A N N U A L R E P O R T 2016 5 TSR AT A GLANCE TSR is engaged in the business of providing contract computer programming services to its customers. The Company provides its customers with technical computer personnel to supplement their in-house information technology (“IT”) capabilities. TSR’s customers for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets. With more than 40 years experience in the information services business, TSR is positioned to fulfill virtually any information technology temporary staffing contract requirement. Extensive recruiting efforts are employed to create and maintain a database of highly qualified professionals who are well-versed in the latest technological advances. TSR’s professional staff has extensive experience across a broad range of industries from telecommunications and pharmaceuticals to banking and insurance. FINANCIAL HIGHLIGHTS (Amounts in Thousands, Except Per Share Data) May 31, 2016 May 31, 2015 May 31, 2014 May 31, 2013 May 31, 2012 Revenue, Net ........................................................................ $ 60,998 $ 57,403 $ 49,530 $ 44,914 $ 45,215 Income (Loss) From Operations .......................................... Net Income (Loss) Attributable to TSR, Inc. ....................... Basic Net Income (Loss) Per TSR, Inc. Common Share ..... 839 399 0.20 432 193 25 (86 ) (716 ) (520 ) (2 ) (62 ) 0.10 (0.04 ) (0.26 ) (0.03 ) Working Capital ................................................................... 9,391 8,986 8,706 8,717 12,402 Total Assets .......................................................................... 14,090 14,051 13,563 13,619 17,165 Total TSR, Inc. Equity ......................................................... Book Value Per TSR, Inc. Common Share .......................... (Total TSR Equity Divided by Common Shares Outstanding) 9,432 4.81 9,033 8,840 8,926 12,498 4.60 4.51 4.55 6.30 Cash Dividends Declared Per TSR, Inc. Common Share .... $ 0.00 $ 0.00 $ 0.00 $ 1.50 $ 0.00 LETTER FROM THE CHAIRMAN Dear Stockholders: The past year marked a challenging stretch for businesses and investors alike. Against this demanding backdrop, I am pleased to report that TSR continued to yield profitable results from our multi-year strategic investment initiative in our people and processes. For the year ended May 31st, 2016, revenue increased 6.3% from last year to $61.0 million. Net income attributable to TSR increased from $193,000 in the prior year to net income of $399,000 in the current year. Additionally, net income per share increased from $0.10 to $0.20 per share. We attribute the increase in revenue largely to two encouraging dynamics. First, the capabilities of our salesforce and technical recruiters – after several years as new hires – have started to mature and blossom. Our focus on organic growth has been another critical driver, with our marketing efforts fixed primarily on increasing business from our existing clients, many of whom we have served for decades. While we have experienced increases in revenue and profitability, there continue to be new challenges. Rapidly changing computer technologies and evolving standards are the new normal of the IT business world. This means finding and hiring the right IT talent for our clients is requiring ever greater effort and investment. Speed to market matters: “It’s the fast fish which eats the slow fish.” Another on-going challenge we face (along with the rest of the business world) is that the cost of our health insurance and other employee benefits continues to increase, primarily due to government mandates. In sum, TSR’s strong culture is built on a foundation of trust, service and hard work. The days are long, often stretching into nights and weekends. Yet we remain relentless in our dedication to listening closely to our customers and their needs, and working smartly on their behalf. We hope and believe that our dedication will also best serve you, our shareholders. As always, I thank you for your ongoing support. Sincerely Joe Hughes 1 TSR INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS May 31, 2016 and 2015 ASSETS Current assets: Cash and cash equivalents................................................................................................. $ Certificates of deposit and marketable securities .............................................................. Accounts receivable: Trade, net of allowance for doubtful accounts of $185,000 in 2016 and $193,000 in 2015 .................................................................................................... Other ............................................................................................................................. Prepaid expenses ............................................................................................................... Deferred income taxes ...................................................................................................... 2016 2015 4,514,157 1,553,272 $ 3,669,790 1,271,568 7,703,680 10,853 7,714,533 99,069 128,000 8,754,784 2,458 8,757,242 116,096 120,000 Total Current Assets .......................................................................................... 14,009,031 13,934,696 Equipment and leasehold improvements, at cost: Equipment ......................................................................................................................... Furniture and fixtures ........................................................................................................ Automobiles ...................................................................................................................... Leasehold improvements .................................................................................................. Less accumulated depreciation and amortization .............................................................. Other assets ......................................................................................................................... Deferred income taxes ........................................................................................................ 99,244 111,107 19,665 60,058 290,074 262,076 27,998 49,653 3,000 102,833 111,107 19,665 60,058 293,663 254,732 38,931 49,653 28,000 Total Assets ........................................................................................................... $ 14,089,682 $ 14,051,280 LIABILITIES AND EQUITY Current liabilities: Accounts and other payables ............................................................................................. $ Accrued expenses and other current liabilities: Salaries, wages and commissions ................................................................................. Other ............................................................................................................................. Income taxes payable ........................................................................................................ Advances from customers ................................................................................................. 2,481,436 152,674 2,634,110 14,810 1,245,563 Total Liabilities .................................................................................................... 4,618,188 2,237,628 146,214 2,383,842 3,877 1,431,522 4,948,346 723,705 $ 1,129,105 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 .......................................................... Additional paid-in capital ................................................................................................. Retained earnings .............................................................................................................. Less: Treasury stock, 1,152,101 shares, at cost ............................................................... Total TSR, Inc. Equity ......................................................................................... Noncontrolling Interest ..................................................................................................... Total Equity ......................................................................................................................... - - 31,142 5,102,868 17,811,884 22,945,894 13,514,003 9,431,891 39,603 9,471,494 31,142 5,102,868 17,412,658 22,546,668 13,514,003 9,032,665 70,269 9,102,934 Total Liabilities and Equity ................................................................................ $ 14,089,682 $ 14,051,280 See accompanying notes to consolidated financial statements. 2 TSR INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended May 31, 2016 and 2015 2016 2015 Revenue, net ......................................................................................................................... $ 60,998,281 $ 57,402,896 Cost of sales .......................................................................................................................... Selling, general and administrative expenses .................................................................... 51,038,879 9,120,526 60,159,405 48,087,428 8,883,003 56,970,431 Income from operations ...................................................................................................... 838,876 432,465 Other income: Interest and dividend income ............................................................................................ Unrealized gain (loss) from marketable securities, net ..................................................... 8,621 (2,296) 6,325 Income before income taxes ................................................................................................ 845,201 Provision for income taxes .................................................................................................. 389,000 Consolidated net income ..................................................................................................... Less: Net income attributable to noncontrolling interest ................................................. 456,201 56,975 6,114 5,712 11,826 444,291 152,000 292,291 99,580 Net income attributable to TSR, Inc. ................................................................................ $ 399,226 $ 192,711 Net income per TSR, Inc. common share .......................................................................... $ 0.20 $ 0.10 Weighted average number of common shares outstanding .............................................. 1,962,062 1,962,062 See accompanying notes to consolidated financial statements. 3 TSR INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Years ended May 31, 2016 and 2015 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, 2014 .................................. 3,114,163 Net income attributable to noncontrolling interest ........................................... - Distribution to noncontrolling interest ........................................... - Net income attributable to TSR, Inc. ...................................... - Balance at May 31, 2015 ................................. 3,114,163 Net income attributable to noncontrolling interest ........................................... - Distribution to noncontrolling interest ........................................... - Net income attributable to TSR, Inc. ...................................... - Balance at May 31, 2016 ................................. 3,114,163 $ 31,142 $ 5,102,868 $ 17,219,947 $(13,514,003) $ 8,839,954 $ 80,124 $ 8,920,078 - - - - - - - - 192,711 - - - - - 99,580 99,580 (109,435) (109,435) 192,711 - 192,711 31,142 5,102,868 17,412,658 (13,514,003) 9,032,665 70,269 9,102,934 - - - - - - - - 399,226 - - - - - 56,975 56,975 (87,641) (87,641) 399,226 - 399,226 $ 31,142 $ 5,102,868 $ 17,811,884 $(13,514,003) $ 9,431,891 $ 39,603 $ 9,471,494 See accompanying notes to consolidated financial statements. 4 TSR INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended May 31, 2016 and 2015 Cash flows from operating activities: Consolidated net income .................................................................................................. Adjustments to reconcile consolidated net income to net cash provided by operating activities: Depreciation and amortization ...................................................................................... Provision for bad debts .................................................................................................. Unrealized (gain) loss from marketable securities, net Deferred income taxes ................................................................................................... Changes in operating assets and liabilities: Accounts receivable-trade .......................................................................................... Other receivables ........................................................................................................ Prepaid expenses ........................................................................................................ Prepaid and recoverable income taxes ....................................................................... Accounts and other payables and accrued expenses and other current liabilities ....... Income taxes payable ................................................................................................. Advances from customers .......................................................................................... 2016 2015 $ 456,201 $ 292,291 22,765 15,000 2,296 17,000 1,036,104 (8,395) 17,027 - (155,132) 10,933 (185,959) 20,428 - (5,712) 68,000 35,554 6,872 (41,908) 32,159 362,385 3,877 (60,424) Net cash provided by operating activities ........................................................................ 1,227,840 713,522 Cash flows from investing activities: Proceeds from maturities of marketable securities ........................................................ Purchases of marketable securities ................................................................................ Purchases of equipment and leasehold improvements .................................................. 1,762,000 (2,046,000) (11,832) 2,487,000 (2,238,000) (25,264) Net cash provided by (used in) investing activities .......................................................... (295,832) 223,736 Cash flows from financing activities: Distributions to noncontrolling interest ......................................................................... (87,641) (109,435) Net cash used in financing activities ................................................................................ (87,641) (109,435) Net increase in cash and cash equivalents ............................................................................ 844,367 827,823 Cash and cash equivalents at beginning of year ................................................................... 3,669,790 2,841,967 Cash and cash equivalents at end of year ......................................................................... $ 4,514,157 $ 3,669,790 Supplemental disclosures of cash flow data: Income taxes paid ............................................................................................................. $ 361,000 $ 49,000 See accompanying notes to consolidated financial statements. 5 TSR INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2016 and 2015 (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 capabilities. 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. In fiscal 2015, two customers each accounted for more than 10% of the Company’s consolidated revenue, constituting a combined 34.9%. The largest of these constituted 19.2% of consolidated revenue. The accounts receivable balances associated with the Company’s largest customers were $3,735,000 for four customers at May 31, 2016 and $2,109,000 for two customers at May 31, 2015. The Company operates in one business segment, computer programming 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 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, 2016 and 2015: Cash in banks ................... Money market funds ......... 2016 2015 $ 3,974,007 $ 2,851,802 817,988 540,150 $ 4,514,157 $ 3,669,790 (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. 6 TSR INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2016 and 2015 The following are the major categories of assets measured at fair value on a recurring basis as of May 31, 2016 and 2015 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, 2016 Level 1 Level 2 Level 3 Total Certificates of deposit.................................................... - 25,272 Equity securities ............................................................ 25,272 $ $ $ 1,528,000 - $ $ 1,528,000 $ - - - $ $ 1,528,000 25,272 1,553,272 May 31, 2015 Level 1 Level 2 Level 3 Total Certificates of deposit...................................................... - Equity securities .............................................................. 27,568 27,568 $ $ $ 1,244,000 - $ $ 1,244,000 $ - - - $ $ 1,244,000 27,568 1,271,568 Based upon the Company’s intent and ability to hold its certificates of deposits 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, 2016 and 2015 are summarized as follows: Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Current 2016: Certificates of deposit ........................................ 1,528,000 Equity securities ................................................. 16,866 1,544,866 $ $ 1,244,000 Current 2015: Certificates of deposit ........................................... 16,866 1,260,866 Equity securities ................................................... $ $ $ $ $ $ - 8,406 8,406 - 10,702 10,702 $ $ $ $ - - - - - - Recorded Value $ $ $ $ 1,528,000 25,272 1,553,272 1,244,000 27,568 1,271,568 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. 7 TSR INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2016 and 2015 (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 .............................................. Furniture and fixtures ............................ Automobiles ........................................... Leasehold improvements ....................... Lesser of lease term or useful life 3 years 3 years 3 years (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, 2016 or 2015. (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 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, 2018. The Company expects the impact of the update, if any, to be immaterial on its consolidated financial statements. transactions 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 and interim periods beginning after December 15, 2016 and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this guidance. 8 TSR INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2016 and 2015 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. (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 46 accounts with open balances as of May 31, 2016. As a percentage of revenue, the four largest customers among these 46 accounts consisted of 48.5% of the net accounts receivable balance at May 31, 2016. (2) Income Taxes A reconciliation of the provision for income taxes computed at the Federal statutory rates for fiscal 2016 and 2015 to the reported amounts is as follows: 2016 2015 Amount % Amount % Amounts at statutory Federal tax rate ................. $ 287,000 Noncontrolling interest ....................................... (19,000) 34.0% (2.3) $ 151,000 34.0% (34,000) (7.6) State and local taxes, net of Federal income tax effect ................................ Non-deductible expenses and other .................... 88,000 33,000 10.4 3.9 13,000 22,000 2.9 4.9 $ 389,000 46.0% $ 152,000 34.2% The components of the provision for income taxes are as follows: 2016: Current ............................................. $ 253,000 $ 119,000 $ 372,000 Deferred ............................................ 3,000 14,000 17,000 $ 256,000 $ 133,000 $ 389,000 Federal State Total 2015: Current ............................................... $ 32,000 $ 52,000 $ Deferred ............................................. 100,000 (32,000) 84,000 68,000 $ 132,000 $ 20,000 $ 152,000 9 TSR INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2016 and 2015 The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets at May 31, 2016 and 2015 are as follows: Allowance for doubtful accounts receivable ................... Accrued compensation and other accrued expenses ....................................................................... Net operating loss carryforward ..................................... Equipment and leasehold improvement depreciation and amortization ..................................... Acquired client relationships .......................................... Unrealized gains ............................................................. Total deferred income tax assets .................. 2016 2015 $ 78,000 $ 86,000 50,000 10,000 34,000 25,000 (6,000) 2,000 (3,000) $ 131,000 1,000 5,000 (3,000) $ 148,000 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. The Company has no unrecognized tax benefits at May 31, 2016 and 2015. The Company’s Federal and state income tax returns prior to fiscal year 2013 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, 2016 follows: Fiscal Year Amount 2017 .............. 2018 .............. 2019 .............. 2020 .............. 2021 .............. Total $ $ 363,000 248,000 191,000 86,000 51,000 939,000 Total rent expenses under all lease agreements amounted to $379,000 and $390,000 in fiscal 2016 and 2015, respectively. The Company has entered into employment agreements with two of its officers expiring through 2020. The total remaining payments under these agreements is $1,225,000 at May 31, 2016. 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) Stockholder’s Equity During the years ended May 31, 2016 and 2015, 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. 10 TSR INC. AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto presented elsewhere in this report. Results of Operations The following table sets forth for the periods indicated certain financial information derived from the Company’s consolidated statements of income. There can be no assurance that historical trends in operating results will continue in the future: Year Ended May 31, (Dollar Amounts in Thousands) 2016 2015 Amount % of Revenue Amount % of Revenue Revenue, Net ............................................................... $ 60,998 100.0% $ 57,403 100.0% Cost of Sales ................................................................ 51,039 Gross Profit .................................................................. Selling, General and Administrative Expenses ............ Income from Operations .............................................. Other Income, Net ....................................................... Income Before Income Taxes ...................................... Provision for Income Taxes ......................................... Consolidated Net Income ........................................... Net Income Attributable to Noncontrolling Interest .... Net Income Attributable to TSR, Inc. .......................... $ 9,959 9,120 839 6 845 389 456 57 399 83.7 16.3 14.9 1.4 0.0 1.4 0.6 0.8 0.1 0.7% $ 48,088 9,315 8,883 83.8 16.2 15.5 432 12 444 152 292 99 193 0.7 0.1 0.8 0.3 0.5 0.2 0.3% revenue Revenue Revenue consists primarily of from computer programming consulting services. Revenue for the fiscal year ended May 31, 2016 increased $3,595,000 or 6.3% from fiscal 2015. This increase in revenue resulted primarily from the average daily rates charged for the consultants on billing with customers increasing approximately 5.5% in the current year compared with the prior fiscal year. This rate increase is primarily the result of placing more consultants in higher level positions. The increase in revenue also resulted from the average number of consultants on billing with customers increasing from approximately 346 for the fiscal year ended May 31, 2015 to approximately 350 for the fiscal year ended May 31, 2016. Cost of Sales Cost of sales for the fiscal year ended May 31, 2016 increased $2,951,000 or 6.1% to $51,039,000 from $48,088,000 in the prior fiscal year. The increase in cost of sales resulted primarily from the average daily rates paid to the consultants on billing with customers increasing approximately 4.5% in the current fiscal year compared with the prior fiscal year. The increase in cost of sales also resulted from the increase in the number of consultants on billing with clients. Cost of sales as a percentage 11 of revenue decreased from 83.8% in the fiscal year ended May 31, 2015 to 83.7% in the fiscal year ended May 31, 2016. in increase incentive compensation paid 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 $237,000 or 2.7% from $8,883,000 in the fiscal year ended May 31, 2015 to $9,120,000 in the fiscal year ended May 31, 2016. This increase was primarily attributable to an to account executives. Several of the account executives hired in recent years contributed increased revenues and earned incentive compensation incentive compensation for the first time. 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 15.5% in the fiscal year ended May 31, 2015 to 14.9% in the fiscal year ended May 31, 2016 as a result of the additional revenue from the increase in the average daily rates charged for the consultants on billing with customers. their guaranteed in excess of TSR INC. AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS interest and dividend Other Income Other income for the fiscal year ended May 31, 2016 resulted primarily from income of $9,000 decreased by a mark to market loss of approximately $3,000 on the Company’s marketable equity securities. Other income for the fiscal year ended May 31, 2015 resulted primarily from interest and dividend income of $6,000 and a mark to market gain of approximately $6,000 on the Company’s marketable equity securities. Income Taxes The effective income tax rates were 46.0% for the fiscal year ended May 31, 2016 and 34.2% for the fiscal year ended May 31, 2015. The effective rate for the fiscal year ended May 31, 2016 increased primarily due to additional state taxes. Net Income Attributable to TSR, Inc. Net income attributable to TSR, Inc. increased $206,000 from $193,000 in the fiscal year ended May 31, 2015 to net income of $399,000 in the fiscal year ended May 31, 2016. This increase in net income was primarily attributable to the increase in revenue as a result of the increase in the average daily rates charged for the consultants on billing with customers. 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 next 12 months. At May 31, 2016, the Company had working capital (total current assets in excess of total current liabilities) of $9,391,000 including cash and cash equivalents and certificates of deposit and marketable securities of $6,067,000 as compared to working capital of $8,986,000 including cash and cash equivalents and certificates of deposit and marketable securities of $4,941,000 at May 31, 2015. Net cash flow of $1,228,000 was provided by operations during fiscal 2016 as compared to $714,000 of net cash flow provided by operations in fiscal 2015. 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. The cash provided by operations for fiscal 2015 primarily resulted from consolidated net income of $292,000 and an increase in accounts payable and accrued expenses of $362,000. Net cash used in investing activities amounted to $296,000 for fiscal 2016, compared to $224,000 in net cash provided by investing activities in fiscal 2015. The net cash used in investing activities for fiscal 2016 primarily resulted from investing in additional certificates of deposit. The cash provided in 2015 primarily resulted from maturing certificates of deposit, a portion of which were not rolled over. Net cash used in financing activities of $88,000 and $109,000 during the fiscal years ended May 31, 2016 and 2015, 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, 2016 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 2016. 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 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, 2018. The Company expects the impact of this update, if any, to be immaterial on its consolidated financial statements. that were previously not 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 and interim periods beginning after December 15, 2016 and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this guidance. 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 12 TSR INC. AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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. the method(s) and to disclose 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. 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: experience, 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 creditworthiness, customer historical 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. types, 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. Forward-Looking Statements; Factors that Affect Future Results Certain statements contained herein, including statements concerning the Company’s plans, future prospects and 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 set forth in the forward-looking statements due to known and unknown risks and uncertainties, including but not limited to, the following: the success of the Company’s plan for internal growth, the impact of adverse economic conditions on the Company’s business; risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company’s contract computer programming services will continue to adversely affect the Company’s business; the concentration of the Company’s business with certain customers; uncertainty as the Company’s ability to maintain its relations with existing customers and expand its contract computer programming services business; the impact of changes in the industry, such as the use of vendor management companies in connection with the consultant procurement process; the increase in customers moving IT operations offshore; the Company’s ability to adapt to changing market conditions; and other risks and uncertainties described in the Company’s filings under the Securities Exchange Act of 1934. The Company is under no obligation to publicly update or revise forward-looking statements. to 13 TSR INC. AND SUBSIDIARIES 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, 2016 and 2015, 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, 2016 and 2015 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. CohnReznick LLP Jericho, New York July 28, 2016 14 TSR INC. AND SUBSIDIARIES MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company’s shares of Common Stock trade on the NASDAQ Capital Market under the symbol TSRI. The following are the high and low sales prices for each quarter during the fiscal years ended May 31, 2016 and 2015: June 1, 2015 – May 31, 2016 1st Quarter High Sales Price ............................ $ 4.77 3.51 Low Sales Price ............................. 3rd 2nd Quarter Quarter $ 4.83 $ 5.03 3.49 4.00 4th Quarter $ 4.12 3.37 June 1, 2014 – May 31, 2015 1st Quarter High Sales Price ............................ $ 3.88 2.90 Low Sales Price ............................. 3rd 2nd Quarter Quarter $ 3.59 $ 4.84 3.34 3.05 4th Quarter $ 5.50 3.66 There were 67 holders of record of the Company’s Common Stock as of June 30, 2016. Additionally, the Company estimates that there were approximately 800 beneficial holders as of that date. There were no dividends declared or paid by the Company with respect to its shares of Common Stock during the last two fiscal years. The Company has no current plans to implement a quarterly dividend program or pay any other special cash dividend. 15 TRANSFER AGENT Continental Stock Transfer 17 Battery Place New York, NY 10004 212-509-4000 AUDITORS CohnReznick LLP 100 Jericho Quadrangle Suite 223 Jericho, NY 11753 COUNSEL Giordano, Halleran & Ciesla, P.C. 125 Half Mile Road Suite 300 Red Bank, NJ 07701 CORPORATE HEADQUARTERS 400 Oser Avenue Suite 150 Hauppauge, NY 11788 631-231-0333 SUBSIDIARY TSR Consulting Services, Inc. New York City 420 Lexington Avenue Suite #835 New York, NY 10170 212-986-4600 E-mail: tsrny@tsrconsulting.com New Jersey 379 Thornall Street 6th Floor Edison, NJ 08837 732-321-9000 E-mail: tsrnj@tsrconsulting.com Long Island 400 Oser Avenue Suite 150 Hauppauge, NY 11788 631-231-0333 E-mail: tsrli@tsrconsulting.com DIRECTORS Joseph F. Hughes Chairman of the Board Chief Executive Officer President and Treasurer Christopher Hughes Senior Vice President and President TSR Consulting Services, Inc. James J. Hill Director Retired Executive Vice President Sales & Marketing, MRA Publications, Inc. Brian J. Mangan Director Retired Senior Vice President Finance, ABC Television Network Raymond A. Roel Director Principal, Ray Roel Consulting LLC OFFICERS Joseph F. Hughes Chairman of the Board Chief Executive Officer President and Treasurer Christopher Hughes Senior Vice President and President TSR Consulting Services, Inc. John G. Sharkey Vice President, Finance and Secretary Copies of the Company’s Form 10-K are available, without charge, to shareholders upon written request to: John G. Sharkey, Vice President, Finance, TSR, Inc., 400 Oser Avenue, Suite 150, Hauppauge, NY 11788
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