UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended August 31, 2014
☐ Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __ to __
Commission File Number: 0-8656
TSR, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 13-2635899 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
400 Oser Avenue, Hauppauge, NY 11788
(Address of principal executive offices)
631-231-0333
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
| Non-Accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller Reporting Company | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of September 30, 2014, there were 1,962,062 shares of common stock, par value $.01 per share, issued and outstanding.
TSR, INC. AND SUBSIDIARIES
INDEX
| Page
Number | |||
| Part I. Financial Information: | |||
| Item 1. | Financial Statements: | ||
| Condensed
Consolidated Balance Sheets – August 31, 2014 and May 31, 2014 |
3 | ||
| Condensed
Consolidated Statements of Operations – For the three months ended August 31, 2014 and 2013 |
4 | ||
| Condensed
Consolidated Statements of Equity – For the three months ended August 31, 2014 and 2013 |
5 | ||
| Condensed
Consolidated Statements of Cash Flows – For the three months ended August 31, 2014 and 2013 |
6 | ||
| Notes to Condensed Consolidated Financial Statements | 7 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
| Item 4. | Controls and Procedures | 14 | |
| Part II. Other Information | 15 | ||
| Item 6. | Exhibits | 15 | |
| Signatures | 16 | ||
| Part I. | Financial Information |
Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| August 31, 2014 | May 31, 2014 | |||||||
| (UNAUDITED) | (see Note 1) | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 4,210,713 | $ | 2,841,967 | ||||
| Certificates of deposit and marketable securities | 1,518,936 | 1,514,856 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $193,000 | 7,829,021 | 8,790,338 | ||||||
| Other receivables | 6,505 | 9,330 | ||||||
| Prepaid expenses | 37,680 | 74,188 | ||||||
| Prepaid and recoverable income taxes | 38,357 | 32,159 | ||||||
| Deferred income taxes | 86,000 | 86,000 | ||||||
| Total Current Assets | 13,727,212 | 13,348,838 | ||||||
| Equipment and leasehold improvements, net of accumulated depreciation and amortization of $250,291 and $245,482 | 36,627 | 34,095 | ||||||
| Other assets | 49,653 | 49,653 | ||||||
| Deferred income taxes | 106,000 | 130,000 | ||||||
| Total Assets | $ | 13,919,492 | $ | 13,562,586 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts and other payables | $ | 1,284,409 | $ | 929,404 | ||||
| Accrued expenses and other current liabilities | 2,193,744 | 2,221,158 | ||||||
| Advances from customers | 1,476,657 | 1,491,946 | ||||||
| Total Liabilities | 4,954,810 | 4,642,508 | ||||||
| Commitments and contingencies | ||||||||
| Equity: | ||||||||
| TSR, Inc.: | ||||||||
| Preferred stock, $1 par value, authorized 500,000 shares; none issued | - | - | ||||||
| Common stock, $.01 par value, authorized 12,500,000 shares; issued 3,114,163 shares, 1,962,062 outstanding | 31,142 | 31,142 | ||||||
| Additional paid-in capital | 5,102,868 | 5,102,868 | ||||||
| Retained earnings | 17,244,539 | 17,219,947 | ||||||
| 22,378,549 | 22,353,957 | |||||||
| Less: Treasury stock, 1,152,101 shares, at cost | 13,514,003 | 13,514,003 | ||||||
| Total TSR, Inc. Equity | 8,864,546 | 8,839,954 | ||||||
| Noncontrolling Interest | 100,136 | 80,124 | ||||||
| Total Equity | 8,964,682 | 8,920,078 | ||||||
| Total Liabilities and Equity | $ | 13,919,492 | $ | 13,562,586 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 3 |
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended August 31, 2014 and 2013
(UNAUDITED)
| Three Months Ended August 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenue, net | $ | 13,685,813 | $ | 12,086,697 | ||||
| Cost of sales | 11,386,634 | 9,988,849 | ||||||
| Selling, general and administrative expenses | 2,226,412 | 2,039,429 | ||||||
| 13,613,046 | 12,028,278 | |||||||
| Income from operations | 72,767 | 58,419 | ||||||
| Other income (expense): | ||||||||
| Interest and dividend income | 1,654 | 1,704 | ||||||
| Unrealized gain (loss) on marketable securities, net. | 6,080 | (1,840 | ) | |||||
| Income before income taxes | 80,501 | 58,283 | ||||||
| Provision for income taxes | 34,000 | 20,000 | ||||||
| Consolidated net income | 46,501 | 38,283 | ||||||
| Less: Net income attributable to noncontrolling interest | (21,909 | ) | (27,365 | ) | ||||
| Net income attributable to TSR, Inc. | $ | 24,592 | $ | 10,918 | ||||
| Net income per TSR, Inc. common share | $ | 0.01 | $ | 0.01 | ||||
| Weighted average number of common shares outstanding | 1,962,062 | 1,962,062 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 4 |
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For The Three Months Ended August 31, 2014 and 2013
(UNAUDITED)
| Shares
of common stock | Common
stock | Additional
paid-in capital | Retained
earnings | Treasury
stock | TSR,
Inc equity | Non-
controlling Interest | Total
equity | |||||||||||||||||||||||||
| Balance at May 31, 2013 | 3,114,163 | $ | 31,142 | $ | 5,102,868 | $ | 17,305,883 | $ | (13,514,003 | ) | $ | 8,925,890 | $ | 3,447 | $ | 8,929,337 | ||||||||||||||||
| Net income attributable to noncontrolling interest | - | - | - | - | - | - | 27,365 | 27,365 | ||||||||||||||||||||||||
| Distribution to noncontrolling interest | - | - | - | - | - | - | (3,212 | ) | (3,212 | ) | ||||||||||||||||||||||
| Net income attributable to TSR, Inc. | - | - | - | 10,918 | - | 10,918 | - | 10,918 | ||||||||||||||||||||||||
| Balance at August 31, 2013 | 3,114,163 | $ | 31,142 | $ | 5,102,868 | $ | 17,316,801 | $ | (13,514,003 | ) | $ | 8,936,808 | $ | 27,600 | $ | 8,964,408 | ||||||||||||||||
| Balance at May 31, 2014 | 3,114,163 | $ | 31,142 | $ | 5,102,868 | $ | 17,219,947 | $ | (13,514,003 | ) | $ | 8,839,954 | $ | 80,124 | $ | 8,920,078 | ||||||||||||||||
| Net income attributable to noncontrolling interest | - | - | - | - | - | - | 21,909 | 21,909 | ||||||||||||||||||||||||
| Distribution to noncontrolling interest | - | - | - | - | - | - | (1,897 | ) | (1,897 | ) | ||||||||||||||||||||||
| Net income attributable to TSR, Inc. | - | - | - | 24,592 | - | 24,592 | - | 24,592 | ||||||||||||||||||||||||
| Balance at August 31, 2014 | 3,114,163 | $ | 31,142 | $ | 5,102,868 | $ | 17,244,539 | $ | (13,514,003 | ) | $ | 8,864,546 | $ | 100,136 | $ | 8,964,682 | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 5 |
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended August 31, 2014 and 2013
(UNAUDITED)
| Three Months Ended August 31, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Consolidated net income | $ | 46,501 | $ | 38,283 | ||||
| Adjustments to reconcile consolidated net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 4,809 | 3,377 | ||||||
| Unrealized (gain) loss from marketable securities, net | (6,080 | ) | 1,840 | |||||
| Deferred income taxes | 24,000 | 14,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 961,317 | (91,981 | ) | |||||
| Other receivables | 2,825 | 3,609 | ||||||
| Prepaid expenses | 36,508 | (26,646 | ) | |||||
| Prepaid and recoverable income taxes | (6,198 | ) | 2,880 | |||||
| Accounts and other payables and accrued expenses and other current liabilities | 327,591 | (136,727 | ) | |||||
| Advances from customers | (15,289 | ) | (23,441 | ) | ||||
| Net cash provided by (used in) operating activities | 1,375,984 | (214,806 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Proceeds from maturities of marketable securities | 747,000 | 993,000 | ||||||
| Purchases of marketable securities | (745,000 | ) | (996,000 | ) | ||||
| Purchases of equipment and leasehold improvements | (7,341 | ) | (3,853 | ) | ||||
| Net cash used in investing activities | (5,341 | ) | (6,853 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Distributions to noncontrolling interest | (1,897 | ) | (3,212 | ) | ||||
| Net cash used in financing activities | (1,897 | ) | (3,212 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 1,368,746 | (224,871 | ) | |||||
| Cash and cash equivalents at beginning of period | 2,841,967 | 1,881,161 | ||||||
| Cash and cash equivalents at end of period | $ | 4,210,713 | $ | 1,656,290 | ||||
| Supplemental disclosures of cash flow data: | ||||||||
| Income taxes paid | $ | 16,000 | $ | 3,000 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| Page 6 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2014
(Unaudited)
| 1. | Basis of Presentation |
The accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries (the “Company”). All significant inter-company balances and transactions have been eliminated in consolidation. These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applying to interim financial information and with the instructions to Form 10-Q of Regulation S-X of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States of America and normally included in the Company’s annual financial statements have been condensed or omitted. These condensed consolidated interim financial statements as of and for the three months ended August 31, 2014 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending May 31, 2015. The balance sheet at May 31, 2014 has been derived from the audited financial statements at that date. These condensed consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2014.
| 2. | 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 any of the periods presented.
| 3. | Cash and Cash Equivalents |
The Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents were comprised of the following as of August 31, 2014 and May 31, 2014:
| August 31, 2014 | May 31, 2014 | ||||||||
| Cash in banks | $ | 3,643,503 | $ | 2,279,148 | |||||
| Money market funds | 567,210 | 562,819 | |||||||
| $ | 4,210,713 | $ | 2,841,967 | ||||||
| 4. | Revenue Recognition |
The Company’s contract computer programming services are generally provided under time and materials arrangements with its customers. Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition,” when persuasive evidence of an arrangement exists, the services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. These conditions occur when a customer agreement is effected and the consultant performs the authorized services. Revenue is recorded net of all discounts and processing fees. Advances from customers represent amounts received from customers prior to the Company’s provision of the related services and credit balances from overpayments.
Reimbursements received by the Company for out-of-pocket expenses are characterized as revenue.
| Page 7 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2014
(Unaudited)
| 5. | 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 condensed consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:
Level 1- These are investments where values are based on unadjusted quoted prices for identical assets in an active market the Company has the ability to access.
Level 2- These are investments where values are based on quoted market prices that are not active or model derived valuations in which all significant inputs are observable in active markets.
Level 3- These are investments where values are derived from techniques in which one or more significant inputs are unobservable.
The following are the major categories of assets measured at fair value on a recurring basis as of August 31, 2014 and May 31, 2014 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable inputs (Level 3):
| August 31, 2014 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Certificates of Deposit | $ | - | $ | 1,491,000 | $ | - | $ | 1,491,000 | |||||||||
| Equity Securities | 27,936 | - | - | 27,936 | |||||||||||||
| $ | 27,936 | $ | 1,491,000 | $ | - | $ | 1,518,936 | ||||||||||
| May 31, 2014 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Certificates of Deposit | $ | - | $ | 1,493,000 | $ | - | $ | 1,493,000 | |||||||||
| Equity Securities | 21,856 | - | - | 21,856 | |||||||||||||
| | $ | 21,856 | $ | 1,493,000 | $ | - | $ | 1,514,856 | |||||||||
| Page 8 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2014
(Unaudited)
Based upon the Company’s intent and ability to hold its certificates of deposit to maturity (which maturities range up to twelve months at purchase), such securities have been classified as held-to-maturity and are carried at amortized cost, which approximates market value. The Company’s equity securities are classified as trading securities, which are carried at fair value, as determined by quoted market prices, which is a Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings. The Company’s marketable securities at August 31, 2014 and May 31, 2014 are summarized as follows:
| August 31, 2014 Current | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Recorded Value | |||||||||||||
| Certificates of Deposit | $ | 1,491,000 | $ | - | $ | - | $ | 1,491,000 | |||||||||
| Equity Securities | 16,866 | 11,070 | - | 27,936 | |||||||||||||
| $ | 1,507,866 | $ | 11,070 | $ | - | $ | 1,518,936 | ||||||||||
| May 31, 2014 Current | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Recorded Value | |||||||||||||
| Certificates of Deposit | $ | 1,493,000 | $ | - | $ | - | $ | 1,493,000 | |||||||||
| Equity Securities | 16,866 | 4,990 | - | 21,856 | |||||||||||||
| $ | 1,509,866 | $ | 4,990 | $ | - | $ | 1,514,856 | ||||||||||
The Company’s investments in marketable securities consist primarily of investments in certificates of deposit. Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market values.
| 6. | Fair Value of Financial Instruments |
ASC Topic 825, “Financial Instruments”, requires disclosure of the fair value of certain financial instruments. For cash and cash equivalents, accounts receivable, accounts and other payables, accrued liabilities and advances from customers, the amounts presented in the condensed consolidated financial statements approximate fair value because of the short-term maturities of these instruments.
| Page 9 |
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2014
(Unaudited)
| 7. | Equity |
During the three months ended August 31, 2014 and 2013, the Company did not purchase any shares of its common stock. As of September 30, 2014, 56,318 shares remain available for purchase under the previously announced plan.
| 8. | Other Matters |
From time to time, the Company is party to various lawsuits, some involving material amounts. Management is not aware of any lawsuits that would have a material adverse impact on the consolidated financial position of the Company.
| 9. | Recent Accounting Pronouncements |
In May 2014, the FASB issued an update to ASC 606, Revenue from Contracts with Customers. This update to ASC 606 provides a five-step process to determine when and how revenue is recognized. The core principle of the guidance is that a Company should recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received in exchange for those goods or services. This update to ASC 606 will also result in enhanced disclosures about revenue, providing guidance for transactions that were not previously addressed comprehensively, and improving guidance for multiple-element arrangements. This update to ASC 606 is effective for the Company beginning in fiscal 2017. The Company is currently evaluating the impact of this update on its consolidated financial statements.
| Page 10 |
TSR, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part I. Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements.
Forward-Looking Statements
Certain statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company’s 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 following: the success of the Company’s plan for internal growth, the impact of adverse economic conditions on the Company’s business; risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company’s contract computer consulting services will continue to adversely affect the Company’s business; the concentration of the Company’s business with certain customers; uncertainty as to the Company’s ability to maintain its relations with existing customers and expand its contract computer consulting services business; the impact of changes in the industry, such as the use of vendor management companies in connection with the consultant procurement process, the increase in customers moving IT operations offshore and other risks and uncertainties set forth in the Company’s filings with the Securities and Exchange Commission. The Company is under no obligation to publicly update or revise forward-looking statements.
Results of Operations
The following table sets forth, for the periods indicated, certain financial information derived from the Company’s condensed consolidated statements of operations. There can be no assurance that trends in operating results will continue in the future:
Three months ended August 31, 2014 compared with three months ended August 31, 2013
| (Dollar amounts in thousands) Three Months Ended | ||||||||||||||||
| August 31, | August 31, | |||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | |||||||||||||
| Revenue, net | $ | 13,686 | 100.0 | % | $ | 12,087 | 100.0 | % | ||||||||
| Cost of sales | 11,387 | 83.2 | % | 9,989 | 82.6 | % | ||||||||||
| Gross profit | 2,299 | 16.8 | % | 2,098 | 17.4 | % | ||||||||||
| Selling, general and administrative expenses | 2,226 | 16.3 | % | 2,040 | 16.9 | % | ||||||||||
| Income from operations | 73 | 0.5 | % | 58 | 0.5 | % | ||||||||||
| Other income, net | 8 | 0.1 | % | 0 | 0.0 | % | ||||||||||
| Income before income taxes | 81 | 0.6 | % | 58 | 0.5 | % | ||||||||||
| Provision for income taxes | 34 | 0.2 | % | 20 | 0.2 | % | ||||||||||
| Consolidated net income | 47 | 0.4 | % | 38 | 0.3 | % | ||||||||||
| Net income attributable to noncontrolling interest | 22 | 0.2 | % | 27 | 0.2 | % | ||||||||||
| Net income attributable to TSR, Inc. | $ | 25 | 0.2 | % | $ | 11 | 0.1 | % | ||||||||
| Page 11 |
TSR, INC. AND SUBSIDIARIES
Revenue
Revenue consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended August 31, 2014 increased $1,599,000 or 13.2% from the prior year quarter. This increase in revenue resulted from the average number of consultants on billing with customers increasing from approximately 300 for the quarter ended August 31, 2013 to 331 for the quarter ended August 31, 2014.
Cost of Sales
Cost of sales for the quarter ended August 31, 2014, increased $1,398,000 or 14.0% to $11,387,000 from $9,989,000 in the prior year period. The increase in cost of sales resulted primarily from the increase in the number of consultants on billing with clients. Cost of sales as a percentage of revenue increased from 82.6% in the quarter ended August 31, 2013 to 83.2% in the quarter ended August 31, 2014. The increase in cost of sales as a percentage of revenue was primarily attributable to increased discounts at two major customers.
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 $186,000 or 9.1% from $2,040,000 in the quarter ended August 31, 2013 to $2,226,000 in the quarter ended August 31, 2014. This increase was primarily attributable to an increase in the number of sales personnel and expenses associated with hiring them. Hiring new sales executives requires a significant investment to cover their costs while their non-compete agreements, which typically last a year, expire. The Company expects selling, general and administrative expenses to continue to increase as more recruiters and sales executives are hired to stimulate growth. Selling, general and administrative expenses, as a percentage of revenue, decreased from 16.9% in the quarter ended August 31, 2013 to 16.3% in the quarter ended August 31, 2014 as a result of the additional technical recruiters and sales executives beginning to contribute additional revenue.
Other Income
Other income for the quarter ended August 31, 2014 resulted primarily from a mark to market gain of $6,000 on the Company’s equity securities and interest and dividend income of $2,000. In the quarter ended August 31, 2013, interest and dividend income of $2,000 was offset by a mark-to-market loss of $2,000 on the Company’s equity securities.
Income Taxes
The income tax provision included in the Company’s results of operations for the quarters ended August 31, 2014 and 2013 reflect the Company’s estimated effective tax rate for the years ending May 31, 2015 and 2014, respectively. These rates were 42.0 % for the quarter ended August 31, 2014 and 34.5% for the quarter ended August 31, 2013.
Net Income Attributable to TSR, Inc.
Net income attributable to TSR, Inc. increased $14,000 from $11,000 in the quarter ended August 31, 2013 to net income of $25,000 in the quarter ended August 31, 2014. This increase was primarily attributable to the increase in revenue as a result of the additional recruiters and sales executives contributing additional revenue. Gradual improvement is expected to continue as the Company’s plan for internal growth begins to generate a sufficient increase in revenue.
| Page 12 |
TSR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
The Company expects that its cash and marketable securities will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for at least the next 12 months.
At August 31, 2014, the Company had working capital (total current assets in excess of total current liabilities) of $8,772,000 including cash and cash equivalents and certificates of deposit and marketable securities of $5,730,000 as compared to working capital of $8,706,000 including cash and cash equivalents and certificates of deposit and marketable securities of $4,357,000 at May 31, 2014.
For the three months ended August 31, 2014, net cash provided by operating activities was $1,376,000 compared to net cash used in operating activities of $215,000 for the three months ended August 31, 2013. The cash provided by operating activities in the three months ended August 31, 2014 resulted primarily from a decrease in accounts receivable of $961,000 and an increase in accounts and other payables and accrued expenses and other current liabilities of $328,000. The decrease in accounts receivable is attributable to a major client instituting a prompt payment discount, resulting in only one month of invoicing outstanding at quarter end instead of the usual three months which were outstanding at year end. The increase in accounts and other payable and accrued expenses and other current liabilities is attributable to an increase in accounts payable resulting from temporary staffing shortages in the accounting department. The cash used in operating activities in the three months ended August 31, 2013 resulted primarily from an increase in accounts receivable of $92,000 and a decrease in accounts and other payables and accrued expenses and other current liabilities of $137,000. The increase in accounts receivable was attributable to the increased revenue. The decrease in accounts and other payable and accrued expenses and other current liabilities was attributable to a decrease in the accrued payroll at the end of the current quarter, which decrease resulted from a decrease in the hours worked by the consultants.
Net cash used in investing activities of $5,000 for the three months ended August 31, 2014 resulted primarily from the purchase of fixed assets. Net cash used in investing activities of $7,000 for the three months ended August 31, 2013 also resulted primarily from the purchase of fixed assets.
Net cash used in financing activities resulted from distributions to the noncontrolling interest of $2,000 in the three months ended August 31, 2014. Net cash used in financing activities resulted from distributions to the noncontrolling interest of $3,000 in the three months ended August 31, 2013.
The Company’s capital resource commitments at August 31, 2014 consisted of lease obligations on its branch and corporate facilities. The Company intends to satisfy these lease commitments from cash flow provided by operations, available cash and short-term marketable securities.
| Page 13 |
TSR, INC. AND SUBSIDIARIES
Recent Accounting Pronouncements
In May 2014, the FASB issued an update to ASC 606, Revenue from Contracts with Customers. This update to ASC 606 provides a five-step process to determine when and how revenue is recognized. The core principle of the guidance is that a Company should recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received in exchange for those goods or services. This update to ASC 606 will also result in enhanced disclosures about revenue, providing guidance for transactions that were not previously addressed comprehensively, and improving guidance for multiple-element arrangements. This update to ASC 606 is effective for the Company beginning in fiscal 2017. The Company is currently evaluating the impact of this update on its consolidated financial statements.
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 the Company’s consolidated financial statements, contained in its May 31, 2014 Annual Report on Form 10-K, as filed with the SEC. The Company believes that those accounting policies require the application of management’s most difficult, subjective or complex judgments. There have been no changes in the Company’s significant accounting policies as of August 31, 2014.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal accounting officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal accounting officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.
Internal Control Over Financial Reporting. There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently reported completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Page 14 |
TSR, INC. AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits
| (a). | Exhibit 31.1 – Certification by J.F. Hughes pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Exhibit 31.2 - Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| Exhibit 32.1 – Certification by J.F. Hughes pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| Exhibit 32.2 – Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| Exhibit 101 – The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Income, (iii) the Statements of Equity, (iv) the Statements of Cash Flows, and (v) the Notes to Financial Statements. * |
* Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purpose of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
| Page 15 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
| TSR Inc. | |
| (Registrant) | |
| Date: October 8, 2014 | /s/ J.F. Hughes |
| J.F. Hughes, Chairman and President | |
| Date: October 8, 2014 | /s/ John G. Sharkey |
| John G. Sharkey, Vice President Finance and Principal Accounting Officer |
Page 16
Exhibit 31.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, J.F. Hughes, Chairman of the Board, Chief Executive Officer and President, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of TSR, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 8, 2014 | |
| /s/ J.F. Hughes | |
| Chairman of the Board, | |
| Chief Executive Officer and President |
Exhibit 31.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John G. Sharkey, Vice President-Finance and Principal Accounting Officer, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of TSR, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 8, 2014 | |
| /s/ John G. Sharkey | |
| Vice President-Finance | |
| and Principal Accounting Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TSR, Inc. (the “Company”) on Form 10-Q for the quarter ended August 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J.F. Hughes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
The foregoing certification is incorporated solely for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose.
| /s/ J.F. Hughes | |
| Chairman of the Board, | |
| Chief Executive Officer | |
| and President | |
| October 8, 2014 |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TSR, Inc. (the “Company”) on Form 10-Q for the quarter ended August 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John G. Sharkey, Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
The foregoing certification is incorporated solely for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose.
| /s/ John G. Sharkey | |
| Vice President-Finance | |
| and Principal Accounting Officer | |
| October 8, 2014 |