Attached files
file | filename |
---|---|
EX-31.2 - CERTIFICATION - TSR INC | f10k2017ex31ii_tsrinc.htm |
EX-32.2 - CERTIFICATION - TSR INC | f10k2017ex32ii_tsrinc.htm |
EX-32.1 - CERTIFICATION - TSR INC | f10k2017ex32i_tsrinc.htm |
EX-31.1 - CERTIFICATION - TSR INC | f10k2017ex31i_tsrinc.htm |
EX-21 - LIST OF SUBSIDIARIES - TSR INC | f10k2017ex21_tsrinc.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended May 31, 2017
or
☐ Transition Report Under 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)
Registrant’s telephone number: 631-231-0333
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, par value, $0.01 per share | The NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange Act. ☐ Yes ☒ No
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 Regulations 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.
☐ Large accelerated filer | ☐ Accelerated filer | ☐ Non-accelerated filer |
☒ Smaller Reporting Company | ☐ Emerging growth company |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the Registrant is a shell Company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant based upon the closing price of $5.65 at November 30, 2016 was $5,848,000.
The number of shares of the Registrant’s common stock outstanding as of June 30, 2017 was 1,962,062.
Documents incorporated by Reference:
The information required in Part III, Items 10, 11, 12, 13 and 14 is incorporated by reference to the Registrant’s Proxy Statement in connection with the 2017 Annual Meeting of Stockholders, which will be filed by the Registrant within 120 days after the close of its fiscal year.
TSR, Inc.
Form 10-K
For the Fiscal Year Ended May 31, 2017
Table of Contents
Page 3 |
Item 1. | Business |
General
TSR, Inc. (the “Company”) is primarily 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. The Company’s customers for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets. In the year ended May 31, 2017, the Company provided IT staffing services to 64 customers. Beginning in the year ended May 31, 2017, the Company also provided contract administrative (non-IT) workers to two of its significant IT customers.
The Company was incorporated in Delaware in 1969. The Company’s executive offices are located at 400 Oser Avenue, Suite 150, Hauppauge, NY 11788, and its telephone number is (631) 231-0333. This annual report, and each of our other periodic and current reports, including any amendments, are available, free of charge, on our website, www.tsrconsulting.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The information contained on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report.
STAFFING SERVICES
The Company’s contract computer programming services involve the provision of technical staff to customers to meet the specialized requirements of their IT operations. The technical personnel provided by the Company generally supplement the in-house capabilities of the Company’s customers. The Company’s approach is to make available to its customers a broad range of technical personnel to meet their requirements rather than focusing on specific specialized areas. The Company has staffing capabilities in the areas of application development in .net and java, mobile applications for android and IOS platforms, project management, IT security specialists, cloud development and architecture, business analysts, UI design and development, network infrastructure and support and database development and administration. The Company’s services provide customers with flexibility in staffing their day-to-day operations, as well as special projects, on a short-term or long-term basis.
The Company provides technical employees for projects, which usually range from three months to one year. Generally, customers may terminate projects at any time. Staffing services are provided at the client’s facility and are billed primarily on an hourly basis based on the actual hours worked by technical personnel provided by the Company and with reimbursement for out-of-pocket expenses. The Company pays its technical personnel on a semi-monthly basis and invoices its customers, not less frequently than monthly.
The Company’s success is dependent upon, among other things, its ability to attract and retain qualified professional computer personnel. The Company believes that there is significant competition for software professionals with the skills and experience necessary to perform the services offered by the Company. Although the Company generally has been successful in attracting employees with the skills needed to fulfill customer engagements, demand for qualified professionals conversant with certain technologies may outstrip supply as new and additional skills are required to keep pace with evolving computer technology or as competition for technical personnel increases. Increasing demand for qualified personnel could also result in increased expenses to hire and retain qualified technical personnel and could adversely affect the Company’s profit margins.
In the past several years, an increasing number of companies are using or are considering using low cost offshore outsourcing centers, particularly in India, to perform technology related work and projects. This trend has contributed to an industry wide decline in domestic IT staffing revenue. There can be no assurance that this trend will not continue to adversely impact the Company’s IT staffing revenue.
Beginning in the year ended May 31, 2017, the Company also provided contract administrative (non-IT) workers to two of its significant IT customers. This service was added at the customers’ request. The recruiting for these positions is less demanding and the Company has hired a separate recruiting staff to handle this business, which includes both-in house and off-shore recruiters. There can be no assurance that the customers will continue to request these services. The Company has no plans to attempt to expand this aspect of its business beyond its existing customers.
Page 4 |
OPERATIONS
The Company provides contract computer programming services primarily in the New York metropolitan area, New England, and the Mid-Atlantic region, although there are also customer locations around the country where the Company places contractors. The Company provides its services principally through offices located in New York, New York, Edison, New Jersey and Long Island, New York. The Company does not currently intend to open additional offices. Competition from larger competitors for recruiters has created more turnover than expected and increased the cost of retaining recruiters, making it more difficult to increase the number of technical recruiters on staff. As of May 31, 2017, the Company employed 22 persons who are responsible for recruiting technical personnel and 13 persons who are account executives. There were an additional 3 recruiting positions open at May 31, 2017 due to turnover near the fiscal year end. As of May 31, 2016, the Company had employed 23 technical personnel recruiters and 13 account executives. Although the number of technical recruiters and account executives has remained substantially the same in fiscal 2017 and fiscal 2016, there have been several personnel changes within each group.
MARKETING AND CUSTOMERS
The Company focuses its marketing efforts on large businesses and institutions with significant IT budgets and recurring staffing and software development needs. The Company provided services to 64 customers during the year ended May 31, 2017 as compared to 77 in the prior fiscal year. The reduction in customers did not include any significant accounts. The Company has historically derived a significant percentage of its total revenue from a relatively small number of customers. In the fiscal year ended May 31, 2017, the Company had three customers which each provided more than 10% of consolidated revenues: Citigroup (19.4%), Pontoon, formerly Beeline (12.9%), and Consolidated Edison (12.6%). Pontoon provides vendor management services under an arrangement where the Company enters into a subcontract with Pontoon and Pontoon directly contracts with six end customers. The Pontoon end customers for which the Company provides services include Bristol Myers Squibb, which alone constituted 8.7% of the Company’s consolidated revenue for the year ended May 31, 2017. Additionally, the Company’s top ten customers (including end customers of vendor management companies) accounted for 82% of consolidated revenue in fiscal 2017 and fiscal 2016. While continuing its efforts to further expand its client base, the Company’s marketing efforts are focused primarily on increasing business from its existing accounts. Approximately 33% of the Company’s revenue is derived from end customers in the financial services business. Continuing economic pressures in financial services have negatively affected the net effective rates that the Company charges to certain of the Company’s end customers in this industry, which has negatively affected the Company’s gross profit margins.
Many of the Company’s major customers, totaling over 33% of revenue, have retained a third party to provide vendor management services and centralize the consultant hiring process. Under this system, the third party retains the Company to provide contract computer programming services, the Company bills the third party and the third party bills the ultimate customer. This process has weakened the relationships the Company has built with its customers’ project managers, who are the Company’s primary contacts with its customers and with whom the Company would normally work to place consultants. Instead, the Company is required to interface with the vendor management provider, making it more difficult to maintain its relationships with its customers and preserve and expand its business. These changes have also reduced the Company’s profit margins because the vendor management company is retained for the purpose of keeping costs down for the end client and receives a processing fee which is deducted from the payment to the Company.
In accordance with industry practice, most of the Company’s contracts for contract computer programming services are terminable by either the client or the Company on short notice. The Company does not believe that backlog is material to its business.
PROFESSIONAL STAFF AND RECRUITMENT
In addition to using internet based job boards such as Dice, Monster and Discover.org, the Company maintains a database of technical personnel with a wide range of skills. The Company uses a sophisticated proprietary computer system to match potential employees’ skills and experience with client requirements. The Company periodically contacts personnel within its database to update their availability, skills, employment interests and other matters and continually updates its database. This database is made available to the account executives and recruiters at each of the Company’s offices.
The Company employs technical personnel primarily on an hourly basis, as required in order to meet the staffing requirements under particular contracts or for particular projects. The Company primarily recruits technical personnel by posting jobs on the Internet and, on occasion, by publishing advertisements in local newspapers and attending job fairs. The Company devotes significant resources to recruiting technical personnel, maintaining 22 recruiters based in the U.S., additionally contracting with an India based company for 4 recruiters in India to help locate U.S. based technical consultants and contracting for 3 recruiters in the Philippines to assist in locating administrative (non-IT) workers. Potential applicants are generally interviewed and tested by the Company’s recruiting personnel, by third parties that have the required technical backgrounds to review the qualifications of the applicants, or by on-line testing services. In some cases, instead of employing technical personnel directly, the Company uses subcontractors who employ the technical personnel who are provided to the Company’s customers. For a small fee, the Company may sometimes process payments on behalf of customers to contractors identified by the customers directly instead of through the normal recruiting process; this is known as “payrolling”.
Page 5 |
Competition
The technical staffing industry is highly competitive and fragmented and has low barriers to entry. The Company competes for potential customers with providers of outsourcing services, systems integrators, computer systems consultants, other providers of technical staffing services and, to a lesser extent, temporary personnel agencies. Many of the Company’s competitors are significantly larger and have greater financial resources than the Company. The Company believes that the principal competitive factors in obtaining and retaining customers are accurate assessment of customers’ requirements, timely assignment of technical employees with appropriate skills and the price of services. The principal competitive factors in attracting qualified technical personnel are compensation, availability, quality and variety of projects and schedule flexibility. The Company believes that many of the technical personnel included in its database may also be pursuing other employment opportunities. Therefore, the Company believes that its responsiveness to the needs of technical personnel is an important factor in the Company’s ability to fill projects. Although the Company believes it competes favorably with respect to these factors, it expects competition to increase and there can be no assurance that the Company will remain competitive.
Intellectual Property Rights
The Company relies primarily upon a combination of trade secret, nondisclosure and other contractual arrangements to protect its proprietary rights. The Company generally enters into confidentiality agreements with its employees, consultants, customers and potential customers and limits access to and distribution of its proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of its proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights.
Personnel
As of May 31, 2017, the Company employed 428 people including its 3 executive officers. Of such employees, 13 were engaged in sales, 22 were recruiters for programmers, 376 were IT and administrative (non-IT) contractors, and 14 were in corporate administrative and clerical functions. None of the Company’s employees belong to unions.
Item 1A. | Risk Factors |
Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business”, including statements concerning the Company’s 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, which statements involve risks and uncertainties, including but not limited to the factors set forth below.
Dependence Upon Key Personnel
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. The Company is dependent on Christopher Hughes in his corporate positions and as President of TSR Consulting Services, Inc. The Company has an employment agreement with Christopher Hughes which expires May 31, 2022. The Company is also dependent on certain of its account executives who are responsible for servicing its principal customers and attracting new customers. The Company does not have employment contracts with these persons. There can be no assurance that the Company will be able to retain its existing personnel or find and attract additional qualified employees. The loss of the service of any of these personnel could have a material adverse effect on the Company.
Page 6 |
Dependence on Significant Customers
In the fiscal year ended May 31, 2017, the Company’s three largest customers, Citigroup, Pontoon and Consolidated Edison, accounted for 19.4%, 12.9%, and 12.6% of the Company’s consolidated revenue, respectively. Pontoon is a vendor management company through which the Company provides services to six end customers, of which Bristol Myers Squibb is the most significant, representing 8.7% of the Company’s consolidated revenue for fiscal 2017. In total, the Company derives over 33% of its revenue from accounts with vendor management companies. The Company’s ten largest customers provided 82% of consolidated revenue in fiscal 2017. Client contract terms vary depending on the nature of the engagement, and there can be no assurance that a client will renew a contract when it terminates. In addition, the Company’s contracts are generally cancelable by the client at any time on short notice, and customers may unilaterally reduce their use of the Company’s services under such contracts without penalty. Approximately 33% of the Company’s revenue is derived from end customers in the financial services business. Continuing economic pressures in financial services have negatively affected the net effective rates that the Company charges to certain end customers in this industry, which has negatively affected the Company’s gross profit margins. See “Rapidly Changing Industry” below.
The accounts receivable balances associated with the Company’s largest customers were $3,340,000 for three customers at May 31, 2017 and $3,735,000 for four customers at May 31, 2016. Because of the significant amount of outstanding receivables that the Company may have with its larger customers at any one time, if a client, including a vendor management company which then contracts with the ultimate client, filed for bankruptcy protection, it could prevent the Company from collecting on the receivables and have an adverse effect on the Company’s results of operations.
Dependence on Reputation
The Company’s reputation among its customers, potential customers and the staffing services industry depends on the performance of the technical personnel that the Company places with its customers. If the Company’s customers are not satisfied with the services provided by the technical personnel placed by the Company, or if the technical personnel placed by the Company lack the qualifications or experience necessary to perform the services required by the Company’s customers, the Company may not be able to successfully maintain its relationships with its customers or expand its client base.
Competitive Market for Technical Personnel
The Company’s success is dependent upon its ability to attract and retain qualified computer professionals to provide as temporary personnel to its customers. Competition for the limited number of qualified professionals with a working knowledge of certain sophisticated computer languages, which the Company requires for its contract computer services business, is intense. The Company believes that there is a shortage of, and significant competition for, software professionals with the skills and experience necessary to perform the services offered by the Company.
The Company’s ability to maintain and renew existing engagements and obtain new business in its contract computer programming business depends, in large part, on its ability to hire and retain technical personnel with the IT skills that keep pace with continuing changes in software evolution, industry standards and technologies, and client preferences. Although the Company generally has been successful in attracting employees with the skills needed to fulfill customer engagements, demand for qualified professionals conversant with certain technologies may outstrip supply as new and additional skills are required to keep pace with evolving computer technology or as competition for technical personnel increases. Increasing demand for qualified personnel could also result in increased expenses to hire and retain qualified technical personnel and could adversely affect the Company’s profit margins.
Competitive Market for Account Executives and Technical Recruiters
The Company faces a highly competitive market for the limited number of qualified personnel. The competitive market for such personnel could affect the Company’s ability to hire and retain such personnel, and, if the Company is successful in hiring technical recruiters and account executives, there can be no assurance that such hiring will result in increased revenue.
Rapidly Changing Industry
The computer industry is characterized by rapidly changing technology and evolving industry standards. These include the overall increase in the sophistication and interdependency of computer technology and a focus by IT managers on cost-efficient solutions. There can be no assurance that these changes will not adversely affect demand for technical staffing services. Organizations may elect to perform such services in-house or outsource such functions to companies that do not utilize temporary staffing, such as that provided by the Company.
Page 7 |
Additionally, a number of companies have, in recent years, limited the number of vendors on their approved vendor lists, and are continuing to do so. In some cases this has required the Company to subcontract with a company on the approved vendor list to provide services to customers. The staffing industry has also experienced margin erosion caused by this increased competition, and customers leveraging their buying power by consolidating the number of vendors with which they deal. In addition to these factors, there has been intense price competition in the area of IT staffing, pressure on billing rates and pressure by customers for discounts. The Company has endeavored to increase its technical recruiting staff in order to better respond to customers’ increasing demands for both the timeliness and quantities of resume submittals against job requisitions.
The Company cannot predict at this time what long-term effect these changes will have on the Company’s business and results of operations.
Vendor Management Companies
There have been changes in the industry which have affected the Company’s operating results. Many customers have retained third parties to provide vendor management services, and in excess of 33% of the Company’s revenue is derived through vendor management companies. The third party is then responsible for retaining companies to provide temporary IT personnel. This results in the Company contracting with such third parties and not directly with the ultimate customer. This change weakens the Company’s relationship with its customer, which makes it more difficult for the Company to maintain and expand its business with its existing customers. It also reduces the Company’s profit margins.
In addition, the agreements with the vendor management companies are frequently structured as subcontracting agreements, with the vendor management company entering into a services agreement directly with the end customers. As a result, in the event of a bankruptcy of a vendor management company, the Company’s ability to collect its outstanding receivables and continue to provide services could be adversely affected.
Effect of Current Economic Uncertainties and Limited Growth in Company’s Business
Demand for the Company’s IT staffing services has been and is significantly affected by the general economic environment. During periods of slowing economic activity, customers may reduce their IT projects and their demand for outside consultants. Therefore, any significant economic downturn could have a material adverse effect on the Company’s results of operations. As a result of the broad based economic downturn that began in 2008, the Company experienced a decrease in the number of consultants on billing with customers, only recently returning to the early 2008 numbers of consultants on billing with customers. Industry-wide IT spending during the 2017 fiscal year appears to have decreased, particularly among foreign based financial services customers. The Company expects that economic conditions will continue to affect the number of consultants on billing with customers and the Company’s profitability. In addition to the impact of the economic uncertainties, the Company has not been successful in expanding its customer base beyond its core customers. There is no assurance that the Company will achieve growth in its revenue.
Effect of Increases in Payroll-related Costs
The Company is required to pay a number of federal, state and local payroll and related costs, including unemployment insurance, workers’ compensation insurance, employer’s portion of Social Security and Medicare taxes, among others, for our employees, including those placed with customers. Significant increases in the effective rates of any payroll-related costs would likely have a material adverse effect on the Company. Recently, many of the states in which the Company conducts business have significantly increased their state unemployment tax rates in an effort to increase funding for unemployment benefits. Costs could also increase as a result of health care reforms and the imposition of penalties for failure to provide health insurance to employees under the Affordable Care Act which went into effect January 1, 2015. Additionally, the New York City Council has approved a measure which went into effect in April 2014 requiring the Company to provide five paid sick days per year. Several municipalities, such as Newark and Jersey City, New Jersey, have enacted similar statutes. The Company has not been able to sufficiently increase the fees charged to its customers to cover these mandated cost increases. There are also proposals on the federal and state levels to phase in paid or partially paid family leave. It is too early to determine how this will affect the Company’s profitability. New York State recently passed a paid family leave law effective January 1, 2018 that is not expected to increase employer costs.
Page 8 |
Effect of Offshore Outsourcing
The current trend of companies moving technology jobs and projects offshore has caused and could continue to cause revenue to decline. In the past few years, more companies are using or are considering using low cost offshore outsourcing centers, particularly in India and other East Asian countries, to perform technology related work and projects. This trend has contributed to the decline in domestic IT staffing revenue for the industry. There can be no assurance that this trend will not continue to adversely impact the Company’s IT staffing revenue.
Effect of Immigration Restrictions
The Company obtains many of its technical personnel by subcontracting with companies that utilize foreign nationals entering the U.S. on work visas, primarily under the H-1B visa classification. The Company also sponsors foreign nationals on H-1B visas on a limited basis. The H-1B visa classification enables U.S. employers to hire qualified foreign nationals in positions that require an education at least equal to a bachelor’s degree. U.S. Immigration laws and regulations are subject to legislative and administrative changes, as well as changes in the application of standards and enforcement. Current and future restrictions on the availability of such visas could restrain the Company’s ability to acquire the skilled professionals needed to meet our customers’ requirements, which could have a material adverse effect on our business. The scope and impact of these changes on the staffing industry and the Company remain unclear, however a narrow interpretation and vigorous enforcement could adversely affect the ability of entities with which the Company subcontracts to utilize foreign nationals and/or renew existing foreign national consultants on assignment. There can be no assurance that the Company or its subcontractors will be able to keep or replace all foreign nationals currently on assignment, or continue to acquire foreign national talent at the same rates as in the past.
Fluctuations in Quarterly Operating Results
The Company’s revenue and operating results are subject to significant variations from quarter to quarter. Revenue is subject to fluctuation based upon a number of factors, including the timing and number of client projects commenced and completed during the quarter, delays incurred in connection with projects, the growth rate of the market for contract computer programming services and general economic conditions. Unanticipated termination of a project or the decision by a client not to proceed to the next stage of a project anticipated by the Company could result in decreased revenue and lower utilization rates which could have a material adverse effect on the Company’s business, operating results and financial condition. Compensation levels can be impacted by a variety of factors, including competition for highly skilled employees and inflation.
The Company’s operating results also fluctuate due to seasonality. Typically, our billable hours, which directly affect our revenue and profitability, decrease in our third fiscal quarter. The holiday season and winter weather cause the number of billable work days for consultants on billing with customers to decrease. Additionally, at the beginning of the calendar year, which also falls within our third fiscal quarter, payroll taxes are at their highest. This results in our lowest gross margins of the year. The Company’s operating results are also subject to fluctuation as a result of other factors.
Competition
The technical staffing industry is highly competitive and fragmented and has low barriers to entry. The Company competes for potential customers with providers of outsourcing services, systems integrators, computer systems consultants, other providers of technical staffing services and, to a lesser extent, temporary personnel agencies. The Company competes for technical personnel with other providers of technical staffing services, systems integrators, providers of outsourcing services, computer systems consultants, customers and temporary personnel agencies. Many of the Company’s competitors are significantly larger and have greater financial resources than the Company. The Company believes that the principal competitive factors in obtaining and retaining customers are accurate assessment of customers’ requirements, timely assignment of technical employees with appropriate skills and the price of services. The principal competitive factors in attracting qualified technical personnel are compensation, availability, quality and variety of projects and schedule flexibility. The Company believes that many of the technical personnel included in its database may also be pursuing other employment opportunities. Therefore, the Company believes that its responsiveness to the needs of technical personnel is an important factor in the Company’s ability to fill projects. Although the Company believes it competes favorably with respect to these factors, it expects competition to increase, and there can be no assurance that the Company will remain competitive.
Page 9 |
Potential for Contract and Other Liability
The personnel provided by the Company to customers provide services involving key aspects of its customers’ software applications. A failure in providing these services could result in a claim for substantial damages against the Company, regardless of the Company’s responsibility for such failure. The Company attempts to limit, contractually, its liability for damages arising from negligence or omissions in rendering services, but it is not always successful in negotiating such limits. Furthermore, due to increased competition and the requirements of vendor management companies, the Company may be required to accept less favorable terms regarding limitations on liability, including assuming obligations to indemnify customers for damages sustained in connection with the provision of our services. There can be no assurance our contracts will include the desired limitations of liability or that the limitations of liability set forth in our contracts would be enforceable or would otherwise protect the Company from liability for damages.
The Company’s business involves assigning personnel to the workplace of the client, typically under the client’s supervision. Although the Company has little control over the client’s workplace, the Company may be exposed to claims of discrimination and harassment and other similar claims as a result of inappropriate actions allegedly taken against the Company’s personnel by customers. As an employer, the Company is also exposed to other possible employment-related claims. The Company is exposed to liability with respect to actions taken by its technical personnel while on a project, such as damages caused by technical personnel errors, misuse of client proprietary information or theft of client property. To reduce these exposures, the Company maintains insurance policies and a fidelity bond covering general liability, worker’s compensation claims, errors and omissions and employee theft. In certain instances, the Company indemnifies its customers for these exposures. Certain of these costs and liabilities are not covered by insurance. There can be no assurance that insurance coverage will continue to be available and at its current price or that it will be adequate to, or will, cover any such liability.
Data Security
Our ability to protect client, employee, and Company data and information is critical to our reputation and the success of our business. Our clients and employees expect that their confidential, personal and private information will be secure in our possession. Attacks against security systems have become increasingly sophisticated along with developments in technology, and such attacks have become more prevalent. Consequently, the regulatory environment surrounding cybersecurity and privacy has become more and more demanding and has resulted in new requirements and increasingly demanding standards for protection of information. As a result, the Company may incur increased expenses associated with adequately protecting confidential client, employee, and Company data and complying with applicable regulatory requirements. There can be no assurance that we will be able to prevent unauthorized third parties from breaching our systems and gaining unauthorized access to confidential client, employee, and Company data even if our cybersecurity measures are compliant with regulatory requirements and standards. Unauthorized third party access to confidential client, employee, and Company data stored in our system whether as a result of a third party system breach, systems failure or employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose customers, and could subject us to monetary damages, fines and/or criminal prosecution. Furthermore, unauthorized third party access to or through our information systems or those we develop for our customers, whether by our employees or third parties, could result in system disruptions, negative publicity, legal liability, monetary damages, and damage to our reputation.
Intellectual Property Rights
The Company relies primarily upon a combination of trade secret, nondisclosure and other contractual agreements to protect its proprietary rights. The Company generally enters into confidentiality agreements with its employees, consultants, customers and potential customers and limits access to and distribution of its proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of its proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights.
Voting Power of Major Stockholder
Joseph F. Hughes, the former Chairman, Chief Executive Officer, President and Treasurer of the Company, and members of his family own Common Stock representing approximately 46.9% of the Company’s voting power as of June 30, 2017. As such, Joseph F. Hughes has significant voting power on all matters submitted to a vote of the Company’s common stockholders.
Page 10 |
Certain Anti-Takeover Provisions May Inhibit a Change of Control
In addition to the significant ownership of Common Stock by Joseph F. Hughes and his family, certain provisions of the Company’s charter and by-laws may have the effect of discouraging a third party from making an acquisition proposal for the Company and may thereby inhibit a change in control of the Company under circumstances that could give the holders of Common Stock the opportunity to realize a premium over the then-prevailing market prices. Such provisions include a classified Board of Directors and advance notice requirements for nomination of directors and certain stockholder proposals set forth in the Company’s Certificate of Incorporation and by-laws.
New Classes and Series of Stock
The Company’s charter authorizes the Board of Directors to create new classes and series of preferred stock and to establish the preferences and rights of any such classes and series without further action of the stockholders. The issuance of additional classes and series of capital stock may have the effect of delaying, deferring or preventing a change in control of the Company.
The Company’s stock price could be extremely volatile and, as a result, investors may not be able to resell their shares at or above the price they paid for them.
Among the factors that could affect the Company’s stock price are:
- | limited float and a low average daily trading volume; |
- | industry trends and the performance of the Company’s customers; |
- | fluctuations in the Company’s results of operations; |
- | litigation; and |
- | general market conditions. |
The stock market has, and may in the future, experience extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company’s Common Stock.
Item 1B. | Unresolved Staff Comments |
None
Item 2. | Properties |
The Company leases 8,000 square feet of space in Hauppauge, New York for a term expiring December 31, 2020, with annual rentals of approximately $81,000. This space is used as executive and administrative offices for the Company and the Company’s operating subsidiary. The Company also leases sales and technical recruiting offices in New York City (lease expires August 2022) and Edison, New Jersey (lease expires February 2019), with aggregate annual rentals of approximately $148,000 and $143,000, respectively.
The Company believes the present locations are adequate for its current needs as well as for the future expansion of its existing business.
Item 3. | Legal Proceedings |
There are no material legal proceedings.
Item 4. | Mine Safety Disclosures |
Not applicable.
Page 11 |
Item 5. | Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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, 2017 and 2016:
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 | 4.35 |
JUNE 1, 2015 – MAY 31, 2016 | ||||||||||||||||
1ST QUARTER | 2ND QUARTER | 3RD QUARTER | 4TH QUARTER | |||||||||||||
High Sales Price | $ | 4.77 | $ | 4.83 | $ | 5.03 | $ | 4.12 | ||||||||
Low Sales Price | 3.51 | 4.00 | 3.49 | 3.37 |
There were 56 holders of record of the Company’s Common Stock as of June 30, 2017. Additionally, the Company estimates that there were approximately 775 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.
Item 6. | Selected Financial Data |
(Amounts in Thousands, Except Per Share Data)
Years Ended | ||||||||||||||||||||
May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | ||||||||||||||||
Revenue, Net | $ | 62,573 | $ | 60,998 | $ | 57,403 | $ | 49,530 | $ | 44,914 | ||||||||||
Income (Loss) From Operations | 562 | 839 | 432 | 25 | (716 | ) | ||||||||||||||
Net Income (Loss) Attributable to TSR, Inc. | 268 | 399 | 193 | (86 | ) | (520 | ) | |||||||||||||
Basic Net Income (Loss) Per TSR, Inc. Common Share | 0.14 | 0.20 | 0.10 | (0.04 | ) | (0.26 | ) | |||||||||||||
Working Capital | 7,689 | 9,391 | 8,986 | 8,706 | 8,717 | |||||||||||||||
Total Assets | 14,535 | 14,090 | 14,051 | 13,563 | 13,619 | |||||||||||||||
Total TSR, Inc. Equity | 7,738 | 9,432 | 9,033 | 8,840 | 8,926 | |||||||||||||||
Book Value Per TSR, Inc. Common Share (Total TSR Equity Divided by Common Shares Outstanding) | 3.94 | 4.81 | 4.60 | 4.51 | 4.55 | |||||||||||||||
Cash Dividends Declared Per TSR, Inc. Common Share | $ | 1.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 1.50 |
Page 12 |
Item 7. | 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 net 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) | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Amount | % of Revenue | Amount | % of Revenue | |||||||||||||
Revenue, Net | $ | 62,573 | 100.0 | % | $ | 60,998 | 100.0 | % | ||||||||
Cost of Sales | 52,327 | 83.6 | 51,039 | 83.7 | ||||||||||||
Gross Profit | 10,246 | 16.4 | 9,959 | 16.3 | ||||||||||||
Selling, General and Administrative Expenses | 9,684 | 15.5 | 9,120 | 14.9 | ||||||||||||
Income from Operations | 562 | 0.9 | 839 | 1.4 | ||||||||||||
Other Income, Net | 15 | 0.0 | 6 | 0.0 | ||||||||||||
Income Before Income Taxes | 577 | 0.9 | 845 | 1.4 | ||||||||||||
Provision for Income Taxes | 263 | 0.4 | 389 | 0.6 | ||||||||||||
Consolidated Net Income | 314 | 0.5 | 456 | 0.8 | ||||||||||||
Net Income Attributable to Noncontrolling Interest | 46 | 0.1 | 57 | 0.1 | ||||||||||||
Net Income Attributable to TSR, Inc. | $ | 268 | 0.4 | % | $ | 399 | 0.7 | % |
Revenue
Revenue consists primarily of revenue from computer programming consulting services. Revenue for the fiscal year ended May 31, 2017 increased $1,575,000 or 2.6% from fiscal 2016. The overall average number of consultants on billing with customers increased from 350 for the fiscal ended May 31, 2016 to 379 for the fiscal year ended May 31, 2017, while the average number of computer programming consultants decreased from 350 for the fiscal year ended May 31, 2016 to 328 in the fiscal year ended May 31, 2017. The 379 consultants on billing for the current period include 51 administrative (non-IT) workers that the Company placed with two large customers at the customers’ requests at billing rates 67.6% lower than those charged for computer programming consultants. The Company did not make any placements of administrative (non-IT) workers in the prior fiscal year. 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 fiscal year ended May 31, 2017 increased $1,288,000 or 2.5% to $52,327,000 from $51,039,000 in the prior fiscal year. The increase in cost of sales resulted primarily from an increase in consultants placed with customers. The placement of lower paid administrative (non-IT) workers at two major customers offset the reduction in the average number of computer programming consultants placed with customers. Cost of sales as a percentage of revenue decreased from 83.7% in the fiscal year ended May 31, 2016 to 83.6% in the fiscal year ended May 31, 2017. The decrease in cost of sales as a percentage of revenue was primarily attributable to the placement of administrative (non-IT) workers at higher average markups than the Company’s computer programming consultants. However, because their pay rates averaged 71.1% 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.
Page 13 |
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 $564,000 or 6.2% from $9,120,000 in the fiscal year ended May 31, 2016 to $9,684,000 in the fiscal year ended May 31, 2017. This increase was primarily attributable to an increase in the cost of in-house recruiters, amounts paid for offshore recruiting services to support the hiring of contract administrative (non-IT) workers and professional fees. Selling, general and administrative expenses, as a percentage of revenue, increased from 14.9% in the fiscal year ended May 31, 2016 to 15.5% in the fiscal year ended May 31, 2017 as a result of the additional expenses not yielding sufficient additional revenue.
Other Income
Other income for the fiscal year ended May 31, 2017 resulted primarily from interest and dividend income of $11,000 and a mark to market gain of approximately $4,000 on the Company’s marketable equity securities. Other income for the fiscal year ended May 31, 2016 resulted primarily from interest and dividend income of $9,000 decreased by a mark to market loss of approximately $3,000 on the Company’s marketable equity securities.
Income Taxes
The effective income tax rates were 45.6% for the fiscal year ended May 31, 2017 and 46.0% for the fiscal year ended May 31, 2016. State income taxes were slightly lower in fiscal year 2017 as compared with fiscal year 2016.
Net Income Attributable to TSR, Inc.
Net income attributable to TSR, Inc. decreased $131,000 from $399,000 in the fiscal year ended May 31, 2016 to net income of $268,000 in the fiscal year ended May 31, 2017. This decrease in net income was primarily attributable to the increase in selling, general and administrative expenses outpacing the increase in gross profit generated by the revenue increase.
Page 14 |
Liquidity, Capital Resources and Changes in Financial Condition
The Company expects that its available cash, certificates of deposit and marketable securities will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for the 12 month period following the date of these financial statements.
At May 31, 2017, the Company had working capital (total current assets in excess of total current liabilities) of $7,689,000 including cash and cash equivalents and certificates of deposit and marketable securities of $6,745,000 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. The decrease in working capital is primarily attributable to the special cash dividend of $1.00 per share declared on May 25, 2017 and payable on July 14, 2017 to shareholders of record on June 16, 2017. There were 1,962,062 shares of the Company’s Common Stock outstanding on the record date, June 16, 2017.
Net cash flow of $750,000 was provided by operations during fiscal 2017 as compared to $1,228,000 of net cash flow provided by operations in fiscal 2016. The cash provided by operations for fiscal 2017 primarily resulted from consolidated net income of $314,000, a decrease in accounts receivable of $379,000 and an increase in accounts and other payables and accrued and other liabilities of $125,000, offset, to some extent, by an increase in prepaid expenses of $77,000 and an increase in prepaid and recoverable income taxes of $95,000. The cash provided by operations for fiscal 2016 primarily resulted from consolidated net income of $456,000 and a decrease in accounts receivable of $1,036,000, offset, to some extent, by a decrease in accounts and other payables and accrued and other liabilities of $155,000 and a decrease in advances from customers of $186,000. The decrease in accounts receivable primarily resulted from a greater number of clients instituting prompt payment discounts.
Net cash provided by investing activities amounted to $523,000 for fiscal 2017, compared to $296,000 in net cash used in investing activities in fiscal 2016. The cash provided by investing activities in 2017 primarily resulted from maturing certificates of deposit, a portion of which were not rolled over. The net cash used in investing activities for fiscal 2016 primarily resulted from investing in additional certificates of deposit.
Net cash used in financing activities of $64,000 and $88,000 during the fiscal years ended May 31, 2017 and 2016, respectively, resulted from distributions to the holder of the noncontrolling interest in the Company’s subsidiary, Logixtech Solutions, LLC.
The Company’s capital resource commitments at May 31, 2017 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from cash flow provided by operations, available cash and short-term marketable securities.
The Company’s cash and marketable securities were sufficient to enable it to meet its liquidity requirements during fiscal 2017.
Page 15 |
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 this 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 will adopt this guidance in the first quarter of fiscal 2018. The Company’s deferred tax assets and liabilities will all be classified as noncurrent.
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.
Page 16 |
Critical Accounting Policies
The SEC defines “critical accounting policies” as those that require the application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The Company’s significant accounting policies are described in Note 1 to its consolidated financial statements, contained elsewhere in this report. The Company believes that the following accounting policies require the application of management’s most difficult, subjective or complex judgments:
Estimating Allowances for Doubtful Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based on our historical experience, customer types, creditworthiness, economic trends and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers, or in their willingness to pay, could have a material adverse effect on the collectibility of our accounts receivable and our future operating results.
Valuation of Marketable Securities
The Company classifies its marketable securities at acquisition as either (i) held-to-maturity, (ii) trading or (iii) available-for-sale. Based upon the Company’s intent and ability to hold its certificates of deposit to maturity (which maturities range up to 12 months), such securities have been classified as held-to-maturity and are carried at amortized cost, which approximates fair value. The Company’s equity securities are classified as trading securities, which are carried at fair value, as determined by quoted market price, which is Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred income tax assets considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse. Presently, 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. In the event that actual results differ from our estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance against a portion or all of our deferred tax assets, which could materially impact our financial position or results of operations.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The Company is a smaller reporting company and is therefore not required to provide this information.
Page 17 |
Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
Page 18 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
TSR, Inc.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of TSR, Inc. and Subsidiaries as of May 31, 2017 and 2016, and the related consolidated statements of income, equity, and cash flows for the years then ended. TSR, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TSR, Inc. and Subsidiaries as of May 31, 2017 and 2016 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ CohnReznick LLP
Jericho, New York
August 15, 2017
Page 19 |
CONSOLIDATED BALANCE SHEETS
May 31, 2017 and 2016
ASSETS
2017 | 2016 | |||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 5,723,976 | $ | 4,514,157 | ||||
Certificates of deposit and marketable securities | 1,020,888 | 1,553,272 | ||||||
Accounts receivable: | ||||||||
Trade, net of allowance for doubtful accounts of $185,000 in 2017 and 2016 | 7,324,291 | 7,703,680 | ||||||
Other | 18,455 | 10,853 | ||||||
7,342,746 | 7,714,533 | |||||||
Prepaid expenses | 176,397 | 99,069 | ||||||
Prepaid and recoverable income taxes | 94,833 | - | ||||||
Deferred income taxes | 106,000 | 128,000 | ||||||
Total Current Assets | 14,464,840 | 14,009,031 | ||||||
Equipment and leasehold improvements, at cost: | ||||||||
Equipment | 98,889 | 99,244 | ||||||
Furniture and fixtures | 111,107 | 111,107 | ||||||
Automobiles | 19,665 | 19,665 | ||||||
Leasehold improvements | 60,058 | 60,058 | ||||||
289,719 | 290,074 | |||||||
Less accumulated depreciation and amortization | 269,069 | 262,076 | ||||||
20,650 | 27,998 | |||||||
Other assets | 49,653 | 49,653 | ||||||
Deferred income taxes | - | 3,000 | ||||||
Total Assets | $ | 14,535,143 | $ | 14,089,682 |
See accompanying notes to consolidated financial statements.
Page 20 |
TSR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 2017 and 2016
LIABILITIES AND EQUITY
2017 | 2016 | |||||||
Current Liabilities: | ||||||||
Accounts and other payables | $ | 644,834 | $ | 723,705 | ||||
Accrued expenses and other current liabilities: | ||||||||
Salaries, wages and commissions | 2,699,686 | 2,481,436 | ||||||
Other | 138,372 | 152,674 | ||||||
2,838,058 | 2,634,110 | |||||||
Income taxes payable | - | 14,810 | ||||||
Dividends payable | 1,962,062 | - | ||||||
Advances from customers | 1,330,714 | 1,245,563 | ||||||
Total Liabilities | 6,775,668 | 4,618,188 | ||||||
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 | 16,118,011 | 17,811,884 | ||||||
21,252,021 | 22,945,894 | |||||||
Less: treasury stock, 1,152,101 shares, at cost | 13,514,003 | 13,514,003 | ||||||
Total TSR, Inc. Equity | 7,738,018 | 9,431,891 | ||||||
Noncontrolling Interest | 21,457 | 39,603 | ||||||
Total Equity | 7,759,475 | 9,471,494 | ||||||
Total Liabilities and Equity | $ | 14,535,143 | $ | 14,089,682 |
See accompanying notes to consolidated financial statements.
Page 21 |
CONSOLIDATED STATEMENTS OF INCOME
Years Ended May 31, 2017 and 2016
2017 | 2016 | |||||||
Revenue, net | $ | 62,572,585 | $ | 60,998,281 | ||||
Cost of sales | 52,326,521 | 51,038,879 | ||||||
Selling, general and administrative expenses | 9,683,601 | 9,120,526 | ||||||
62,010,122 | 60,159,405 | |||||||
Income from operations | 562,463 | 838,876 | ||||||
Other income: | ||||||||
Interest and dividend income | 10,888 | 8,621 | ||||||
Unrealized gain (loss) from marketable securities, net | 3,616 | (2,296 | ) | |||||
14,504 | 6,325 | |||||||
Income before income taxes | 576,967 | 845,201 | ||||||
Provision for income taxes | 263,000 | 389,000 | ||||||
Consolidated net income | 313,967 | 456,201 | ||||||
Less: Net income attributable to noncontrolling interest | 45,778 | 56,975 | ||||||
Net income attributable to TSR, Inc. | $ | 268,189 | $ | 399,226 | ||||
Net income per TSR, Inc. common share | $ | 0.14 | $ | 0.20 | ||||
Weighted average number of common shares outstanding | 1,962,062 | 1,962,062 |
See accompanying notes to consolidated financial statements.
Page 22 |
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended May 31, 2017 and 2016
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, 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 | - | - | - | - | - | - | 56,975 | 56,975 | ||||||||||||||||||||||||
Distribution to noncontrolling interest | - | - | - | - | - | - | (87,641 | ) | (87,641 | ) | ||||||||||||||||||||||
Net income attributable to TSR, Inc. | - | - | - | 399,226 | - | 399,226 | - | 399,226 | ||||||||||||||||||||||||
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 | - | - | - | - | - | - | 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 |
See accompanying notes to consolidated financial statements.
Page 23 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 31, 2017 and 2016
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Consolidated net income | $ | 313,967 | $ | 456,201 | ||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 19,976 | 22,765 | ||||||
Provision for bad debts | - | 15,000 | ||||||
Unrealized (gain) loss from marketable securities, net | (3,616 | ) | 2,296 | |||||
Deferred income taxes | 25,000 | 17,000 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable-trade | 379,389 | 1,036,104 | ||||||
Other receivables | (7,602 | ) | (8,395 | ) | ||||
Prepaid expenses | (77,328 | ) | 17,027 | |||||
Prepaid and recoverable income taxes | (94,833 | ) | - | |||||
Accounts and other payables and accrued expenses and other current liabilities | 125,077 | (155,132 | ) | |||||
Income taxes payable | (14,810 | ) | 10,933 | |||||
Advances from customers | 85,151 | (185,959 | ) | |||||
Net cash provided by operating activities | 750,371 | 1,227,840 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities of marketable securities | 2,523,000 | 1,762,000 | ||||||
Purchases of marketable securities | (1,987,000 | ) | (2,046,000 | ) | ||||
Purchases of equipment and leasehold improvements | (12,628 | ) | (11,832 | ) | ||||
Net cash provided by (used in) investing activities | 523,372 | (295,832 | ) | |||||
Cash flows from financing activities: | ||||||||
Distributions to noncontrolling interest | (63,924 | ) | (87,641 | ) | ||||
Net cash used in financing activities | (63,924 | ) | (87,641 | ) | ||||
Net increase in cash and cash equivalents | 1,209,819 | 844,367 | ||||||
Cash and cash equivalents at beginning of year | 4,514,157 | 3,669,790 | ||||||
Cash and cash equivalents at end of year | $ | 5,723,976 | $ | 4,514,157 | ||||
Supplemental disclosures of cash flow data: | ||||||||
Income taxes paid | $ | 348,000 | $ | 361,000 | ||||
Non-cash: | ||||||||
Dividends declared and payable | $ | 1,962,000 | $ | - |
See accompanying notes to consolidated financial statements.
Page 24 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2017 and 2016
(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 provided administrative (non-IT) workers on a contract basis to two of its existing customers. 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. In fiscal 2016, four customers each accounted for more than 10% of the Company’s consolidated revenue, constituting a combined 55.0%. The largest of these constituted 17.7% of consolidated revenue. The accounts receivable balances associated with the Company’s largest customers were $3,340,000 for three customers at May 31, 2017 and $3,735,000 for four customers at May 31, 2016. 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 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 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, 2017 and 2016:
2017 | 2016 | ||||||||
Cash in banks | $ | 4,634,245 | $ | 3,974,007 | |||||
Money market funds | 840,731 | 540,150 | |||||||
Certificates of deposit | 249,000 | - | |||||||
$ | 5,723,976 | $ | 4,514,157 |
(Continued)
Page 25 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2017 and 2016
(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. |
The following are the major categories of assets measured at fair value on a recurring basis as of May 31, 2017 and 2016 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
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 | ||||||||||
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 May 31, 2017 and 2016 are summarized as follows:
(Continued)
Page 26 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2017 and 2016
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 | ||||||||||
May 31, 2016 | |||||||||||||||||
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.
(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 collectability.
(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 |
(Continued)
Page 27 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2017 and 2016
(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, 2017 or 2016.
(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 will adopt this guidance in the first quarter of fiscal 2018. The Company’s deferred tax assets and liabilities will all be classified as noncurrent.
(Continued)
Page 28 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2017 and 2016
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.
(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 47 accounts with open balances as of May 31, 2017. As a percentage of revenue, the three largest customers among these 47 accounts consisted of 45.6% of the net accounts receivable balance at May 31, 2017.
(Continued)
Page 29 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2017 and 2016
(2) | Income Taxes |
A reconciliation of the provision for income taxes computed at the Federal statutory rates for fiscal 2017 and 2016 to the reported amounts is as follows:
2017 | 2016 | ||||||||||||||||
Amount | % | Amount | % | ||||||||||||||
Amounts at statutory Federal tax rate | $ | 196,000 | 34.0 | % | $ | 287,000 | 34.0 | % | |||||||||
Noncontrolling interest | (16,000 | ) | (2.8 | ) | (19,000 | ) | (2.3 | ) | |||||||||
State and local taxes, net of Federal income tax effect. | 56,000 | 9.7 | 88,000 | 10.4 | |||||||||||||
Non-deductible expenses and other | 27,000 | 4.7 | 33,000 | 3.9 | |||||||||||||
$ | 263,000 | 45.6 | % | $ | 389,000 | 46.0 | % |
The components of the provision for income taxes are as follows:
Federal | State | Total | |||||||||||
2017: Current | $ | 170,000 | $ | 68,000 | $ | 238,000 | |||||||
Deferred | 8,000 | 17,000 | 25,000 | ||||||||||
$ | 178,000 | $ | 85,000 | $ | 263,000 | ||||||||
2016: Current | $ | 253,000 | $ | 119,000 | $ | 372,000 | |||||||
Deferred | 3,000 | 14,000 | 17,000 | ||||||||||
$ | 256,000 | $ | 133,000 | $ | 389,000 |
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets at May 31, 2017 and 2016 are as follows:
2017 | 2016 | ||||||||
Allowance for doubtful accounts receivable | $ | 75,000 | $ | 78,000 | |||||
Accrued compensation and other accrued expenses | 38,000 | 50,000 | |||||||
Net operating loss carryforward | - | 10,000 | |||||||
Equipment and leasehold improvement depreciation and amortization | (4,000 | ) | (6,000 | ) | |||||
Acquired client relationships | 2,000 | 2,000 | |||||||
Unrealized gain | (5,000 | ) | (3,000 | ) | |||||
Total deferred income tax assets | $ | 106,000 | $ | 131,000 |
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.
(Continued)
Page 30 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2017 and 2016
The Company has no unrecognized tax benefits at May 31, 2017 and 2016. The Company’s Federal and state income tax returns prior to fiscal year 2014 are closed.
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.
(3) | Commitments and Contingencies |
A summary of noncancellable long-term operating lease commitments for facilities as of May 31, 2017 follows:
Fiscal Year | Amount | ||||
2018 | $ | 372,000 | |||
2019 | 342,000 | ||||
2020 | 241,000 | ||||
2021 | 209,000 | ||||
2022 | 161,000 | ||||
thereafter | 41,000 | ||||
Total | $ | 1,366,000 |
Total rent expenses under all lease agreements amounted to $372,000 and $379,000 in fiscal 2017 and 2016, 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 $2,500,000 at May 31, 2017.
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.
(4) | Stockholders’ 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.
During the years ended May 31, 2017 and 2016, the Company did not purchase any of its common stock on the open market under the previously announced plan. As of April 7, 2016, the previously announced plan was terminated with 56,318 shares remaining available for purchase.
(5) | Subsequent Event |
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 of 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.
Page 31 |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
Item 9A. | 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 financial 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 financial 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.
Management’s Report on Internal Control Over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that its internal control over financial reporting was effective as of May 31, 2017.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Item 9B. | Other Information |
None
Page 32 |
Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this Item 10 is incorporated by reference to the Company’s definitive proxy statement in connection with the 2017 Annual Meeting of Stockholders.
Item 11. | Executive Compensation |
The information required by this Item 11 is incorporated by reference to the Company’s definitive proxy statement in connection with the 2017 Annual Meeting of Stockholders.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item 12 is incorporated by reference to the Company’s definitive proxy statement in connection with the 2017 Annual Meeting of Stockholders.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item 13 is incorporated by reference to the Company’s definitive proxy statement in connection with the 2017 Annual Meeting of Stockholders.
Item 14. | Principal Accounting Fees and Services |
The information required by this Item 14 is incorporated by reference to the Company’s definitive proxy statement in connection with the 2017 Annual Meeting of Stockholders.
Item 15. | Exhibits and Financial Statement Schedules |
(a) | The following documents are filed as part of this report: |
1. The consolidated financial statements as indicated in the index set forth on page 18.
Financial Statement Schedules have been omitted, since they are either not applicable, not required or the information is included elsewhere herein.
2. Exhibits as listed in Exhibit Index on page 35.
Page 33 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized.
TSR, INC.
By: | /s/ Christopher Hughes | |
Christopher Hughes, Chairman, Chief Executive Officer, President and Treasurer |
Dated: August 15, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
/s/ Christopher Hughes | |
Christopher Hughes, Chairman, Chief Executive Officer, President and Treasurer |
|
/s/ John G. Sharkey | |
John G. Sharkey, Vice President, Finance and Principal Accounting Officer |
|
/s/ James J. Hill | |
James J. Hill, Director | |
/s/ Raymond A. Roel | |
Raymond A. Roel, Director |
|
/s/ Brian J. Mangan | |
Brian J. Mangan, Director |
|
/s/ Regina Dowd | |
Regina Dowd, Director |
|
Dated: August 15, 2017 |
Page 34 |
TSR, INC. AND SUBSIDIARIES
EXHIBIT INDEX
FORM 10-K, MAY 31, 2017
Page 35