NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August
31, 2019
(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, 2019, 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 ended August 31, 2019 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, 2020. 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, 2019.
|
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 August 31, 2019 and May 31, 2019:
|
|
August 31,
2019
|
|
|
May 31,
2019
|
|
Cash in banks
|
|
$
|
2,508,422
|
|
|
$
|
3,072,218
|
|
Money market funds
|
|
|
304,097
|
|
|
|
622,771
|
|
|
|
$
|
2,812,519
|
|
|
$
|
3,694,989
|
|
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
August
31, 2019
(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. The Company adopted this ASU on June 1,
2018 as part of the adoption of ASC 606 and it did not have a significant impact.
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. The Company adopted this ASU on June 1, 2018 as part of the adoption of ASC 606 and it did not have a significant impact.
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
August
31, 2019
(Unaudited)
The
following are the major categories of assets measured at fair value on a recurring basis as of August 31, 2019 and May 31, 2019
using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant
unobservable inputs (Level 3):
August 31, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of Deposit
|
|
$
|
-
|
|
|
$
|
245,000
|
|
|
$
|
-
|
|
|
$
|
245,000
|
|
Equity Securities
|
|
|
37,928
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,928
|
|
|
|
$
|
37,928
|
|
|
$
|
245,000
|
|
|
$
|
-
|
|
|
$
|
282,928
|
|
May 31, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of Deposit
|
|
$
|
-
|
|
|
$
|
492,000
|
|
|
$
|
-
|
|
|
$
|
492,000
|
|
Equity Securities
|
|
|
35,232
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,232
|
|
|
|
$
|
35,232
|
|
|
$
|
492,000
|
|
|
$
|
-
|
|
|
$
|
527,232
|
|
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 August 31,
2019 and May 31, 2019 are summarized as follows:
August 31, 2019
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Certificates of Deposit
|
|
$
|
245,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
245,000
|
|
Equity Securities
|
|
|
16,866
|
|
|
|
21,062
|
|
|
|
-
|
|
|
|
37,928
|
|
|
|
$
|
261,866
|
|
|
$
|
21,062
|
|
|
$
|
-
|
|
|
$
|
282,928
|
|
May 31, 2019
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Certificates of Deposit
|
|
$
|
492,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
492,000
|
|
Equity Securities
|
|
|
16,866
|
|
|
|
18,366
|
|
|
|
-
|
|
|
|
35,232
|
|
|
|
$
|
508,866
|
|
|
$
|
18,366
|
|
|
$
|
-
|
|
|
$
|
527,232
|
|
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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August
31, 2019
(Unaudited)
|
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.
Common
Stock Transactions
On
July 24, 2018, the Company became aware that Joseph F. Hughes and Winifred Hughes filed Amendments to 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 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 was 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
issued and outstanding Common Stock from Joseph F. Hughes and Winifred Hughes in this transaction. Amendments to 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 July 30, 2018 that Fintech Consulting LLC and Tajuddin Haslani filed a Schedule 13D with the SEC disclosing
beneficial ownership of 376,100 shares of Common Stock, which represents approximately 19.2% 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 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
beneficially 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 August 28, 2018 that QAR Industries, Inc. and Robert Fitzgerald filed an Amendment to Schedule 13D with
the SEC disclosing the additional purchase by QAR Industries, Inc. of an aggregate of 4,070 shares of Common Stock. As a result
of these additional purchases of Common Stock, QAR Industries, Inc. and Robert Fitzgerald beneficially own a total of 143,900
shares of Common Stock, which represents approximately 7.3% of the Company’s issued and outstanding Common Stock. The Company
became aware on September 10, 2019 that QAR Industries, Inc. and Robert Fitzgerald filed an Amendment to Schedule 13D with the
SEC disclosing beneficial ownership of an aggregate of 139,200 shares of Common Stock, which represents approximately 7.1% of
the Company’s issued and outstanding Common Stock.
As
a result of the transactions described above, Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC are the beneficial
owners of an aggregate of 953,074 shares of Common Stock, which represents approximately 48.6% of the Company’s issued and
outstanding Common Stock.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August
31, 2019
(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, par value $0.01 per share (“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.
On
August 30, 2019, the Company entered into a settlement and release agreement (the “Settlement Agreement”) with Zeff
Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert Fitzgerald, Fintech Consulting LLC and Tajuddin
Haslani (collectively, the “Investor Parties”), pursuant to which the Company
agreed to, among other things, amend and restate the Rights Agreement to provide that a “Distribution Date” (as defined
below) shall not occur as a result of any request by any of the Investor Parties calling for a special meeting pursuant to Article
II, Section 5 of the Amended and Restated By-Laws of the Company in accordance with the terms of the Settlement Agreement. (See
Note 8, “Other Matters.”)
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, 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
August 31, 2019
(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 on 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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(Unaudited)
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.
From time to time, the Company
is party to various lawsuits, some involving material amounts. Management is not aware of any lawsuits that would have a material
adverse impact on the consolidated financial position of the Company.
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. , QAR Industries, Inc. and Fintech Consulting LLC. 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 Capital,
L.P., QAR Industries, Inc. and Fintech Consulting LLC 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 Zeff Capital, L.P.,
QAR Industries, Inc. and Fintech Consulting LLC aided and abetted Joseph F. Hughes’ and Winifred M. Hughes’ conduct,
and ultimately sought to buy out the remaining shares of the Company at an unfair price. The complaint requests declarations from
the court that: (1) Joseph F. Hughes’ and Winifred M. Hughes’ sale of their controlling interest to Zeff Capital, L.P.,
QAR Industries, Inc. and Fintech Consulting LLC 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 of Directors 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 Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting
LLC, and (3) Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC 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 Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC, to disgorge any benefit they received from the sale of
the Hughes’ controlling interest, (2) for the Board of Directors 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 damage allegations against the Company, and the complaint states that it names the Company solely to effectuate
equitable relief if granted.
On May 6, 2019, a
stipulation of dismissal was filed in this action with respect to defendants Joseph F. Hughes, Winifred M. Hughes, and Regina
Dowd, in which the plaintiff and these defendants agreed to the dismissal of all claims asserted by and against them, without
prejudice. On July 26, 2019, the Company filed cross-claims against Zeff Capital, L.P., QAR Industries, Inc. and Fintech
Consulting LLC relating to alleged breaches of fiduciary duties and for indemnification and contribution filed.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(Unaudited)
On June 14, 2019, Ms. Paskowitz
filed an amended complaint in the Supreme Court of the State of New York, Queens County against the members of the Board of Directors
and Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC, which asserts substantially similar allegations to those
contained in the October 11, 2018 complaint. In addition to the members of the Board of Directors named in the original complaint,
the amended complaint names directors Ira Cohen, Joseph Pennacchio, and William Kelly as defendants. The amended complaint also
asserts a derivative claim purportedly on behalf of the Company against the named members of the Board of Directors. The amended
complaint seeks declaratory judgment and unspecified monetary damages. The complaint requests: (1) a declaration from the court
that the members of the Board of Directors 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 Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC; (2) damages derivatively on behalf of the Company for
unspecified harm caused by the Directors’ alleged breaches of fiduciary duties; (3) damages and equitable relief derivatively
on behalf of the Company for the Directors’ alleged failure to adopt proper corporate governance practices; and (4) damages
and injunctive relief against Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC based on their knowing dissemination
of false or misleading public statements concerning their status as a group. The complaint has not assigned any monetary values
to alleged damages.
On July 15, 2019, the Company
filed an answer to the amended complaint and cross-claims against Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting
LLC for breaches of their fiduciary duties, aiding and abetting breaches of fiduciary duties, and indemnification and contribution
based on their misappropriation of material nonpublic information and their failure to disclose complete and accurate information
in SEC filings concerning their group actions to attempt a creeping takeover of the Company.
In addition, on December 21,
2018, the Company filed a complaint in the United States 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, 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. The Company has filed motions for preliminary injunction and
expedited discovery. The court held an initial pretrial conference on April 23, 2019 during which it ordered the parties to participate
in a mediation of the claims raised in the action. The parties subsequently participated in mediation sessions through the Court-annexed
Mediation Program; however, no resolution has been reached.
On January 7, 2019, Ms. Paskowitz
filed a related action against Zeff Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert Fitzgerald,
Fintech Consulting LLC, and Tajuddin Haslani in the Southern District of New York, which asserts claims against them for breach
of fiduciary duty and under federal securities laws similar to those asserted in the Company’s action. Although the Company
is not a party to Ms. Paskowitz’s action, the court has determined to treat the Company’s and Ms. Paskowitz’s
respective actions as related.
On August
7, 2019, following the Company’s initial rescheduling of the 2018 Annual Meeting for September 13, 2019 and the filing of
Preliminary Proxy Statements by the Company and Zeff Capital, L.P., Zeff Capital, L.P. filed a complaint in the Delaware Court
of Chancery against the Company seeking an order requiring the Company to hold its next annual meeting of stockholders on or around
September 13, 2019, and obligating the Company to elect Class I and Class III directors at that annual meeting.
On August
30, 2019, the Company entered into the Settlement and Release Agreement with the Investor Parties with respect to the proxy contest
pertaining to the election of directors at the 2018 Annual Meeting, which was agreed to be held on October 22, 2019. Pursuant to
the Settlement Agreement, the parties have agreed to forever settle and resolve any and all disputes between the parties, including
without limitation disputes arising out of or relating to the following litigations:
(i) The
complaint relating to alleged breaches of fiduciary duties filed on November 1, 2018 by Fintech Consulting LLC against the Company
in the Delaware Court of Chancery, which was previously dismissed voluntarily;
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(Unaudited)
(ii) The
complaint for declaratory and injunctive relief for violations of the federal securities laws filed on December 21, 2018 by the
Company against the Investor Parties in the United States District Court in the Southern District of New York;
(iii) Cross-claims
relating to alleged breaches of fiduciary duties and for indemnification and contribution filed on July 26, 2019 by the Company
against the Investor Parties in New York Supreme Court, Queens County; and
(iv) The
complaint to compel annual meeting of stockholders filed on August 7, 2019 by Zeff Capital, L.P. against the Company in the Delaware
Court of Chancery.
No party admitted
any liability by entering into the Settlement Agreement. The Settlement Agreement did not resolve the pending litigation filed
by Susan Paskowitz against the Company, Joseph F. Hughes, Winifred M. Hughes and certain current and former directors of the Company
in the Supreme Court of the State of New York on October 11, 2018, which is the only ongoing litigation in which the Company is
involved.
In addition,
concurrently with the Settlement Agreement, the parties entered into a share repurchase agreement (the “Repurchase Agreement”)
under which the Company may purchase 633,074 shares of the Company’s Common Stock, at a purchase price of $6.25 per share,
from the Investor Parties, and Christopher Hughes, the Chairman of the Board of Directors and the Chief Executive Officer of the
Company, may purchase 320,000 shares of Common Stock, at a purchase price of $6.25 per share, from the Investor Parties, for an
aggregate purchase price of $5,956,712.50 in cash, subject to the terms and conditions contained in the Repurchase Agreement (the
“Repurchase”). The Company also agreed to make a payment of $1,543,287.50 to the Investor Parties at the closing of
the Repurchase for the settlement of all disputes between the parties, dismissal of any and all claims related thereto, including
the lawsuits mentioned above, and the settlement and release of any and all matters (the “Settlement Payment”). There
can be no assurance that either the Company or Christopher Hughes will ultimately consummate these purchases.
Pursuant to
the Settlement Agreement, (1) the Company agreed to adopt an amendment to the Company’s Amended and Restated By-Laws, dated
April 9, 2015 (the “By-Laws Amendment”), providing that stockholders of the Company owning at least forty percent (40%)
of the issued and outstanding Common Stock may request a special meeting of stockholders; (2) the Investor Parties agreed not to
take any action to call or otherwise cause a special meeting of stockholders to occur prior to December 30, 2019 unless the Company
fails to hold the 2018 Annual Meeting; (3) the Company agreed to amend and restate the Company’s Rights Agreement, dated
August 29, 2018 (the “Amended Rights Agreement”), to confirm that a Distribution Date (as defined in the Amended and
Restated Rights Agreement) shall not occur as a result of any request by any of the Investor Parties for a special meeting; (4)
the Company agreed that prior to the earlier of (A) the completion of the Repurchase and the payment of the Settlement Payment
and (B) January 1, 2020, the Board of Directors shall not consist of more than seven (7) directors.
The Settlement
Agreement provides the Company will solicit proxies for two alternative Class I director slates for election at the 2018 Annual
Meeting: one slate for the Company’s nominees, and one slate for nominees selected by Zeff Capital, L.P. If the Company completes
the Repurchase and makes the Settlement Payment prior to the 2018 Annual Meeting, Zeff Capital, L.P. will withdraw its director
slate from consideration at the 2018 Annual Meeting and a vote for Zeff Capital, L.P.’s nominees shall constitute a vote
for the Company’s nominees. If the Repurchase is not completed or the Settlement Payment is not made prior to the 2018 Annual
Meeting, then the Company will withdraw its director slate and a vote for the Company’s nominees shall constitute a vote
for the slate proposed by Zeff Capital, L.P. If the Repurchase is not completed or the Settlement Payment is not made as of 5:00
pm, Eastern Time, on December 30, 2019, the current members of the Board of Directors will resign from the Board. If the Repurchase
is completed after the 2018 Annual Meeting and prior to December 30, 2019, the two directors nominated by Zeff Capital, L.P. will
resign from the Board of Directors.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(Unaudited)
In addition,
the Settlement Agreement provides for mutual releases between the Company and each of the Investor Parties and certain of their
affiliates. Each of the Investor Parties and certain of their affiliates also agreed to certain customary standstill provisions,
including without limitation, with regard to certain actions in connection with the 2018 Annual Meeting, Extraordinary Transactions
(as defined in the Settlement Agreement) with the Company, and the acquisition of any securities (or beneficial ownership
thereof) of the Company, each of which expire on the later of December 30, 2019, or, should the Company consummate the Repurchase
and the payment of the Settlement Payment prior thereto, the opening of the Company’s advance notice period in respect of
its annual meeting occurring during the calendar year 2027.
The foregoing
is not a complete description of the terms of the Settlement Agreement and the Share Repurchase Agreement. For a further description
of the terms of the Settlement Agreement and the Share Repurchase Agreement, including copies of the Settlement Agreement and Share
Repurchase Agreement, please see the Company’s Current Report on Form 8-K filed by the Company with the SEC on September
3, 2019.
At this time,
it is not possible to predict the outcome of the litigation matters or their effect on the Company and the Company’s consolidated
financial position.
|
9.
|
Recently Adopted Accounting Pronouncements
|
Effective June 1, 2019, the
Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, which sets out the principle for the
recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The
new standard requires lessees to classify leases as either finance or operating leases and record a right-of-use asset and a lease
liability for all leases with a term of greater than 12 months regardless of their classification. An accounting policy election
may be made to account for leases with a term of 12 months or less similar to existing guidance for operating leases today. ASU
No. 2016-02 supersedes the existing guidance on accounting for leases. In July 2018, the FASB issued ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements, which allows for an optional transition method for the adoption of Topic 842. The two permitted
transition methods are now the modified retrospective approach, which applies the new lease requirements at the beginning of the
earliest period presented, and the optional transition method, which applies the new lease requirements through a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. ASU 2016-02 is effective for our fiscal year
ending May 31, 2020 and the interim periods within that year. The Company adopted this standard in the first quarter of fiscal
2020 using the optional transition method. The Company also intends to elect the practical expedients that allow us to carry forward
the historical lease classification. The Company has established an inventory of existing leases and implemented a new process
of evaluating the classification of each lease. The financial impact of the adoption of the new standard at June 1, 2019 increased
total assets and total liabilities by approximately $690,000. The financial impact of the adoption primarily relates to the capitalization
of right-of-use assets and recognition of lease liability related to operating leases. The Company will implement changes to its
processes and internal controls, as necessary, to meet the reporting and disclosure requirements of the new standard.
The Company leases the space for its three offices.
Under ASC 842, at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified
as an operating or finance lease. Operating leases are in right-of-use assets and operating lease liabilities in our consolidated
balance sheets.
The Company’s leases for
its three offices are classified as operating leases.
The lease agreements expire
on February 28, 2020, December 31, 2020 and August 31, 2022, respectively, and do not include any renewal options.
In addition to the monthly base
amounts in the lease agreements, the Company is required to pay real estate taxes and operating expenses during the lease terms.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
August 31, 2019
(Unaudited)
For the three months ended August
31, 2019, the Company’s operating lease expense for these leases was $96,958.
Future minimum lease payments
under non-cancellable operating leases as of August 31, 2019 were as follows:
Twelve Months Ended August 31
|
|
|
|
2020
|
|
$
|
313,626
|
|
2021
|
|
|
187,693
|
|
2022
|
|
|
161,707
|
|
Total undiscounted operating lease payments
|
|
|
663,026
|
|
Less imputed interest
|
|
|
55,175
|
|
Present value of operating lease payments
|
|
$
|
607,851
|
|
The following table sets forth
the right-of-use assets and operating lease liabilities as of August 31, 2019:
Assets
|
|
|
|
Right-of-use assets
|
|
$
|
606,199
|
|
Liabilities
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
281,205
|
|
Long-term operating lease liabilities
|
|
|
326,646
|
|
Total operating lease liabilities
|
|
$
|
607,851
|
|
The weighted average remaining
lease term for the Company’s operating leases is 2.3 years.
TSR, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should
be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements.
Forward-Looking Statements
Certain statements contained in Management’s
Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company’s plans,
future prospects and the Company’s future cash flow requirements are forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward-looking statements
due to known and unknown risks and uncertainties, including but not limited to the following: the statements concerning the ultimate
consummation of the Company’s and Christopher Hughes’ purchase of Common Stock from the Investor Parties and the slate
of nominees that will stand for election to the Board; the success of the Company’s plan for growth, both internal and through
the previously announced pursuit of suitable acquisition candidates; the impact of adverse economic conditions on client spending
which has a negative impact 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 to the Company’s ability to maintain its relations with existing customers and expand its 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;
the risks, uncertainties and expense of the legal proceedings to which the Company is a party; and other risks and uncertainties
set forth in the Company’s filings with the Securities and Exchange Commission. The Company is under no obligation to publicly
update or revise forward-looking statements.
Results of Operations
The following table sets forth, for the
periods indicated, certain financial information derived from the Company’s condensed consolidated statements of operations.
There can be no assurance that trends in operating results will continue in the future:
Three months ended August 31, 2019 compared with three months
ended August 31, 2018
|
|
(Dollar
amounts in thousands)
Three Months Ended
|
|
|
|
August
31,
2019
|
|
|
August
31,
2018
|
|
|
|
Amount
|
|
|
%
of
Revenue
|
|
|
Amount
|
|
|
%
of
Revenue
|
|
Revenue,
net
|
|
$
|
14,947
|
|
|
|
100.0
|
%
|
|
$
|
16,581
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
12,671
|
|
|
|
84.8
|
%
|
|
|
13,985
|
|
|
|
84.3
|
%
|
Gross profit
|
|
|
2,276
|
|
|
|
15.2
|
%
|
|
|
2,596
|
|
|
|
15.7
|
%
|
Selling,
general and administrative expenses
|
|
|
3,190
|
|
|
|
21.3
|
%
|
|
|
2,520
|
|
|
|
15.2
|
%
|
Income (loss) from
operations
|
|
|
(914
|
)
|
|
|
(6.1
|
)%
|
|
|
76
|
|
|
|
0.5
|
%
|
Other
income (loss), net
|
|
|
8
|
|
|
|
0.0
|
%
|
|
|
(1
|
)
|
|
|
0.0
|
%
|
Income (loss) before
income taxes
|
|
|
(906
|
)
|
|
|
(6.1
|
)%
|
|
|
75
|
|
|
|
0.5
|
%
|
Provision
for (benefit from) income taxes
|
|
|
(247
|
)
|
|
|
1.7
|
%
|
|
|
19
|
|
|
|
0.2
|
%
|
Consolidated net income
(loss)
|
|
|
(659
|
)
|
|
|
(4.4
|
)%
|
|
|
56
|
|
|
|
0.3
|
%
|
Less:
Net income attributable to noncontrolling interest
|
|
|
4
|
|
|
|
0.0
|
%
|
|
|
18
|
|
|
|
0.1
|
%
|
Net
income (loss) attributable to TSR, Inc.
|
|
$
|
(663
|
|
|
|
(4.4
|
)%
|
|
$
|
38
|
|
|
|
0.2
|
%
|
TSR, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue
Revenue consists primarily of revenue from
computer programming consulting services. Overall, revenue for the quarter ended August 31, 2019 decreased $1,634,000 or 9.9% from
the prior year quarter. Revenue for IT consultants for the current quarter decreased by 6.2%, primarily due to lower average billing
rates from a shift in business mix with less placements for high end skills. Revenue for administrative (non-IT workers) decreased
by 33.3%, primarily due to reduced opportunities for placements with a large customer due to the customer’s plan to reduce
its expenses. Such reductions began to ease at the end of the first quarter. The overall average number of consultants on billing
with customers decreased from 389 for the quarter ended August 31, 2018 to 375 for the quarter ended August 31, 2019, while the
average number of computer programming consultants remained the same at 329 in the quarters ended August 31, 2019 and 2018. The
375 consultants on billing for the current quarter include an equivalent 46 administrative (non-IT) workers that the Company placed
at the customers’ requests as compared with the prior year quarter which included an equivalent 60 administrative (non-IT)
workers.
Cost of Sales
Cost of sales for the quarter ended August
31, 2019 decreased $1,314,000 or 9.4% to $12,671,000 from $13,985,000 in the prior year period. The decrease in cost of sales resulted
primarily from a decrease in the average rates paid to consultants on billing and from a decrease in consultants placed with customers.
Cost of sales as a percentage of revenue increased from 84.3% in the quarter ended August 31, 2018 to 84.8% in the quarter ended
August 31, 2019. The percentage decrease in cost of sales for the current quarter as compared to the prior year quarter (9.4% decrease)
was lower than the percentage decrease in revenue for the current quarter as compared to the prior year quarter (9.9% decrease),
causing a reduction in gross margins. Customer demands for discounts and aggressive pricing combined with a competitive market
environment have continued to apply downward pressures on gross margins, causing an increase in cost of sales as a percentage of
revenue.
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 approximately $670,000 or 26.6% from approximately $2,520,000 in the quarter ended August 31,
2018 to $3,190,000 in the quarter ended August 31, 2019. The increase in these expenses primarily resulted from a significant increase
in amounts paid for legal and advisory services of $766,000. The prior year also had increased legal and advisory fees of $160,000
over the quarter ended August 31, 2017. The legal and advisory expenses increased in connection with various stockholder lawsuits
and the contested proxy solicitation relating to our annual meeting that was originally scheduled to be held on November 28, 2018,
but which was postponed in order to provide the Company with additional time to review and respond to certain stockholder proposals,
and due to the uncertainty caused by certain stockholder litigations against the Company and current and former members of its
Board of Directors that were commenced prior to the original date for the annual meeting. This annual meeting is currently scheduled
to be held on October 22, 2019 after initially being rescheduled for September 13, 2019. Selling, general and administrative expenses,
as a percentage of revenue, increased from 15.2% in the quarter ended August 31, 2018 to 21.3% in the quarter ended August 31,
2019.
Other Income (Loss)
Other income for the quarter ended August
31, 2019 resulted primarily from interest and dividend income of $5,000 and a mark- to-market gain of $3,000 on the Company’s
equity securities. Other income (loss) for the quarter ended August 31, 2018 resulted primarily from interest and dividend income
of $4,000 and a mark-to-market loss of $5,000 on the Company’s equity securities.
Income Taxes Provision (Benefit)
The income tax provision included in the
Company’s results of operations for the quarters ended August 31, 2019 and 2018 reflects the Company’s estimated effective
tax rate for the years ending May 31, 2020 and 2019, respectively. These rates resulted in a benefit of 27.3% for the quarter ended
August 31, 2019 and a provision of 25.3% for the quarter ended August 31, 2018.
Net Income (Loss) Attributable to TSR, Inc.
Net loss attributable to TSR, Inc. was
$663,000 in the quarter ended August 31, 2019 compared to net income of $38,000 in the quarter ended August 31, 2018. This decrease
was primarily attributable to an increase in professional fees and to a decrease in revenue.
TSR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
The Company expects that its cash and cash
equivalents, certificates of deposit and marketable securities and cash flow provided by operations will be sufficient to provide
the Company with adequate resources to meet its liquidity requirements for at least the next 12 months from the issuance of these
financial statements. Conditions affecting the Company’s business, including on-going legal expenses, a potential repurchase
of 633,074 shares of the Company’s Common Stock at a purchase price of $6.25 per share and a potential payment of a settlement
of $1,543,288 in connection with previous lawsuits (see Note 8 to the condensed consolidated financial statements), will result
in the need for the Company to obtain additional liquidity. Utilizing its accounts receivable as collateral, the Company is seeking
a line of credit or other financing to increase its liquidity. The Company does not currently maintain a credit facility with any
financial institution and there can be no assurance that a line of credit or other financing will be available to the Company on
terms acceptable to it.
At August 31, 2019, the Company had working
capital (total current assets in excess of total current liabilities) of $5,018,000 including cash and cash equivalents and certificates
of deposit and marketable securities of $3,095,000 as compared to working capital of $6,225,000 including cash and cash equivalents
and certificates of deposit and marketable securities of $4,222,000 at May 31, 2019.
For the three months ended August 31, 2019,
net cash used in operating activities was $1,129,000 compared to net cash used in operating activities of $329,000 for the three
months ended August 31, 2018. The cash used in operating activities in the three months ended August 31, 2019 resulted primarily
from the consolidated net loss of $659,000, a decrease in accounts payable and other payables and accrued expenses of $353,000
and an increase in deferred income taxes of $269,000. The cash used in operating activities in the three months ended August 31,
2018 resulted primarily from an increase in accounts receivable of $558,000 offset by an increase in accounts payable and other
payables and accrued expenses of $191,000. The increase in accounts receivable resulted primarily from two clients changing from
weekly to monthly payment cycles.
Net cash provided by investing activities
of $247,000 for the three months ended August 31, 2019 primarily resulted from not reinvesting a certificate of deposit that matured
during that period. Net cash provided by investing activities of $1,000 for the three months ended August 31, 2018 primarily resulted
from not fully reinvesting a certificate of deposit that matured during that period.
In the three months ended August 31, 2019,
there was no cash used in financing activities. In the three months ended August 31, 2018, net cash used in financing activities
resulted from distributions to the noncontrolling interest of $44,000.
The Company’s capital resource commitments
at August 31, 2019 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these
lease commitments from cash flows provided by operations, available cash and short-term marketable securities, supplemented by
the line of credit which the Company is seeking, as described above.
Recently Adopted Accounting Pronouncements
Effective June 1, 2019, the Company adopted
Accounting Standards Update (“ASU”) No. 2016-02, Leases, which sets out the principle for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees
to classify leases as either finance or operating leases and record a right-of-use asset and a lease liability for all leases with
a term of greater than 12 months regardless of their classification. An accounting policy election may be made to account for leases
with a term of 12 months or less similar to existing guidance for operating leases today. ASU No. 2016-02 supersedes the existing
guidance on accounting for leases. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements,
which allows for an optional transition method for the adoption of Topic 842. The two permitted transition methods are now the
modified retrospective approach, which applies the new lease requirements at the beginning of the earliest period presented, and
the optional transition method, which applies the new lease requirements through a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. ASU 2016-02 is effective for our fiscal year ending May 31, 2020 and the
interim periods within that year. The Company adopted this standard in the first quarter of fiscal 2020 using the optional transition
method. The Company also intends to elect the practical expedients that allow us to carry forward the historical lease classification.
The Company has established an inventory of existing leases and implemented a new process of evaluating the classification of each
lease. The financial impact of the adoption of the new standard at June 1, 2019 increased total assets and total liabilities by
approximately $690,000. The financial impact of the adoption primarily relates to the capitalization of right-of-use assets and
recognition of lease liability related to operating leases. The Company will implement changes to its processes and internal controls,
as necessary, to meet the reporting and disclosure requirements of the new standard.
TSR, INC. AND SUBSIDIARIES
Critical Accounting Policies
The Securities and Exchange Commission
defines “critical accounting policies” as those that require the application of management’s most difficult subjective
or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain
and may change in subsequent periods.
The Company’s significant accounting
policies are described in Note 1 to the Company’s consolidated financial statements, contained in its May 31, 2019 Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission. The Company believes that those accounting policies
require the application of management’s most difficult, subjective or complex judgments. Except for the adoption of ASU No.
2016-02, Leases, as of June 1, 2019, disclosed in Note 9 to the condensed consolidated financial statements, there have
been no changes in the Company’s significant accounting policies as of August 31, 2019.