NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013
(Unaudited)
The accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries (the “Company”). All significant inter-company balances and transactions have been eliminated in consolidation. 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, 2013 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, 2014. The balance sheet at May 31, 2013 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, 2013.
|
2.
|
Net Income (Loss) Per Common Share
|
Basic net income (loss) per common share is computed by dividing income (loss) 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, 2013 and May 31, 2013:
| |
|
August 31,
2013
|
|
|
May 31,
2013
|
|
|
Cash in banks
|
|
$ |
1,336,647 |
|
|
$ |
1,562,939 |
|
|
Money market funds
|
|
|
319,643 |
|
|
|
318,222 |
|
| |
|
$ |
1,656,290 |
|
|
$ |
1,881,161 |
|
The Company’s contract computer programming services are generally provided under time and materials arrangements with its customers. Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition,” when persuasive evidence of an arrangement exists, the services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. These conditions occur when a customer agreement is effected and the consultant performs the authorized services. Revenue is recorded net of all discounts and processing fees. Advances from customers represent amounts received from customers prior to the Company’s provision of the related services and credit balances from overpayments.
Reimbursements received by the Company for out-of-pocket expenses are characterized as revenue.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2013
(Unaudited)
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, 2013 and May 31, 2013 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, 2013
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Certificates of Deposit
|
|
$ |
- |
|
|
$ |
1,992,000 |
|
|
$ |
- |
|
|
$ |
1,992,000 |
|
|
Equity Securities
|
|
|
17,584 |
|
|
|
- |
|
|
|
- |
|
|
|
17,584 |
|
| |
|
$ |
17,584 |
|
|
$ |
1,992,000 |
|
|
$ |
- |
|
|
$ |
2,009,584 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2013
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Certificates of Deposit
|
|
$ |
- |
|
|
$ |
1,989,000 |
|
|
$ |
- |
|
|
$ |
1,989,000 |
|
|
Equity Securities
|
|
|
19,424 |
|
|
|
- |
|
|
|
- |
|
|
|
19,424 |
|
| |
|
$ |
19,424 |
|
|
$ |
1,989,000 |
|
|
$ |
- |
|
|
$ |
2,008,424 |
|
Based upon the Company’s intent and ability to hold its certificates of deposit to maturity (which maturities range up to twenty four 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, 2013 and May 31, 2013 are summarized as follows:
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2013
(Unaudited)
|
August 31, 2013
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$ |
1,743,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,743,000 |
|
|
Equity Securities
|
|
|
16,866 |
|
|
|
718 |
|
|
|
- |
|
|
|
17,584 |
|
| |
|
$ |
1,759,866 |
|
|
$ |
718 |
|
|
$ |
- |
|
|
$ |
1,760,584 |
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$ |
249,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
249,000 |
|
|
May 31, 2013
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$ |
1,989,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,989,000 |
|
|
Equity Securities
|
|
|
16,866 |
|
|
|
2,558 |
|
|
|
- |
|
|
|
19,424 |
|
| |
|
$ |
2,005,866 |
|
|
$ |
2,558 |
|
|
$ |
- |
|
|
$ |
2,008,424 |
|
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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 31, 2013
(Unaudited)
During the three months ended August 31, 2013, the Company did not purchase any shares of its common stock. During the three months ended August 31, 2012, the Company purchased a total of 3,600 shares of its common stock for $16,571. These shares were purchased in various transactions on the open market under a previously announced repurchase plan of 150,000 shares. As of September 30, 2013, 56,318 shares remain available for purchase under the plan.
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
|
The Company is not aware of any new accounting pronouncements that would have a material impact on its condensed consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part I. Financial Information
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, 2013 compared with three months ended August 31, 2012
| |
|
(Dollar amounts in thousands)
Three Months Ended
|
|
| |
|
August 31, 2013
|
|
|
August 31, 2012
|
|
| |
|
Amount
|
|
|
% of Revenue
|
|
|
Amount
|
|
|
% of Revenue
|
|
|
Revenue, net
|
|
$ |
12,087 |
|
|
|
100.0 |
% |
|
$ |
11,289 |
|
|
|
100.0 |
% |
|
Cost of sales
|
|
|
9,989 |
|
|
|
82.6 |
% |
|
|
9,439 |
|
|
|
83.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,098 |
|
|
|
17.4 |
% |
|
|
1,850 |
|
|
|
16.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,040 |
|
|
|
16.9 |
% |
|
|
1,963 |
|
|
|
17.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
58 |
|
|
|
0.5 |
% |
|
|
(113 |
) |
|
|
(1.0 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
0 |
|
|
|
0.0 |
% |
|
|
2 |
|
|
|
0.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
58 |
|
|
|
0.5 |
% |
|
|
(111 |
) |
|
|
(1.0 |
)% |
|
Provision (benefit) for income taxes
|
|
|
20 |
|
|
|
0.2 |
% |
|
|
(37 |
) |
|
|
(0.3 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
$ |
38 |
|
|
|
0.3 |
% |
|
$ |
(74 |
) |
|
|
(0.7 |
)% |
TSR, INC. AND SUBSIDIARIES
Revenue
Revenue consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended August 31, 2013 increased $798,000 or 7.1% from the prior year quarter. The average number of consultants on billing with customers increased from approximately 254 for the quarter ended August 31, 2012 to 300 for the quarter ended August 31, 2013. The revenue increase was somewhat muted due to reduced average billing rates for the consultants on billing with customers compared with the prior year quarter. This resulted from a shift in the business mix as a higher percentage of new placements have been with customers where there is stronger competition due to managed vendor services programs.
Cost of Sales
Cost of sales for the quarter ended August 31, 2013, increased $550,000 or 5.8% to $9,989,000 from $9,439,000 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 decreased from 83.6% in the quarter ended August 31, 2012 to 82.6% in the quarter ended August 31, 2013. The decrease in cost of sales as a percentage of revenue was primarily attributable to increased revenue from full time placement fees which do not have associated direct costs.
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 $77,000 or 3.9% from $1,963,000 in the quarter ended August 31, 2012 to $2,040,000 in the quarter ended August 31, 2013. 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 17.4% in the quarter ended August 31, 2012 to 16.9% in the quarter ended August 31, 2013 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, 2013 resulted primarily from interest and dividend income of $2,000, which decreased by $1,000 from the level realized in the quarter ended August 31, 2012 due to lower interest rates earned on the Company’s certificates of deposit and money market accounts. The interest and dividend income was offset by a mark to market loss of $2,000 on the Company’s equity securities.
Income Taxes
The income tax provision (benefit) included in the Company’s results of operations for the quarters ended August 31, 2013 and 2012 reflect the Company’s estimated effective tax rate for the years ending May 31, 2014 and 2013, respectively. These rates were (33.3) % for the quarter ended August 31, 2012 and 34.5% for the quarter ended August 31, 2013.
Consolidated Net Income (Loss)
Consolidated net income increased $112,000 from a loss of $74,000 in the quarter ended August 31, 2012 to net income of $38,000 in the quarter ended August 31, 2013. 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.
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, 2013, the Company had working capital (total current assets in excess of total current liabilities) of $8,516,000 including cash and cash equivalents and certificates of deposit and marketable securities of $3,417,000 as compared to working capital of $8,717,000 including cash and cash equivalents and certificates of deposit and marketable securities of $3,890,000 at May 31, 2013.
For the three months ended August 31, 2013, net cash used in operating activities was $215,000 compared to net cash provided by operating activities of $188,000 for the three months ended August 31, 2012. 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 is attributable to the increased revenue. The decrease in accounts and other payable and accrued expenses and other current liabilities is attributable to a decrease in the accrued payroll at the end of the current quarter. The cash provided by operating activities in the three months ended August 31, 2012 primarily resulted from a decrease in accounts receivable of $139,000 and an increase in accounts and other payables and accrued expenses and other current liabilities of $173,000 which were offset, to some extent, by the consolidated net loss of $74,000.
Net cash used in investing activities of $7,000 for the three months ended August 31, 2013 resulted primarily from the purchase of fixed assets. Net cash used in investing activities of $2,737,000 for the three months ended August 31, 2012 primarily resulted from new investments in US Treasury securities and certificates of deposit.
Net cash used in financing activities resulted from distributions to the noncontrolling interest of $3,000 in the three months ended August 31, 2013. Net cash used in financing activities resulted from distributions to the noncontrolling interest of $3,500 and the purchases of 3,600 shares of common stock for $17,000 in the three months ended August 31, 2012.
The Company’s capital resource commitments at August 31, 2013 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.
TSR, INC. AND SUBSIDIARIES
Recent Accounting Pronouncements
The Company is not aware of any new accounting pronouncements that would have a material impact on its condensed 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, 2013 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, 2013.
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.
TSR, INC. AND SUBSIDIARIES
| |
(a).
|
Exhibit 31.1 – Certification by J.F. Hughes pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 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, 2013, 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.
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, 2013
|
|
/s/ J.F. Hughes
|
|
| |
|
J.F. Hughes, Chairman and President
|
|
| |
|
|
|
|
Date: October 8, 2013
|
|
/s/ John G. Sharkey
|
|
| |
|
John G. Sharkey, Vice President Finance and Principal Accounting Officer
|
|