Item 1. Financial Statements
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
November 30, 2018
(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. The condensed balance sheet as of May 31, 2018,
which has been derived from audited financial statements, and the unaudited 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 and six months ended November 30, 2018 are unaudited; however, in the opinion of management,
such statements include all adjustments (consisting of normal recurring adjustments) 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, 2019. 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, 2018.
|
2.
|
Net Income (Loss) Per Common Share
|
Basic net income (loss) per common
share is computed by dividing net 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 November 30, 2018 and May 31, 2018:
|
|
|
November 30,
2018
|
|
|
May 31,
2018
|
|
|
Cash in banks
|
|
$
|
3,941,517
|
|
|
$
|
4,723,700
|
|
|
Money market funds
|
|
|
607,941
|
|
|
|
599,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,549,458
|
|
|
$
|
5,323,437
|
|
Effective June 1, 2018, the Company
adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, using
the modified retrospective method. This update outlined a comprehensive new revenue recognition model designed to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The new standard also requires additional quantitative and qualitative disclosures. The
adoption allows companies to apply the new revenue standard to reporting periods beginning in the year the standard is first implemented,
while prior periods continue to be reported in accordance with previous accounting guidance. Since the adoption of Accounting Standards
Codification (“ASC”) 606 did not have a significant impact on the recognition of revenue, the Company did not have
an opening retained earnings adjustment.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
November 30, 2018
(Unaudited)
In March 2016, the Financial
Accounting Standards Board (“FASB”) issued ASU 2016-08,
Principal versus Agent Consideration
(Topic 606). This
update contains guidance on principal versus agent assessments when a third party is involved in providing goods or services to
a customer. It specifies that an entity is a principal, and thus records revenue on a gross basis, if it controls a good or service
before transferring the good or service to the customer. An entity is an agent, and thus records revenue on a net basis, if it
arranges for a good or service to be provided by another entity. This update is effective for the Company in the fiscal year ending
May 31, 2019 as part of the adoption of ASC 606.
In May 2016, the FASB issued
ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
(Topic 606). This update provides certain clarifications
to reduce potential diversity and to simplify the standard. The amendments in ASU 2016-12 clarify the following key areas: assessing
collectibility; presenting sales taxes and other similar taxes collected from customers; noncash consideration; contract modifications
at transition; completed contracts at transition; and disclosing the accounting change in the period of adoption. This update is
effective for the Company in the fiscal year ending May 31, 2019 as part of the adoption of ASC 606.
Revenues are recognized as control
of the promised service is transferred to customers, in an amount that reflects the consideration expected in exchange for the
services. Revenue from contract assignments are recognized over time, based on hours worked by the Company’s contract professionals.
The performance of the requested service over time is the single performance obligation for assignment revenues. Certain customers
may receive discounts (e.g., volume discounts, rebates, prompt-pay discounts) and adjustments to the amounts billed. These discounts,
rebates and adjustments are considered variable consideration. Volume discounts are the largest component of variable consideration
and are estimated using the most likely amount method prescribed by ASC 606, contracts terms and estimates of revenue. Revenues
are recognized net of variable consideration to the extent that it is probable that a significant reversal of revenues will not
occur in subsequent periods. Payment terms vary and the time between invoicing and when payment is due is not significant. There
are no financing components to the Company’s arrangements. There are no incremental costs to obtain contracts and costs to
fulfill contracts are expensed as incurred. The Company’s operations are primarily located in the United States.
The Company recognizes most of
its revenue on a gross basis when it acts as a principal in its transactions. The Company has direct contractual relationships
with its customers, bears the risks and rewards of its arrangements, has the discretion to select the contract professionals and
establish the price for the services to be provided. Additionally, the Company retains control over its contract professionals
based on its contractual arrangements. The Company primarily provides services through its employees and to a lesser extent, through
subcontractors; the related costs are included in cost of sales. The Company includes billable expenses (out-of-pocket reimbursable
expenses) in revenue and the associated expenses are included in cost of sales.
|
5.
|
Certificates of Deposit and Marketable Securities
|
The Company has characterized
its investments in certificates of deposit and 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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
November 30, 2018
(Unaudited)
The following are the major categories
of assets measured at fair value on a recurring basis as of November 30, 2018 and May 31, 2018 using quoted prices in active markets
for identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable inputs (Level 3):
|
November 30, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
-
|
|
|
$
|
492,000
|
|
|
$
|
-
|
|
|
$
|
492,000
|
|
|
Equity Securities
|
|
|
39,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,448
|
|
|
|
|
$
|
39,448
|
|
|
$
|
492,000
|
|
|
$
|
-
|
|
|
$
|
531,448
|
|
|
May 31, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
-
|
|
|
$
|
493,000
|
|
|
$
|
-
|
|
|
$
|
493,000
|
|
|
Equity Securities
|
|
|
44,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,160
|
|
|
|
|
$
|
44,160
|
|
|
$
|
493,000
|
|
|
$
|
-
|
|
|
$
|
537,160
|
|
Based upon the Company’s
intent and ability to hold its certificates of deposit to maturity (which maturities range up to twelve months at purchase), such
securities have been classified as held-to-maturity and are carried at amortized cost, which approximates market value. The Company’s
equity securities are classified as trading securities, which are carried at fair value, as determined by quoted market prices,
which is a Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings.
The Company’s certificates of deposit and marketable securities at November 30, 2018 and May 31, 2018 are summarized as follows:
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Recorded
|
|
|
November 30, 2018
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
492,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
492,000
|
|
|
Equity Securities
|
|
|
16,866
|
|
|
|
22,582
|
|
|
|
-
|
|
|
|
39,448
|
|
|
|
|
$
|
508,866
|
|
|
$
|
22,582
|
|
|
$
|
-
|
|
|
$
|
531,448
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Recorded
|
|
|
May 31, 2018
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
493,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
493,000
|
|
|
Equity Securities
|
|
|
16,866
|
|
|
|
27,294
|
|
|
|
-
|
|
|
|
44,160
|
|
|
|
|
$
|
509,866
|
|
|
$
|
27,294
|
|
|
$
|
-
|
|
|
$
|
537,160
|
|
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
November 30, 2018
(Unaudited)
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.
|
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.
Cash Dividend
On May 25, 2017, the Company
declared a special cash dividend of $1.00 per common share payable on July 14, 2017 to shareholders of record on June 16, 2017.
This dividend totaled $1,962,062. The Company has no current plans to implement a quarterly dividend program or pay any other special
cash dividend.
Common Stock Transactions
On July 24, 2018 the Company became
aware that Joseph F. Hughes and Winifred Hughes filed Amendments to Statements on Schedule 13D (the “Schedules 13D”)
with the United States Securities and Exchange Commission (the “SEC”) on that date, in which Joseph F. Hughes and Winifred
Hughes disclosed that they had collectively sold 819,491 shares of the Company’s Common Stock, par value $0.01 per share
(“Common Stock”), jointly held by them in a privately-negotiated transaction to Zeff Capital, L.P., QAR Industries,
Inc. and Fintech Consulting LLC. The Schedules 13D stated that the sale closed on July 23, 2018. Joseph F. Hughes is the former
Chairman and Chief Executive Officer of the Company. Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC acquired,
in the aggregate, 41.8% of the Company’s shares of issued and outstanding Common Stock from Joseph F. Hughes and Winifred
Hughes in this transaction. Amendments to Statements on Schedule 13D previously filed by Joseph F. Hughes and Winifred Hughes on
July 17, 2018 attached an exhibit wherein it was stated that prior to the transaction described above, Zeff Capital, L.P. owned
77,615 shares or approximately 4% of the Company’s issued and outstanding Common Stock.
The Company became aware on
August 23, 2018 that Zeff Capital, L.P., Zeff Holding Company, LLC and Daniel Zeff filed an Amendment to Statement on Schedule
13D with the SEC disclosing the additional purchase by Zeff Capital, L.P. of an aggregate of 55,680 shares of Common Stock. As
a result of these additional purchases of Common Stock, Zeff Capital, L.P., Zeff Holding Company, LLC and Daniel Zeff own a total
of 437,774 shares of Common Stock, which represents approximately 22.3% of the Company’s issued and outstanding Common Stock.
The Company became aware on
November 20, 2018 that QAR Industries, Inc. and Robert Fitzgerald filed an Amendment to Statement on Schedule 13D with the SEC
disclosing that QAR Industries, Inc. and Robert Fitzgerald own a total of 139,869 shares of Common Stock, which represents approximately
7.1% of the Company’s issued and outstanding Common Stock.
Based upon the filings described
above, Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC are the owners of an aggregate of 953,743 shares Common
Stock, which represents approximately 48.6% of the Company’s issued and outstanding Common Stock. Zeff Capital, L.P., QAR
Industries, Inc. and Fintech Consulting LLC have not filed Statements on Schedule 13D stating that they are acting as a group.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2018
(Unaudited)
Rights
Plan / Preferred Stock
On
August 29, 2018, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a “Right”)
for each share of Common Stock of the Company outstanding on August 29, 2018 (the “Record Date”) to the stockholders
of record on that date. In connection with the distribution of the Rights, the Company entered into a Rights Agreement (the “Rights
Agreement”), dated as of August 29, 2018, between the Company and Continental Stock Transfer & Trust Company, as Rights
Agent. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Class A Preferred
Stock, Series One, par value $0.01 per share (“Preferred Stock”), of the Company at a price of $24.78 per one one-hundredth
of a share of Preferred Stock represented by a Right (the “Purchase Price”), subject to adjustment.
Distribution
Date; Exercisability; Expiration
Initially,
the Rights will be attached to all certificates for shares of Common Stock and no separate certificates evidencing the Rights
(“Rights Certificates”) will be issued. Until the Distribution Date (as defined below), the Rights will be transferred
with and only with shares of Common Stock. As long as the Rights are attached to the shares of Common Stock, the Company will
issue one Right with each new share of Common Stock so that all such shares of Common Stock will have Rights attached.
The
Rights will separate and begin trading separately from the Common Stock, and Rights Certificates will be issued to evidence the
Rights, on the earlier to occur of (a) the Close of Business (as such term is defined in the Rights Agreement) on the tenth
day following a public announcement, or the public disclosure of facts indicating, that a Person (as such term is defined in the
Rights Agreement), group of affiliated or associated Persons or any other Person with whom such Person is Acting in Concert (as
defined below) has acquired Beneficial Ownership (as defined below) of 5% or more of the outstanding Common Stock (an “Acquiring
Person”) (or, in the event an exchange is effected in accordance with Section 27 of the Rights Agreement and the Board
of Directors determines that a later date is advisable, then such later date) or (b) the Close of Business on the tenth Business
Day (as such term is defined in the Rights Agreement) (or such later date as may be determined by action of the Board of Directors
prior to such time as any Person becomes an Acquiring Person) following the commencement of a tender offer or exchange offer the
consummation of which would result in the Beneficial Ownership by a Person or group of 5% or more of the outstanding Common Stock
(the earlier of such dates, the “Distribution Date”). As soon as practicable after the Distribution Date, unless the
Rights are recorded in book-entry or other uncertificated form, the Company will prepare and cause the Right Certificates to be
sent to each record holder of Common Stock as of the Close of Business on the Distribution Date.
An
“Acquiring Person” will not include (i) the Company, (ii) any Subsidiary (as such term is defined in
the Rights Agreement) of the Company, (iii) any employee benefit plan or employee stock plan of the Company or any Subsidiary
of the Company, or any trust or other entity organized, appointed, established or holding Common Stock for or pursuant to the
terms of any such plan, or (iv) any Person who or which, at the time of the first public announcement of the Rights
Agreement, is a Beneficial Owner of 5% or more of the Common Shares then outstanding (a “Grandfathered
Stockholder”). However, if a Grandfathered Stockholder becomes, after such time, the Beneficial Owner of any additional
shares of Common Stock (regardless of whether, thereafter or as a result thereof, there is an increase, decrease or no change
in the percentage of shares of Common Stock then outstanding beneficially owned by such Grandfathered Stockholder) then such
Grandfathered Stockholder shall be deemed to be an Acquiring Person unless, upon such acquisition of Beneficial Ownership of
additional shares of Common Stock, such Person is not the Beneficial Owner of 5% or more of the Common Stock then
outstanding. In addition, upon the first decrease of a Grandfathered Stockholder’s Beneficial Ownership below 5%, such
Grandfathered Stockholder will cease to be a Grandfathered Stockholder. In the event that after the time of the first public
announcement of the Rights Agreement, any agreement, arrangement or understanding pursuant to which any Grandfathered
Stockholder is deemed to be the Beneficial Owner of Common Stock expires, terminates or no longer confers any benefit to or
imposes any obligation on the Grandfathered Stockholder, any direct or indirect replacement, extension or substitution of
such agreement, arrangement or understanding with respect to the same or different shares of Common Stock that confers
Beneficial Ownership of Common Stock shall be considered the
acquisition
of Beneficial Ownership of additional shares of Common Stock by the Grandfathered Stockholder and render such Grandfathered Stockholder
an Acquiring Person for purposes of the Rights Agreement unless, upon such acquisition of Beneficial Ownership of additional shares
of Common Stock, such Person is not the Beneficial Owner of 5% or more of the Common Stock then outstanding.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2018
(Unaudited)
The
Rights are not exercisable until the Distribution Date. The Rights will expire on the Close of Business on August 29, 2021 (the
“Expiration Date”).
Redemption
At
any time prior to the Close of Business on the earlier of (a) the tenth day following the Stock Acquisition Date or (b) the Expiration
Date, the Board of Directors may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the “Redemption
Price”). The “Stock Acquisition Date” is the first date on which there is a public announcement by the Company
or an Acquiring Person that an Acquiring Person has become such, or such earlier date as a majority of the Board of Directors
becomes aware of the existence of an Acquiring Person. The redemption of the Rights may be made effective at such time, on such
basis and with such conditions as the Board of Directors in its sole discretion may establish. Immediately upon the action of
the Board of Directors ordering the redemption of the Rights, the right to exercise the Rights will terminate and the only right
of the holders of Rights will be to receive the Redemption Price.
Preferred
Stock Rights
The
Preferred Stock will not be redeemable. Each share of Preferred Stock will be entitled to receive, when, as and if declared by
the Board of Directors, (a) cash dividends in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate
per share amount of all cash dividends declared or paid on the Common Stock and (b) a preferential quarterly cash dividend (the
“Preferential Dividends”) in an amount equal to $50.00 per share of Preferred Stock less the per share amount of all
cash dividends declared on the Preferred Stock pursuant to clause (a) of this sentence. Each share of Preferred Stock will entitle
the holder thereof to 100 votes per share, voting together with the holders of the Common Stock as a single class, except as otherwise
provided in the Certificate of Designations of Class A Preferred Stock Series One filed by the Company with the Delaware Secretary
of State or the Company’s Amended and Restated Certificate of Incorporation, as amended, or Amended and Restated By-laws.
In the event of any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged
for or changed into other stock or securities, cash and/or any other property, then in any such case each outstanding share of
Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash
and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed
or exchanged, multiplied by 100. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, (a)
no distribution shall be made to the holders of shares of stock ranking junior to the Preferred Stock unless the holders of the
Preferred Stock shall have received the greater of (i) $100 per share of Preferred Stock plus an amount equal to accrued and unpaid
dividends and distributions thereon or (ii) an amount equal to 100 times the aggregate amount to be distributed per share to holders
of the Common Stock, and (b) no distribution shall be made to the holders of stock ranking on a parity upon liquidation, dissolution
or winding up with the Preferred Stock unless simultaneously therewith distributions are made ratably to the holders of the Preferred
Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Preferred
Stock are entitled under clause (a)(i) of this sentence and to which the holders of such parity shares are entitled, in each case
upon such liquidation, dissolution or winding up.
The
foregoing rights are protected by customary anti-dilution provisions.
The
foregoing description of the rights of the Preferred Stock does not purport to be complete and is qualified in its entirety by
reference to the Certificate of Designations of Class A Preferred Stock Series One.
Rights
of Holders
Until
a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2018
(Unaudited)
8.
|
Retirement
Arrangement
|
Joseph
F. Hughes, retired as Chairman of the Board, Chief Executive Officer, President and Treasurer on July 5, 2017. The Board of Directors
of the Company has elected Christopher Hughes, formerly Senior Vice President of TSR, Inc., to succeed Joseph F. Hughes as Chairman
of the Board, Chief Executive Officer, President and Treasurer. Upon his retirement, the Board awarded Joseph F. Hughes a one-time
founder’s bonus of $100,000. The Board also approved the continued payment by the Company of the remaining payments under
the lease for the automobile used by Joseph F. Hughes until the lease expired in May, 2018. Further, the Board approved the continued
payment by the Company for health insurance coverage for Joseph F. Hughes and his spouse under the Company’s executive medical
plan until May 31, 2018 and payments in lieu of the insurance coverage for two years thereafter. Joseph F. Hughes and his spouse
have remained on the executive medical plan subsequent to May 31, 2018 at the Company’s expense in lieu of the direct payments
to them for this coverage, saving the Company a small amount monthly. The total amount of these retirement benefits were accrued
in the first quarter of fiscal 2018, resulting in charges amounting to approximately $180,000 which were included in selling,
general and administrative expenses for the quarter.
From
time to time, the Company is party to various lawsuits, some involving material amounts. Except as described below, management
is not aware of any lawsuits to which the Company is a party.
On
October 16, 2018, the Company was served with a complaint filed in the Supreme Court of the State of New York, Queens County,
by Susan Paskowitz, a stockholder of the Company, against the Company; Joseph F. Hughes and Winifred M. Hughes; current and former
directors Christopher Hughes, Raymond A. Roel, Brian J. Mangan, Regina Dowd, James J. Hill, William Kelly, and Eric Stein; as
well as stockholders Zeff Capital, L.P. (“Zeff”), QAR Industries, Inc. (“QAR”) and Fintech Consulting
LLC (“Fintech,” and collectively with Zeff and QAR, the “Zeff Group”). The complaint purports to be a
class action lawsuit asserting claims on behalf of all minority stockholders of the Company. Ms. Paskowitz alleges the following:
the sale by Joseph F. Hughes and Winifred M. Hughes of an aggregate of 819,491 shares of the Company’s common stock (“controlling
interest”) to Zeff, QAR and Fintech was in breach of Joseph F. Hughes’ and Winifred M. Hughes’ fiduciary duties
and to the detriment of the Company’s minority stockholders; the members of the Board of Directors of the Company named
in the complaint breached their fiduciary duties by failing to immediately adopt a rights plan that would have prevented Joseph
F. Hughes and Winifred M. Hughes from selling their shares and preserved a higher premium for all stockholders; Zeff, QAR, and
Fintech are “partners” and constitute a “group.” Ms. Paskowitz also asserts that the Zeff Group aided
and abetted Joseph F. Hughes’ and Winifred M. Hughes’ conduct and ultimately seeks to buy out the remaining shares
of the Company at an unfair price.
The
complaint filed by Ms. Paskowitz on October 11, 2018 seeks declaratory judgment and unspecified monetary damages. The complaint
requests declarations from the court that: (1) Joseph F. Hughes’ and Winifred M. Hughes’ sale of their controlling
interest to the Zeff Group was in breach of their fiduciary duties, and that those shares may not be voted or sold back to the
Company pending further court order; (2) the members of the Board named in the complaint breached their fiduciary duties by failing
to timely adopt a stockholder rights plan, which resulted in the loss of the ability to auction the Company off to the highest
bidder without interference from the Zeff Group; and (3) the Zeff Group must make a number of disclosures regarding their plans
for the Company, their relationships with one another, and any agreements with Joseph F. Hughes and Winifred M. Hughes. The complaint
has not assigned any monetary values to alleged damages, but it seeks: (1) for Joseph F. Hughes and Winifred M. Hughes, and the
Zeff Group, to disgorge any benefit they received from the sale of the Hughes’ controlling interest; (2) for the Board of
Directors of the Company to pay damages equal to the reduced value of the class members’ shares as auctionable assets; and
(3) reasonable attorneys’ fees and costs. Although the Company is named as a defendant, there are no claims or damages allegations
against the Company, and the complaint states that it names the Company solely to effectuate equitable relief if granted.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2018
(Unaudited)
On
November 5, 2018, the Company was served with a complaint filed in the Delaware Court of Chancery by Fintech. The complaint purports
to be a stockholder derivative lawsuit on behalf of the Company against all current members of the Board of Directors of the Company.
Fintech claims that the Board of Directors breached its fiduciary duties owed to the Company’s stockholders by approving
certain anti-takeover measures. Fintech seeks relief in the following forms: (1) a declaration that the anti-takeover measures
are invalid; (2) a declaration that no change in control of the Company has occurred for purposes of the Company’s stockholder
rights plan or the employment agreement between the Company and the Company’s Chairman, President and Chief Executive Officer,
(3) unspecified money damages; and (4) attorneys’ fees and costs. Fintech also seeks an expedited trial.
On
November 8, 2018, the Company was served with a second complaint filed by Susan Paskowitz, which she filed in the Delaware Court
of Chancery on November 6, 2018. Ms. Paskowitz purports to bring the complaint directly, and in the alternative, derivatively
on behalf of the Company, against Fintech, all current members of the Board of Directors of the Company, and the Company as a
nominal defendant.
The
complaint filed by Ms. Paskowitz in the Delaware Court of Chancery alleges that the stockholder rights plan adopted by the Company
is reasonable and that the relief Fintech seeks in the derivative suit that Fintech filed in the Delaware Court of Chancery (which
is described above) is excessive and not in the best interest of the Company’s stockholders. Ms. Paskowitz’s complaint
additionally alleges that the approval by the Company’s Board of Directors of a change-in-control agreement with Christopher
Hughes, the Company’s President, CEO, and Chairman of the Board, and an amendment to the by-laws of the Company eliminating
the stockholders’ right to call a special meeting of stockholders, are unreasonable and were adopted in breach of the Board’s
fiduciary duties.
Ms.
Paskowitz’s complaint seeks declaratory relief. It requests that the court (1) reject Fintech’s challenge to the Board’s
adoption of a stockholder rights plan; (2) void Christopher Hughes’ change-in-control agreement; and (3) void the special
meeting amendment. Although the Company is named as a nominal defendant, there are no claims against the Company, and the complaint
states that it names the Company solely to effectuate equitable or declaratory relief if granted.
The
Company intends vigorously to defend against any and all allegations against the Company and current and former directors and
officers of the Company contained in the complaints described above.
In
addition, on December 21, 2018, the Company filed a complaint in the United Stated District Court, Southern District of New York,
against Zeff Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert Fitzgerald, Fintech Consulting
LLC d/b/a ApTask, and Tajuddin Haslani for violations of the disclosure and anti-fraud requirements of the federal securities
laws under Sections 13(d) and 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and the related rules
and regulations promulgated by the SEC, for failing to disclose to the Company and its stockholders their formation of a group
and the group’s intention to seize control of the Company. The complaint requests that the court, among other things, declare
that the defendants have solicited proxies without filing timely, accurate and complete reports on Schedule 13D and Schedule 14A
in violation of Sections 13(d) and 14(a) of the Exchange Act, direct the defendants to file with the SEC complete and accurate
disclosures, enjoin the defendants from voting any of their shares prior to such time as complete and accurate disclosures have
been filed, and enjoin the defendants from further violations of the Exchange Act with respect to the securities of the Company.
At
this time, it is not possible to predict the outcome of any of these litigation matters or their effect on the Company and the
Company’s consolidated financial position.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2018
(Unaudited)
10.
|
Recently
Adopted Accounting Pronouncements
|
Effective
June 1, 2018, the Company adopted ASU No. 2016-01,
Financial Instruments-Overall (Subtopic 825-10),
which requires 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. The adoption of this standard did not have significant impact on the Company’s consolidated financial
statements.
11.
|
Recent
Accounting Pronouncements
|
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.
TSR,
INC. AND SUBSIDIARIES