) by Mr. Hughes and Mrs. Hughes in a transaction involving the Company; or (d) remaining independent and continuing to execute the Company’s business plans on a standalone basis, and to review, consider and evaluate, for purposes of advising the full Board, whether any of the potential strategic alternatives is in the best interests of the Company’s stockholders. The Special Committee has remained in place following the acquisition of the Shares by Zeff Capital, LP, QAR Industries, Inc. and Fintech Consulting LLC from Joseph F. Hughes and Winifred M. Hughes described above.

 

 

TSR INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto presented elsewhere in this report.

 

Results of Operations

The following table sets forth for the periods indicated certain financial information derived from the Company’s consolidated statements of income. There can be no assurance that historical trends in operating results will continue in the future:

 

		Year Ended May 31,
		(Dollar Amounts in Thousands)
		2018								2017
		Amount				% of Revenue				Amount				% of Revenue
Revenue, Net		$	64,990				100.0	%		$	62,573				100.0	%
Cost of Sales			54,609				84.0				52,327				83.6
Gross Profit			10,381				16.0				10,246				16.4
Selling, General and Administrative Expenses			9,472				14.6				9,684				15.5
Income from Operations			909				1.4				562				0.9
Other Income, Net			28				0.0				15				0.0
Income Before Income Taxes			937				1.4				577				0.9
Provision for Income Taxes			381				0.6				263				0.4
Consolidated Net Income			556				0.8				314				0.5
Net Income Attributable to Noncontrolling Interest			70				0.1				46				0.1
Net Income Attributable to TSR, Inc.		$	486				0.7	%		$	268				0.4	%

 

 

 

TSR INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

 

 

 

TSR INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

 

 

 

TSR INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

 

 

 

TSR INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of TSR, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of TSR, Inc. and Subsidiaries (the Company) as of May 31, 2018 and 2017, and the related consolidated statements of income, equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ CohnReznick LLP

CohnReznick LLP

 

We have served as the Company’s auditor since 2008.

Jericho, New York

August 21, 2018

 

 

TSR INC. AND SUBSIDIARIES

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

The Company’s shares of Common Stock trade on the NASDAQ Capital Market under the symbol TSRI. The following are the high and low sales prices for each quarter during the fiscal years ended May 31, 2018 and 2017:

 

June 1, 2017 – May 31, 2018

 

		1st Quarter				2nd Quarter				3rd Quarter				4th Quarter
High Sales Price		$	11.10			$	7.45			$	8.41			$	6.64
Low Sales Price			4.05				3.80				4.75				4.95

 

June 1, 2016 – May 31, 2017

 

		1st Quarter				2nd Quarter				3rd Quarter				4th Quarter
High Sales Price		$	6.80			$	9.50			$	6.70			$	8.00
Low Sales Price			3.42				4.70				4.80				4.34

 

There were 54 holders of record of the Company’s Common Stock as of June 30, 2018. Additionally, the Company estimates that there were approximately 785 beneficial holders as of that date. On May 25, 2017, the Company declared a special cash dividend of $1.00 per common share payable on July 14, 2017 to stockholders of record on June 16, 2017. The Company has no current plans to implement a quarterly dividend program or pay any other special cash dividend.

 

There are no securities authorized for issuance under any equity compensation plans.