Item 1. Financial Statements
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
February 28,
2021
|
|
|
May 31,
2020
|
|
|
|
(Unaudited)
|
|
|
(see Note 1)
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,633,545
|
|
|
$
|
9,730,022
|
|
Marketable securities
|
|
|
48,624
|
|
|
|
50,344
|
|
Accounts receivable, net of allowance for doubtful accounts of $181,000
|
|
|
8,873,053
|
|
|
|
7,057,365
|
|
Other receivables
|
|
|
29,656
|
|
|
|
5,088
|
|
Prepaid expenses
|
|
|
350,775
|
|
|
|
202,862
|
|
Prepaid and recoverable income taxes
|
|
|
541,251
|
|
|
|
598,893
|
|
Total Current Assets
|
|
|
16,476,904
|
|
|
|
17,644,574
|
|
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $286,356 and $276,673
|
|
|
43,823
|
|
|
|
20,191
|
|
Other assets
|
|
|
61,772
|
|
|
|
49,653
|
|
Right-of-use assets
|
|
|
956,023
|
|
|
|
377,182
|
|
Intangible assets, net
|
|
|
1,714,500
|
|
|
|
-
|
|
Goodwill
|
|
|
785,883
|
|
|
|
-
|
|
Deferred income taxes
|
|
|
967,000
|
|
|
|
784,000
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
21,005,905
|
|
|
$
|
18,875,600
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other payables
|
|
$
|
1,967,594
|
|
|
$
|
503,166
|
|
Accrued expenses and other current liabilities
|
|
|
3,958,557
|
|
|
|
3,031,633
|
|
Advances from customers
|
|
|
1,169,832
|
|
|
|
1,181,234
|
|
Revolving line of credit
|
|
|
27,638
|
|
|
|
501,134
|
|
Operating lease liabilities - current
|
|
|
274,477
|
|
|
|
188,799
|
|
Legal settlement payable - current
|
|
|
295,096
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
7,693,194
|
|
|
|
5,405,966
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities, net of current portion
|
|
|
787,386
|
|
|
|
192,409
|
|
Legal settlement payable, net of current portion
|
|
|
562,191
|
|
|
|
827,822
|
|
SBA Paycheck Protection Program loan payable
|
|
|
6,659,220
|
|
|
|
6,659,220
|
|
Total Liabilities
|
|
|
15,701,991
|
|
|
|
13,085,417
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
TSR, Inc.:
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par value, authorized 500,000 shares; none issued
|
|
|
-
|
|
|
|
-
|
|
Class A Preferred Stock, Series One, authorized 30,000 shares; none issued
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value, authorized 12,500,000 shares; issued 3,114,163 shares, 1,962,062 outstanding
|
|
|
31,142
|
|
|
|
31,142
|
|
Additional paid-in capital
|
|
|
5,161,951
|
|
|
|
5,102,868
|
|
Retained earnings
|
|
|
13,587,109
|
|
|
|
14,141,796
|
|
|
|
|
18,780,202
|
|
|
|
19,275,806
|
|
|
|
|
|
|
|
|
|
|
Less: Treasury stock, 1,152,101 shares, at cost
|
|
|
13,514,003
|
|
|
|
13,514,003
|
|
Total TSR, Inc. Equity
|
|
|
5,266,199
|
|
|
|
5,761,803
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
37,715
|
|
|
|
28,380
|
|
Total Equity
|
|
|
5,303,914
|
|
|
|
5,790,183
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
21,005,905
|
|
|
$
|
18,875,600
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months and Nine Months Ended
February 28, 2021 and February 29, 2020
(UNAUDITED)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue, net
|
|
$
|
17,160,494
|
|
|
$
|
14,144,569
|
|
|
$
|
47,743,077
|
|
|
$
|
44,325,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
14,414,611
|
|
|
|
12,124,514
|
|
|
|
39,831,025
|
|
|
|
37,579,651
|
|
Selling, general and administrative expenses
|
|
|
3,084,495
|
|
|
|
3,270,723
|
|
|
|
8,414,414
|
|
|
|
8,845,716
|
|
|
|
|
17,499,106
|
|
|
|
15,395,237
|
|
|
|
48,245,439
|
|
|
|
46,425,367
|
|
Loss from operations
|
|
|
(338,612
|
)
|
|
|
(1,250,668
|
)
|
|
|
(502,362
|
)
|
|
|
(2,100,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(51,297
|
)
|
|
|
(41,301
|
)
|
|
|
(155,270
|
)
|
|
|
(33,394
|
)
|
Unrealized gain (loss) on marketable securities, net
|
|
|
9,944
|
|
|
|
(2,024
|
)
|
|
|
(1,720
|
)
|
|
|
9,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(379,965
|
)
|
|
|
(1,293,993
|
)
|
|
|
(659,352
|
)
|
|
|
(2,124,577
|
)
|
Benefit from income taxes
|
|
|
(79,000
|
)
|
|
|
(352,000
|
)
|
|
|
(114,000
|
)
|
|
|
(591,000
|
)
|
Consolidated net loss
|
|
|
(300,965
|
)
|
|
|
(941,993
|
)
|
|
|
(545,352
|
)
|
|
|
(1,533,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
3,964
|
|
|
|
3,109
|
|
|
|
9,335
|
|
|
|
13,027
|
|
Net loss attributable to TSR, Inc.
|
|
$
|
(304,929
|
)
|
|
$
|
(945,102
|
)
|
|
$
|
(554,687
|
)
|
|
$
|
(1,546,604
|
)
|
Basic net loss per TSR, Inc. common share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.79
|
)
|
Diluted net loss per TSR, Inc. common share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.79
|
)
|
Basic weighted average number of common shares outstanding
|
|
|
1,962,062
|
|
|
|
1,962,062
|
|
|
|
1,962,062
|
|
|
|
1,962,062
|
|
Diluted weighted average number of common shares outstanding
|
|
|
1,962,062
|
|
|
|
1,962,062
|
|
|
|
1,962,062
|
|
|
|
1,962,062
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For The Three Months
and Nine Months Ended February 28, 2021 and February 29, 2020
(UNAUDITED)
|
|
Shares of
common
stock
|
|
|
Common
stock
|
|
|
Additional
paid-in
capital
|
|
|
Retained
earnings
|
|
|
Treasury
stock
|
|
|
TSR, Inc.
equity
|
|
|
Non-
controlling
interest
|
|
|
Total
equity
|
|
Balance at May 31, 2019
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
15,268,224
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
6,888,231
|
|
|
$
|
28,792
|
|
|
$
|
6,917,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,672
|
|
|
|
3,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(663,014
|
)
|
|
|
-
|
|
|
|
(663,014
|
)
|
|
|
-
|
|
|
|
(663,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Aug. 31, 2019
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
14,605,210
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
6,225,217
|
|
|
$
|
32,464
|
|
|
$
|
6,257,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,246
|
|
|
|
6,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,000
|
)
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,512
|
|
|
|
-
|
|
|
|
61,512
|
|
|
|
-
|
|
|
|
61,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2019
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
14,666,722
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
6,286,729
|
|
|
$
|
27,710
|
|
|
$
|
6,314,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,109
|
|
|
|
3,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,791
|
)
|
|
|
(17,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(945,102
|
)
|
|
|
-
|
|
|
|
(945,102
|
)
|
|
|
-
|
|
|
|
(945,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2020
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
13,721,620
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
5,341,627
|
|
|
$
|
13,028
|
|
|
$
|
5,354,655
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For The Three Months and Nine Months Ended February 28, 2021 and February 29, 2020
(UNAUDITED)
|
|
Shares of
common
stock
|
|
|
Common
stock
|
|
|
Additional
paid-in
capital
|
|
|
Retained
earnings
|
|
|
Treasury
stock
|
|
|
TSR, Inc.
equity
|
|
|
Non-
controlling
interest
|
|
|
Total
equity
|
|
Balance at May 31, 2020
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
14,141,796
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
5,761,803
|
|
|
$
|
28,380
|
|
|
$
|
5,790,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,923
|
|
|
|
5,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Aug. 31, 2020
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
14,138,796
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
5,758,803
|
|
|
$
|
34,303
|
|
|
$
|
5,793,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(552
|
)
|
|
|
(552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(246,758
|
)
|
|
|
-
|
|
|
|
(246,758
|
)
|
|
|
-
|
|
|
|
(246,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2020
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,102,868
|
|
|
$
|
13,892,038
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
5,512,045
|
|
|
$
|
33,751
|
|
|
$
|
5,545,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,964
|
|
|
|
3,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
59,083
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,083
|
|
|
|
-
|
|
|
|
59,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to TSR, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(304,929
|
)
|
|
|
-
|
|
|
|
(304,929
|
)
|
|
|
-
|
|
|
|
(304,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2021
|
|
|
3,114,163
|
|
|
$
|
31,142
|
|
|
$
|
5,161,951
|
|
|
$
|
13,587,109
|
|
|
$
|
(13,514,003
|
)
|
|
$
|
5,266,199
|
|
|
$
|
37,715
|
|
|
$
|
5,303,914
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended February 28, 2021 and February 29, 2020
(UNAUDITED)
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(545,352
|
)
|
|
$
|
(1,533,577
|
)
|
Adjustments to reconcile consolidated net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
95,183
|
|
|
|
4,558
|
|
Unrealized (gain) loss on marketable securities, net
|
|
|
1,720
|
|
|
|
(9,184
|
)
|
Deferred income taxes
|
|
|
(183,000
|
)
|
|
|
(613,000
|
)
|
Non-cash lease (recovery) expense
|
|
|
(34,785
|
)
|
|
|
3,518
|
|
Non-cash right-of-use asset impairment charge
|
|
|
136,599
|
|
|
|
-
|
|
Non-cash stock-based compensation expense
|
|
|
59,083
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,036,758
|
)
|
|
|
625,641
|
|
Other receivables
|
|
|
(24,568
|
)
|
|
|
(3,556
|
)
|
Prepaid expenses
|
|
|
(142,664
|
)
|
|
|
(136,429
|
)
|
Prepaid and recoverable income taxes
|
|
|
57,642
|
|
|
|
52,385
|
|
Other assets
|
|
|
(12,119
|
)
|
|
|
-
|
|
Accounts payable, other payables, accrued expenses and other current liabilities
|
|
|
2,121,404
|
|
|
|
(861,108
|
)
|
Advances from customers
|
|
|
(11,402
|
)
|
|
|
39,021
|
|
Legal settlement payable
|
|
|
29,465
|
|
|
|
818,000
|
|
Net cash provided by (used in) operating activities
|
|
|
510,448
|
|
|
|
(1,613,731
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from maturities of marketable securities
|
|
|
-
|
|
|
|
492,000
|
|
Purchase of Geneva Consulting Group, Inc., net of cash acquired of $241,946
|
|
|
(3,100,114
|
)
|
|
|
-
|
|
Purchases of equipment and leasehold improvements
|
|
|
(33,315
|
)
|
|
|
(11,489
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(3,133,429
|
)
|
|
|
480,511
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net drawings (repayments) on line of credit
|
|
|
(473,496
|
)
|
|
|
940,304
|
|
Distribution to noncontrolling interest
|
|
|
-
|
|
|
|
(28,791
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(473,496
|
)
|
|
|
911,513
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(3,096,477
|
)
|
|
|
(221,707
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
9,730,022
|
|
|
|
3,694,989
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,633,545
|
|
|
$
|
3,473,282
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow data:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
12,000
|
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Right-of-use asset and operating lease liability
|
|
$
|
846,000
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
The accompanying condensed consolidated
interim financial statements include the accounts of TSR, Inc. and its subsidiaries. Unless otherwise stated or the context otherwise
requires, the terms “we,” “us,” “our,” and the “Company” refer to TSR, Inc. and
its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The condensed
balance sheet as of May 31, 2020, 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
(the “SEC”). 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 nine months ended February
28, 2021 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, 2021. 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, 2020.
2.
|
Net Loss Per Common Share
|
Basic net loss per common share is computed by dividing net loss available
to common stockholders of TSR, Inc. by the weighted average number of common shares outstanding during the reporting period, excluding
the effects of any potentially dilutive securities. During the quarter ended February 28, 2021, the Company granted time and performance
vesting stock awards under its 2020 Equity Incentive Plan (see Note 19 for further information). Diluted earnings per share gives effect
to all potentially dilutive common shares outstanding during the reporting period. The common stock equivalents associated with these
stock awards of 77,037 and 94,199 in the three months and nine months ended February 28, 2021 respectively, have not been included for
dilutive shares outstanding for the three months and nine months ended February 28, 2021 since the effect would be anti-dilutive due to
the net losses incurred for those periods.
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 February 28, 2021 and May 31, 2020:
|
|
February 28,
2021
|
|
|
May 31,
2020
|
|
Cash in banks
|
|
$
|
6,580,695
|
|
|
$
|
9,677,848
|
|
Money market funds
|
|
|
52,850
|
|
|
|
52,174
|
|
|
|
$
|
6,633,545
|
|
|
$
|
9,730,022
|
|
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
4.
|
Fair Value of Financial Instruments
|
Accounting Standards Codification (“ASC”) 820-10, Fair
Value Measurements and Disclosures (“ASC 820-10”), defines fair value, establishes a framework for measuring fair value
under accounting principles generally accepted in the United States of America (“GAAP”) and provides for expanded disclosure
about fair value measurements. ASC 820-10 applies to all other accounting pronouncements that require or permit fair value measurements.
The Company determines or calculates
the fair value of financial instruments using quoted market prices in active markets when such information is available or using
appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market
discount rate information for similar types of instruments while estimating for non-performance and liquidity risk. These techniques
are significantly affected by the assumptions used, including the discount rate, credit spreads and estimates of future cash flows.
Assets and liabilities typically
recorded at fair value on a non-recurring basis to which ASC 820-10 applies include:
|
●
|
non-financial assets and liabilities initially measured
at fair value in an acquisition or business combination, and
|
|
●
|
long-lived assets measured at fair value due to an impairment
assessment under ASC 360-10-15, Impairment or Disposal of Long-Lived Assets.
|
This topic defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 requires that assets and liabilities recorded
at fair value be classified and disclosed in one of the following three categories:
|
●
|
Level 1 - inputs utilize quoted prices (unadjusted) in
active markets for identical assets or liabilities that the Company has the ability to access.
|
|
●
|
Level 2 - inputs utilize other-than-quoted prices that
are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active
markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
●
|
Level 3 - inputs are unobservable and are typically based
on the Company’s own assumptions, including situations where there is little, if any, market activity. Both observable and
unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 classification.
|
In certain cases, the inputs
used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company classifies such
financial assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or liability.
ASC Topic 825, Financial Instruments,
requires disclosure of the fair value of certain financial instruments. For cash and cash equivalents, accounts receivable, accounts
and other payables, accrued liabilities and advances from customers, the amounts presented in the condensed consolidated financial statements
approximate fair value because of the short-term maturities of these instruments.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
The Company has characterized
its investments in marketable securities, based on the priority of the inputs used to value the investments, into a three-level
fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets
or liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall
within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair
value measurement of the instrument.
Investments recorded in the
accompanying condensed consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:
Level 1- These are investments
where values are based on unadjusted quoted prices for identical assets in an active market the Company has the ability to access.
Level 2- These
are investments where values are based on quoted market prices that are not active or model derived valuations in which all significant
inputs are observable in active markets.
Level 3- These are investments
where values are derived from techniques in which one or more significant inputs are unobservable.
The following are the major
categories of assets measured at fair value on a recurring basis as of February 28, 2021 and May 31, 2020 using quoted prices in
active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable inputs
(Level 3):
February 28, 2021
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equity Securities
|
|
$
|
48,624
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,624
|
|
|
|
$
|
48,624
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,624
|
|
May 31, 2020
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equity Securities
|
|
$
|
50,344
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50,344
|
|
|
|
$
|
50,344
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50,344
|
|
The Company’s equity securities
are classified as trading securities, which are carried at fair value, as determined by quoted market prices, which is a Level
1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings. The Company’s
marketable securities at February 28, 2021 and May 31, 2020 are summarized as follows:
February 28, 2021
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Equity Securities
|
|
$
|
16,866
|
|
|
$
|
31,758
|
|
|
$
|
-
|
|
|
$
|
48,624
|
|
|
|
$
|
16,866
|
|
|
$
|
31,758
|
|
|
$
|
-
|
|
|
$
|
48,624
|
|
May 31, 2020
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Equity Securities
|
|
$
|
16,866
|
|
|
$
|
33,478
|
|
|
$
|
-
|
|
|
$
|
50,344
|
|
|
|
$
|
16,866
|
|
|
$
|
33,478
|
|
|
$
|
-
|
|
|
$
|
50,344
|
|
The Company’s investments
in marketable securities consist primarily of investments in 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
February 28, 2021
(Unaudited)
Rights Plan / Preferred Stock
Amended
and Restated Rights Agreement
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 to the stockholders of record on that date. In connection with the distribution of the Rights, the Company entered into a
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, 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 7, “Other Matters.”) Pursuant to the Settlement Agreement, the Company amended and restated the Rights Agreement
on September 3, 2019 (the “A&R Rights Agreement”) to confirm that a Distribution Date shall not occur as a result
of any request by any of the Investor Parties for a special meeting of the Company’s stockholders.
The
following is a description of key terms of the A&R Rights Agreement. This description does not purport to be complete and is
qualified in its entirety by reference to the full text of the A&R Rights Agreement, which is filed as Exhibit 4.1 to the Company’s
current report on Form 8-K filed with the SEC on September 3, 2019.
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 A&R 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 A&R Rights Agreement), group of affiliated or associated Persons or any other Person with whom such Person is Acting
in Concert (as defined in the A&R Rights Agreement) has acquired Beneficial Ownership (as defined in the A&R Rights Agreement)
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 A&R 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 A&R
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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
An
“Acquiring Person” will not include (i) the Company, (ii) any Subsidiary (as such term is defined in
the A&R 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 A&R 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 A&R 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 A&R 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. 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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
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.
First Amendment
to A&R Rights Agreement
On
January 5, 2021, the disinterested members of the Board of Directors of the Company approved a waiver for QAR Industries, Inc.
to complete its proposed acquisition of shares owned by Fintech Consulting LLC (the “Acquisition”) under the Company’s
A&R Rights Agreement so that a Distribution Date would not occur as a result of the Acquisition. On February 4, 2021, the Company
entered into that certain First Amendment to the A&R Rights Agreement with the Rights Agent, which provides that a distribution
date shall not occur as a result of the Acquisition. This description of this amendment does not purport to be complete and is
qualified in its entirety by reference to the full text of such amendment, which is filed as Exhibit 4.1 to the Company’s
current report on Form 8-K filed with the SEC on February 4, 2021.
Second
Amendment to A&R Rights Agreement and Termination of A&R Rights Agreement as of March 31, 2021
At the Company’s combined
2019 and 2020 annual meeting of stockholders held on November 19, 2020, the Company’s stockholders approved an advisory
vote to terminate the Company’s A&R Rights Agreement no later than August 29, 2021. On March 31, 2021, the Company entered
into that certain Second Amendment to A&R Rights Agreement with the Rights Agent, pursuant to which the Expiration Date will
be advanced from August 29, 2021 to March 31, 2021. As a result of this amendment, effective as of the close of business on March
31, 2021, the A&R Rights Agreement expired and are no longer outstanding and the A&R Rights Agreement was terminated by
its terms. The description herein of this amendment is qualified in its entirety by reference to the full text of such amendment,
which is filed as Exhibit 4.3 to the Company’s current report on Form 8-K filed with the SEC on April 1, 2021.
Following
the expiration of the Rights and the termination of the A&R Rights Agreement on April 1, 2021, the Company filed a Certificate
of Elimination (the “Certificate of Elimination”) with the Secretary of State of the State of Delaware eliminating
the Class A Preferred Shares and returning them to authorized but undesignated shares of the Company’s preferred stock.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
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 except for the litigation disclosed below.
On October 16, 2018, the Company
was served with a complaint filed on October 11, 2018 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; 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 “Stockholder Litigation”). 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 former 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.
On June 14, 2019, Ms. Paskowitz
filed an amended complaint in the Stockholder Litigation 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, but omits Regina Dowd, Joseph F. Hughes and Winifred
M. Hughes as defendants. In addition to the former members of the Board of Directors named in the original complaint, the amended
complaint names former 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 former 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 former 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 former Directors’ alleged breaches of fiduciary duties; (3) damages and equitable relief derivatively
on behalf of the Company for the former 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 in the Stockholder Litigation 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, which was thereafter amended
on July 26, 2019.
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 “SDNY Action”). 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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
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 of stockholders (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 13, 2019, the Company filed a motion for
preliminary injunction in the SDNY Action in advance of the Company’s 2018 Annual Meeting originally scheduled for September
13, 2019, and requested leave to file a motion for expedited discovery. The Court denied the Company’s motion for preliminary
injunction but ordered Zeff Capital, L.P. to “make clear that the second set of directors” described by Zeff Capital,
L.P. in its preliminary proxy statement “is contingent upon the resolution of a proceeding in Delaware Chancery Court.”
On August, 30,
2019, the Company entered into the Settlement Agreement with the Investor Parties with respect to the proxy contest pertaining
to the election of directors at the 2018 Annual Meeting, which was held on October 22, 2019. Pursuant to the Settlement Agreement,
the parties 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;
(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 Stockholder Litigation filed
by Susan Paskowitz against the Company, Joseph F. Hughes, Winifred M. Hughes and certain former directors of the Company in the
Supreme Court of the State of New York on October 11, 2018.
Concurrently
with the Settlement Agreement, the parties entered into a share repurchase agreement (the “Repurchase Agreement”) which
provided for the purchase by the Company and Christopher Hughes, the Company’s former President and Chief Executive Officer,
of the shares of the Company’s Common Stock held by the Investor Parties (the “Repurchase”). The Settlement Agreement
also contemplated that, if the Repurchase was completed, the Company would make a settlement payment to the Investor Parties at
the closing of the Repurchase in an amount of approximately $1,500,000 (the “Settlement Payment”). However, the Repurchase
and Settlement Payment were not completed by the deadline of December 30, 2019.
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
had failed to hold the 2018 Annual Meeting); (3) the Company agreed to amend and restate the Company’s Rights Agreement,
dated August 29, 2018
(the “A&R Rights Agreement”), to confirm that a Distribution Date (as defined in the A&R 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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
Pursuant to the
terms of the Settlement Agreement, the two nominees for director made by Zeff Capital, L.P. were elected as directors at the Company’s
2018 Annual Meeting held on October 22, 2019. Please see the Company’s current Report on Form 8-K filed with the SEC on October
21, 2019 for more information about the background of the election of directors at the Company’s 2018 Annual Meeting.
Pursuant to the terms of the Settlement Agreement,
inasmuch as the Repurchase was not completed and the Settlement Payment was not made by December 30, 2019, the members of the Board
of Directors (other than the two directors who were nominated by Zeff Capital, L.P. and elected as directors at the 2018 Annual
Meeting) resigned from the Board effective 5:00 p.m. Eastern Time on December 30, 2019. Immediately thereafter, the two remaining
directors appointed Robert Fitzgerald to the Board of Directors. Please see the Company’s Current Report on Form 8-K filed
with the SEC on December 31, 2019 for more information about the background and the appointment of Robert Fitzgerald.
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.
On October 21,
2019, the Company entered into a Memorandum of Understanding (the “MOU”) with Susan Paskowitz providing for the settlement
of the Stockholder Litigation filed by Ms. Paskowitz on October 11, 2018. The MOU provides for the settlement of the claims by
Ms. Paskowitz that (1) the former members of the Board named in the original complaint allegedly breached their fiduciary duties
by failing to immediately adopt a rights plan that would have prevented the sale by Joseph F. Hughes and Winifred M. Hughes of
an aggregate of 819,491 shares of the Company’s common stock to the Investor Parties; (2) the former members of the Board
named in the amended complaint allegedly breached their fiduciary duties and failed to adopt proper corporate governance practices;
and (3) the Investor Parties acted as “partners” and constituted a “group” in their purchase of shares
from Joseph F. Hughes and Winifred M. Hughes and knowingly disseminated false or misleading public statements concerning their
status as a group.
Pursuant to the
terms of the MOU, the Company will (1) implement certain corporate governance reforms described in the MOU within 30 days of a
final order and judgment entered by the court, and keep these corporate governance reforms in place for 5 years from the time of
the final order and judgment; and (2) acknowledge that the plaintiff, Ms. Paskowitz, and her counsel provided a substantial benefit
to the Company and its stockholders through the prosecution of the Stockholder Litigation and other related actions filed by Ms.
Paskowitz described above.
On
December 16, 2019, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) with Susan
Paskowitz in the Stockholder Litigation. The Stipulation retains the terms and conditions of settlement of the Stockholder Litigation
contained in the MOU described in the preceding paragraph, with the addition that the Company will pay to plaintiff’s counsel
an award of attorneys’ fees and reimbursement of expenses in the amount of $260,000 (collectively, the “Stockholder
Litigation Settlement”). The Stockholder Litigation Settlement is intended to fully, finally, and forever compromise, settle,
release, resolve, and dismiss with prejudice the Stockholder Litigation and all claims asserted therein directly against all present
and former defendants and derivatively against them on behalf of the Company. The Stockholder Litigation Settlement does not contain
any admission of liability, wrongdoing or responsibility by any of the parties, and provides for mutual releases by all parties.
Each stockholder of the Company is a member of the plaintiff class unless
such stockholder opts out of the class. The Company expects that
the full amount of the $260,000 settlement payment will be covered by insurance proceeds. The Stipulation remains subject to approval
by the court. The Stipulation is independent of the Settlement Agreement and Share Repurchase Agreement that the Company had entered
into with the Investor Parties.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
On December 24, 2019, Ms. Paskowitz moved for preliminary approval
of the Stockholder Litigation Settlement. On May 21, 2020, the Court entered an order preliminarily approving the Stockholder Litigation
Settlement. On July 9, 2020, the parties submitted an agreed upon proposed scheduling order for final approval of the Stockholder Litigation
Settlement and a proposed mailing notice of the Stockholder Litigation Settlement to the Company’s stockholders. On December 16,
2020, the Court entered a scheduling order, which approved the form of the parties’ mailing notice, and provided that the hearing
for final approval of the Stockholder Litigation Settlement will be held on April 20, 2021. Pursuant to the scheduling order, TSR provided
notice of the Stockholder Litigation Settlement to applicable stockholders by December 31, 2020. On March 30, 2021, Ms. Paskowitz filed
her motion for final approval of the Stockholder Litigation Settlement and class certification and in support of counsel’s application
for an award of attorney’s fees and expenses. No objections to the Stockholder Litigation Settlement were filed by the April 5,
2021 deadline. Although the Company believes that the Stockholder Litigation Settlement represents a fair and reasonable compromise of
the matters in dispute in the Stockholder Litigation, there can be no assurance that the court will approve the Stockholder Litigation
Settlement as proposed, or at all.
Inasmuch as the
Company did not complete the Repurchase and make the Settlement Payment prior to the December 30, 2019 deadline, the members of
the Board of Directors (other than the two directors who were elected as directors at the 2018 Annual Meeting) resigned from the
Board effective at 5:00 p.m. Eastern Time on December 30, 2019. Immediately thereafter, the two remaining directors, Bradley M.
Tirpak and H. Timothy Eriksen, appointed Robert Fitzgerald as a new director. Each of Messrs. Tirpak, Eriksen and Fitzgerald qualifies
as an “independent director” under the NASDAQ Stock Market Rules. These three individuals were also appointed to the
Audit Committee, Nominating Committee, Compensation Committee and Special Committee. The Board appointed Mr. Tirpak as Chairman
of the Board to succeed Christopher Hughes. Mr. Hughes continued to serve as the Chief Executive Officer, President and Treasurer
of the Company until January 17, 2020. Additionally, the Board appointed Mr. Eriksen as Lead Independent Director, Chairman of
the Audit Committee and Chairman of the Nominating Committee. The Board also appointed Mr. Fitzgerald as the Chairman of the Compensation
Committee and Chairman of the Special Committee.
During the quarter
ended February 29, 2020, the Company negotiated a settlement with Zeff Capital, L.P. to reimburse it for legal expenses of $900,000
(net present value of $818,000 accrued at February 29, 2020) by entering into a binding term sheet on April 1, 2020. The parties
entered into a final agreement reflecting these terms on August 13, 2020. For additional information about this matter, please
refer to Note 12, Legal Settlement with Investor.
Please also refer
to Note 11, Termination of Former CEO, regarding an ongoing lawsuit originally filed by the Company’s former Chief Executive
Officer against the Company in the Supreme Court of the State of New York in March 2020.
8.
|
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 Financial
Accounting Standards Board 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 ended 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 elected 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 liabilities related to operating leases.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
The Company leases the space for its
three offices in New York City, Hauppauge and New Jersey. 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 are in our condensed consolidated balance sheets.
The Company’s leases for
its three offices are classified as operating leases.
The lease agreements for New
York City, Hauppauge and New Jersey expire on August 31, 2022, December 31, 2023 and May 31, 2027, respectively, and do not include
any renewal options. During the current quarter, the Company entered into a lease in a new location for its New Jersey office expiring
May 31, 2027. During the prior quarter, the Company entered into an agreement to sublease the space in New York City expiring August
31, 2022. Due to the fact that the future sublease cash inflows will be less than the carrying value of the corresponding right-of-use
asset, the Company recorded a right-of-use asset impairment charge of $136,599 in the quarter ended November 30, 2020.
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.
For the three months and nine months
ended February 28, 2021, the Company’s operating lease expense for these leases was $120,914 and $351,836, respectively.
Future minimum lease payments
under non-cancellable operating leases as of February 28, 2021 were as follows:
Twelve Months Ending February 28,
|
|
|
|
2022
|
|
$
|
340,909
|
|
2023
|
|
|
295,519
|
|
2024
|
|
|
203,248
|
|
2025
|
|
|
123,085
|
|
2026
|
|
|
126,162
|
|
Thereafter
|
|
|
161,843
|
|
Total undiscounted operating lease payments
|
|
|
1,250,766
|
|
Less imputed interest
|
|
|
188,903
|
|
Present value of operating lease payments
|
|
$
|
1,061,863
|
|
The following table sets forth
the right-of-use assets and operating lease liabilities as of February 28, 2021:
Assets
|
|
|
|
Right-of-use assets, net
|
|
$
|
956,023
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
274,477
|
|
Long-term operating lease liabilities
|
|
|
787,386
|
|
Total operating lease liabilities
|
|
$
|
1,061,863
|
|
The weighted average remaining
lease term for the Company’s operating leases is 3.5 years.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
On November 27, 2019, TSR, Inc.
(“TSR”) closed on a revolving credit facility (the “Credit Facility”) pursuant to a Loan and Security Agreement
with Access Capital, Inc. (the “Lender”) that initially provided up to $7,000,000 in funding to TSR and its direct
and indirect subsidiaries, TSR Consulting Services, Inc., Logixtech Solutions, LLC and Eurologix, S.A.R.L., each of which, together
with TSR, is a borrower under the Credit Facility. Each of the borrowers has provided a security interest to the Lender in all
of their respective assets to secure amounts borrowed under the Credit Facility.
TSR expects to utilize the Credit
Facility for working capital and general corporate purposes. TSR had also expected to utilize the Credit Facility to complete the
Repurchase and make the Settlement Payment; however, TSR did not complete the Repurchase and make the Settlement Payment prior
to the December 30, 2019 deadline established in the Credit Facility for such use.
Because TSR did not complete
the Repurchase and make the Settlement Payment prior to the December 30, 2019 deadline, the maximum amount that may now be advanced
under the Credit Facility at any time shall not exceed $2,000,000.
Advances under the Credit Facility
accrue interest at a rate per annum equal to (x) the “base rate” or “prime rate” announced by Citibank,
N.A. from time to time, which shall be increased or decreased, as the case may be, in an amount equal to each increase or decrease
in such “base rate” or “prime rate,” plus (y) 1.75%. The prime rate as of February 28, 2021 was 3.25%,
indicating an interest rate of 5.0% on the line of credit. The initial term of the Credit Facility is 5 years, which shall automatically
renew for successive 5-year periods unless either TSR or the Lender gives written notice to the other of termination at least 60
days prior to the expiration date of the then-current term.
TSR is obliged to satisfy certain
financial covenants and minimum borrowing requirements under the Credit Facility, and to pay certain fees, including prepayment
fees, and provide certain financial information to the Lender. The Company was in compliance with all covenants as of February
28, 2021 and through the date of this filing.
As of February 28, 2021, the net borrowings outstanding
against this line of credit facility were $27,638. The amount the Company has borrowed fluctuates and, at times in the prior fiscal
year, it has utilized the maximum amount of $2,000,000 available under the facility to fund its payroll and other obligations.
11.
|
Termination of Former CEO
|
The Company terminated Christopher Hughes, the former
Chief Executive Officer of the Company (“Hughes”), effective February 29, 2020 for “Cause” as defined in
Section 6(a) of his Amended and Restated Employment Agreement dated August 9, 2018 (the “Employment Agreement”). Despite
having already been terminated from employment, on March 2, 2020, the Company received a letter from Mr. Hughes, providing notice
of his intent to resign for “Good Reason” as defined in Section 7(c) of the Employment Agreement pursuant to which
he claimed to be entitled to the “Enhanced Severance Amount” under the Employment Agreement. Hughes filed a complaint
against the Company in the Supreme Court of the State of New York in March 2020 alleging two causes of action: (1) breach of his
employment contract; and (2) breach of duty of good faith and fair dealing. Plaintiff Hughes alleges that he was terminated without
cause or in the alternative that he resigned for good reason and therefore, pursuant to the Employment Agreement, Hughes seeks
severance pay in the amount of $1,000,000 and reasonable costs and attorney’s fees. The Company denies Plaintiff’s
allegations in their entirety and has filed counterclaims against Plaintiff for (1) declaratory relief; (2) breach of confidence/non-compete
agreement; (3) declaratory and injunctive relief – confidence/non-compete; (4) tortious interference with current and prospective
contractual and economic relations; (5) breach of fiduciary duty; (6) misappropriation of trade secrets; (7) declaratory and injunctive
relief – unfair competition; and (8) conversion.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
12.
|
Legal Settlement with Investor
|
On April 1, 2020, the Company entered
into a binding term sheet (“Term Sheet”) with Zeff Capital, L.P. (“Zeff”) pursuant to which it agreed to pay Zeff
an amount of $900,000 over a period of three years in cash or cash and stock in settlement of expenses incurred by Zeff during its solicitations
in 2018 and 2019 in connection with the annual meetings of the Company, the costs incurred in connection with the litigation initiated
by and against the Company as well as negotiation, execution and enforcement of the Settlement and Release Agreement, dated as of August
30, 2019, by and between the Company, Zeff and certain other parties (See Note 7). In exchange for certain releases, the Term Sheet calls
for a cash payment of $300,000 on June 30, 2021, a second cash payment of $300,000 on June 30, 2022 and a third payment of $300,000 also
on June 30, 2022, which can be paid in cash or common stock at the Company’s option. There is no interest due on these payments.
The agreement also has protections to defer such payment dates so that the debt covenants with the Company’s lender are not breached.
On August 13, 2020, the Company, Zeff, Zeff Holding Company, LLC and Daniel Zeff entered into a settlement agreement to reflect these
terms. Any installment payment which is deferred as permitted above will accrue interest at the prime rate plus 3.75%, and Zeff shall
thereby have the option to convert such deferred amounts (plus accrued interest if any) into shares of the Company’s stock. The
Company accrued $818,000, the estimated present value of these payments using an effective interest rate of 5%, in the quarter ended February
29, 2020, as the events relating to the expense occurred prior to such date. The estimated present value of these payments is $847,000
at February 28, 2021.
The COVID-19 outbreak in the United States has caused
business disruption including mandated and voluntary closing of various businesses. While the disruption is currently expected
to be temporary, there is considerable uncertainty around the duration of the closings and the impact of the pandemic on our business.
Therefore, the Company expects this matter to continue to negatively impact its operating results in future periods. The full financial
impact and duration cannot be reasonably estimated at this time.
14.
|
Payroll Protection Program Loan
|
On April 15, 2020, the Company received loan proceeds
of $6,659,220 under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (“PPP”)
was established under the recent congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) and is administered by the U.S. Small Business Administration (“SBA”). The PPP Loan to the Company is being
made through JPMorgan Chase Bank, N.A., a national banking association.
The original term of the PPP Loan is two years. The
term may be extended to five years by the SBA and the lender. The annual interest rate on the PPP Loan is 0.98%. Payments of principal
and interest on the loan will be deferred for the first six months of the term of the loan. The promissory note evidencing the
PPP Loan contains customary events of default relating to, among other things, payment defaults, breach of representations and
warranties, or provisions of the promissory note. The occurrence of an event of default may trigger the immediate repayment of
all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining a judgment against
the Company.
Under the terms of the CARES Act, PPP Loan recipients
may apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined,
subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the
maintenance of employee and compensation levels. While the Company believes that it has acted in compliance with the program and
submitted its application for forgiveness of the PPP Loan on March 29, 2021, no assurance can be provided that the Company will
obtain forgiveness of the PPP Loan in whole or in part.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
15.
|
Geneva Consulting Group Acquisition
|
On September 1, 2020, the Company completed the acquisition
of all of the outstanding stock of Geneva Consulting Group, Inc., a New York corporation (“Geneva”) and provider of
temporary and permanent information technology personnel based in Port Washington, New York. The stock of Geneva was purchased
from the three shareholders of Geneva (the “Sellers”), none of which had, or will have following the acquisition, a
material relationship with the Company or its affiliates.
The purchase price for the shares of
Geneva is comprised of the following: (i) $1,452,000 in cash paid to Sellers at the closing of the acquisition, (ii) an amount of $748,000,
that is equal to the amount of Geneva’s loan under the PPP that was not assumed by the Company and is expected to be substantially
forgiven by the SBA, (iii) an amount up to $300,000 which may be paid as an earnout payment in part in February 2021 and in part in August
2021 (the “Earnout Payments”), (iv) bonus payments payable in $10,000 increments, (v) $747,000 for the net working capital
of Geneva as of closing and (vi) other purchase price adjustments of which $36,000 has been paid to date. Any Earnout Payments and bonus
payments will be determined based upon the achievement of certain criteria relating to the number the Company’s contractors working
full-time at the Company’s clients on such dates.
On March 17, 2021, the Company entered
into an agreement with the Sellers’ representatives pursuant to which the parties agreed to settle certain interpretive differences
regarding the Sellers’ entitlement to the bonus payments described above. Pursuant to this agreement, and in full satisfaction of
the Company’s obligations for deferred payments under the purchase agreement for the Geneva acquisition, the Sellers’ representative
acknowledged receipt of the first Earnout Payment in the amount of $100,000, the parties agreed that the Company would make aggregate
bonus payments to the Sellers’ representatives in the amount of $260,000, and the Company agreed to instruct the escrow agent to
release to the Sellers’ representatives the second Earnout Payment in the amount of $200,000. All amounts relating to the Earnout
Payments and bonus payments that had not been paid as of the date of the agreement were either paid by the Company or released by the
escrow agent on March 18, 2021. No further earnout or bonus amounts can be earned or will be paid subsequent to March 18, 2021.
The acquisition was accounted for as an acquisition
of a business in accordance with the acquisition method of accounting. The acquired assets and assumed liabilities have been recorded
at their preliminary estimated fair values. The Company determined the preliminary estimated fair values with the assistance of
valuations performed by an independent third-party specialist. There have been no changes made to the preliminary valuation as
of February 28, 2021.
The Company has incurred approximately $498,000 in
legal fees, business broker fees, valuation services, accounting fees and other expenses to complete the Geneva acquisition, of
which $220,000 of these expenses were recorded in the quarter ended February 28, 2021. This amount primarily relates to the accrual
of additional bonus payments to the Sellers of $210,000 related to the March 17, 2021 agreement discussed above. All acquisition
related costs have been expensed as incurred and included in selling, general and administrative expenses.
The following table summarizes the components of
the purchase price at fair values at September 1, 2020:
Cash consideration paid to date
|
|
$
|
2,983,264
|
|
Estimated earnout and other liabilities
|
|
|
358,796
|
|
Total purchase price
|
|
$
|
3,342,060
|
|
The following table summarizes
the allocation of purchase price at preliminary estimated fair values at September 1, 2020:
Cash
|
|
$
|
241,946
|
|
Accounts receivable
|
|
|
778,930
|
|
Prepaid expenses
|
|
|
5,249
|
|
Intangible assets (see Note 17)
|
|
|
1,800,000
|
|
Goodwill
|
|
|
785,883
|
|
Accrued expenses
|
|
|
(269,948
|
)
|
Net assets
|
|
$
|
3,342,060
|
|
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2021
(Unaudited)
The purchase agreement for the Geneva
acquisition provided for earn-out payments of up to $300,000 plus bonus amounts in $10,000 increments which are earned through August
2021. The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework
using Black Scholes due to the option-like nature of the earn-out payout structure (Level 3 of the fair value hierarchy). The earn-out
was revalued quarterly prior to the settlement discussed above, using a present value approach and any resulting increase or decrease
was recorded into selling, general and administrative expenses. Any changes in the amount of the actual results and forecasted scenarios
could impact the fair value. Significant judgment was employed in determining the appropriateness of the assumptions used in calculating
the fair value of the earn-out as of the acquisition date and subsequent period ends. The earn-out and bonus payments due through August
2021 were settled in full by the payments made in accordance with the agreement between the Company and the Sellers on March 17, 2021.
This agreement resulted in a charge to selling, general and administrative expenses of $210,000 in the quarter ended February 28, 2021.
No further earnout or bonus amounts can be earned or will be paid subsequent to March 18, 2021.
The following unaudited pro
forma financial information presents the combined operating results of the Company and Geneva as if the acquisition had occurred
as of the beginning of the earliest period presented. Pro forma data is subject to various assumptions and estimates and is presented
for informational purposes only. This pro forma data does not purport to represent or be indicative of the consolidated operating
results that would have been reported had the transaction been completed as described herein, and the data should not be taken
as indicative of future operating results.
Unaudited pro forma financial
information assuming the acquisition of Geneva as of June 1, 2019 is presented in the following table (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue
|
|
$
|
17,160
|
|
|
$
|
16,601
|
|
|
$
|
49,180
|
|
|
$
|
51,591
|
|
Net loss
|
|
$
|
(305
|
)
|
|
$
|
(909
|
)
|
|
$
|
(779
|
)
|
|
$
|
(1,390
|
)
|
Earnings loss per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.71
|
)
|
Goodwill is recorded when the
purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.
Goodwill is not amortized but is subject to impairment analysis at least once annually or more frequently upon the occurrence of
an event or when circumstances indicate that the carrying amount of a unit is greater than its fair value.
The Company amortizes its intangible
assets over their estimated useful lives and will review these assets for impairment when there is evidence that events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured
by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If intangible assets
are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds
its fair market value.
TSR, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Intangible assets identified
in the Geneva acquisition are as follows:
|
|
September 1,
|
|
|
|
|
|
February 28,
|
|
|
|
2020
|
|
|
Amortization
|
|
|
2021
|
|
Database (estimated life 5 years)
|
|
$
|
230,000
|
|
|
$
|
23,000
|
|
|
$
|
207,000
|
|
Non-compete agreement (estimated life 2 years)
|
|
|
10,000
|
|
|
|
2,500
|
|
|
|
7,500
|
|
Trademark (estimated life 3 years)
|
|
|
60,000
|
|
|
|
10,000
|
|
|
|
50,000
|
|
Customer relationships (estimated life 15 years)
|
|
|
1,500,000
|
|
|
|
50,000
|
|
|
|
1,450,000
|
|
Total
|
|
$
|
1,800,000
|
|
|
$
|
85,500
|
|
|
$
|
1,714,500
|
|
No instances of triggering events
or impairment indicators were identified at February 28, 2021.
18.
|
Related Party Transactions
|
On January 5, 2021, the members of the
Board of Directors of TSR, Inc. other than Robert Fitzgerald approved providing a waiver to QAR Industries, Inc. for its contemplated
acquisition of shares owned by Fintech Consulting LLC (the “Acquisition”) under the Company’s A&R Rights Agreement
so that a Distribution Date (as defined under the A&R Rights Agreement) shall not occur as a result of the Acquisition. QAR Industries,
Inc. and Fintech Consulting LLC were both principal stockholders of the Company, each owning more than 5% of the Company’s outstanding
common stock prior to the consummation of the Acquisition. Robert Fitzgerald is the President and majority shareholder of QAR Industries,
Inc. The other directors of the Company are not affiliated with QAR Industries, Inc.
On February
3, 2021, the transaction was completed. QAR Industries, Inc. purchased 348,414 shares of TSR, Inc. common stock from Fintech Consulting
LLC at a price of $7.25 per share. At the same time, Bradley M. Tirpak, Chairman of TSR, Inc., purchased 27,586 shares of TSR,
Inc. common stock from Fintech Consulting LLC at a price of $7.25 per share.
19.
|
Stock-based Compensation Expense
|
On January 28, 2021 the Company granted
108,333 shares in time vesting stock awards and 69,167 shares in time and performance vesting stock awards to officers, directors and
key employees under the TSR, Inc. 2020 Equity Incentive Plan (the “Plan”). The time vesting shares vest in tranches at the
one, two and three-year anniversaries of the grants (“service condition”). These shares had a grant date fair value of $826,000
based on the closing price of TSR, Inc. common stock on the day prior to the grants. The associated compensation expense is recognized
on a straight-line basis over the time between grant date and the date the shares vest (the “service period”). The time and
performance vesting shares also vest in tranches at or after the two and three-year anniversaries of the grants. The performance condition
is defined in the grant agreements and relates to the market price of the Company’s common stock over a stated period of time (“market
condition”). These shares had a grant date value $262,000 based on the closing price of TSR, Inc. common shares on the day prior
to the grants discounted by estimated forfeiture rates of 40-60%. The Company took into account the historical volatility of its common
stock to assess the probability of satisfying the market condition. The associated compensation expense is recognized on a straight-line
basis between the time the achievement of the performance criteria is deemed probable and the time the shares may vest. During the three
months and nine months ended February 28, 2021, $59,000 has been record as stock based compensation expense and included in selling, general
and administrative expenses. As of February 28, 2021, there is approximately $1,029,000 of unearned compensation expense that will be
expensed through February 2024; 142,666 stock awards expected to vest and zero vested stock awards.
TSR, INC. AND SUBSIDIARIES
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 success of the Company’s plan
for growth, both internal and through the previously announced pursuit of suitable acquisition candidates; the successful integration
of announced and completed acquisitions and any anticipated benefits therefrom; the impact of adverse economic conditions on client spending
which has a negative impact on the Company’s business, which includes, but is not limited to, the current adverse economic conditions
associated with the COVID-19 global health pandemic and the associated financial crisis, stay-at-home and other orders, which may significantly
reduce client spending and which may have 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 February 28, 2021
compared with three months ended February 29, 2020
|
|
(Dollar amounts in thousands)
Three Months Ended
|
|
|
|
February 28,
2021
|
|
|
February 29,
2020
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
Revenue, net
|
|
$
|
17,160
|
|
|
|
100.0
|
%
|
|
$
|
14,145
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
14,415
|
|
|
|
84.0
|
%
|
|
|
12,125
|
|
|
|
85.7
|
%
|
Gross profit
|
|
|
2,745
|
|
|
|
16.0
|
%
|
|
|
2,020
|
|
|
|
14.3
|
%
|
Selling, general and administrative expenses
|
|
|
3,084
|
|
|
|
18.0
|
%
|
|
|
3,271
|
|
|
|
23.1
|
%
|
Loss from operations
|
|
|
(339
|
)
|
|
|
(2.0
|
)%
|
|
|
(1,251
|
)
|
|
|
(8.8
|
)%
|
Other expense, net
|
|
|
(41
|
)
|
|
|
(0.2
|
)%
|
|
|
(43
|
)
|
|
|
(0.3
|
)%
|
Loss before income taxes
|
|
|
(380
|
)
|
|
|
(2.2
|
)%
|
|
|
(1,294
|
)
|
|
|
(9.1
|
)%
|
Benefit from income taxes
|
|
|
(79
|
)
|
|
|
(0.4
|
)%
|
|
|
(352
|
)
|
|
|
(2.4
|
)%
|
Consolidated net loss
|
|
|
(301
|
)
|
|
|
(1.8
|
)%
|
|
|
(942
|
)
|
|
|
(6.7
|
)%
|
Less: Net income attributable to noncontrolling interest
|
|
|
4
|
|
|
|
(0.0
|
)%
|
|
|
3
|
|
|
|
0.0
|
%
|
Net loss attributable to TSR, Inc.
|
|
$
|
(305
|
)
|
|
|
(1.8
|
)%
|
|
$
|
(945
|
)
|
|
|
(6.7
|
)%
|
TSR, INC. AND SUBSIDIARIES
Revenue
Revenue consists primarily of revenue from computer programming
consulting services. Revenue for the quarter ended February 28, 2021 increased approximately $3,015,000 or 21.3% from the quarter
ended February 29, 2020, primarily due to new business development within the existing Geneva client base. Without the added business
activity of $2,806,000 from the Geneva acquisition, revenue would have increased $209,000 or 1.5%. Revenue for the current quarter
increased due to higher overall average number of consultants on billing with customers which increased from 361 for the quarter
ended February 29, 2020 to 418 for the quarter ended February 28, 2021, with Geneva contributing 68 of the 418 average number of
consultants on billing.
We have experienced and continue to experience
terminated assignments and a decrease in demand for new assignments due to the COVID-19 pandemic, which has led to a lower number of consultant
placements and negatively impacted the Company’s revenues. Additionally, the COVID-19 pandemic has created operational challenges.
The start of certain new assignments has been and continues to be delayed due to delays in obtaining necessary clearances, as many of
the agencies required to be contacted in obtaining the information needed for background checks have been fully or partially closed. As
of February 28, 2021, the Company had used 100% of the PPP Loan funds to fund its payroll and other allowable expenses. The use of these
funds allowed the Company to avoid certain salary reductions, furloughs and layoffs of employees during the covered period.
Cost of Sales
Cost of sales for the quarter ended February 28, 2021 increased
approximately $2,290,000 or 18.9% to $14,415,000 from $12,125,000 in the prior year period. The increase in cost of sales resulted
primarily from an increase in consultants on billing with customers resulting from the Geneva acquisition. Cost of sales as a percentage
of revenue decreased from 85.7% in the quarter ended February 29, 2020 to 84.0% in the quarter ended February 28, 2021. The percentage
increase in cost of sales for the current quarter as compared to the prior year quarter (18.9% increase) was lower than the percentage
increase in revenue for the current quarter as compared to the prior year quarter (21.3% increase), causing an increase in gross
margins.
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
decreased approximately $187,000 or 5.7% from $3,271,000 in the quarter ended February 29, 2020 to $3,084,000 in the quarter ended
February 28, 2021. The decrease in these expenses primarily resulted from the settlement with an investor for $818,000 in the prior
year, offset by $506,000 in expenses from the newly acquired Geneva operation and an accrual of $210,000 for the final performance
bonus payments to the sellers of Geneva. Selling, general and administrative expenses, as a percentage of revenue, decreased from
23.1% in the quarter ended February 29, 2020 to 18.0% in the quarter ended February 28, 2021.
Other Expense
Other expense for the quarter ended February 28, 2021 resulted
primarily from interest expense of approximately $51,000 and a mark to market gain of approximately $10,000 on the Company’s
marketable equity securities. Other expense for the quarter ended February 29, 2020 resulted primarily from interest expense of
$38,000 and a mark to market loss of approximately $2,000 on the Company’s marketable equity securities.
Income Tax Benefit
The income tax benefit included in the Company’s results
of operations for the quarters ended February 28, 2021 and February 29, 2020 reflects the Company’s estimated effective tax
rate for the fiscal years ending May 31, 2021 and 2020, respectively. These rates resulted in a benefit of 20.8% for the quarter
ended February 28, 2021 and a benefit of 27.2% for the quarter ended February 29, 2020.
Net Loss Attributable to TSR, Inc.
Net loss attributable to TSR, Inc. was approximately $305,000
in the quarter ended February 28, 2021 compared to a net loss of $945,000 in the quarter ended February 29, 2020. The decrease
in the net loss was primarily attributable to the increase in revenue and gross profit from the Geneva acquisition and a decrease
in selling, general; and administrative expenses due to the prior year accrual of the settlement with an investor.
TSR, INC. AND SUBSIDIARIES
Nine months ended February 28, 2021 compared with nine months
ended February 29, 2020
|
|
(Dollar amounts in thousands)
Nine Months Ended
|
|
|
|
February 28,
2021
|
|
|
February 29,
2020
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
Revenue, net
|
|
$
|
47,743
|
|
|
|
100.0
|
%
|
|
$
|
44,325
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
39,831
|
|
|
|
83.4
|
%
|
|
|
37,580
|
|
|
|
84.8
|
%
|
Gross profit
|
|
|
7,912
|
|
|
|
16.6
|
%
|
|
|
6,745
|
|
|
|
15.2
|
%
|
Selling, general and administrative expenses
|
|
|
8,414
|
|
|
|
17.6
|
%
|
|
|
8,846
|
|
|
|
20.0
|
%
|
Loss from operations
|
|
|
(502
|
)
|
|
|
(1.0
|
)%
|
|
|
(2,101
|
)
|
|
|
(4.8
|
)%
|
Other expense, net
|
|
|
(157
|
)
|
|
|
(0.3
|
)%
|
|
|
(24
|
)
|
|
|
0.0
|
%
|
Loss before income taxes
|
|
|
(659
|
)
|
|
|
(1.4
|
)%
|
|
|
(2,125
|
)
|
|
|
(4.8
|
)%
|
Benefit from income taxes
|
|
|
(114
|
)
|
|
|
0.2
|
%
|
|
|
(591
|
)
|
|
|
1.3
|
%
|
Consolidated net loss
|
|
|
(545
|
)
|
|
|
(1.2
|
)%
|
|
|
(1,534
|
)
|
|
|
(3.5
|
)%
|
Less: Net income attributable to noncontrolling interest
|
|
|
10
|
|
|
|
0.0
|
%
|
|
|
13
|
|
|
|
0.0
|
%
|
Net loss attributable to TSR, Inc.
|
|
$
|
(555
|
)
|
|
|
(1.2
|
)%
|
|
$
|
(1,547
|
)
|
|
|
(3.5
|
)%
|
Revenue
Revenue consists primarily of revenue from computer
programming consulting services. Revenue for the nine months ended February 28, 2021 increased approximately $3,418,000 or 7.7% from the
nine months ended February 29, 2020, primarily due to new business development within the existing Geneva client base. Without the added
business activity of $4,768,000 from the Geneva acquisition, revenue would have decreased $1,350,000 or 3.0%. The average number of consultants
on billing with customers increased from 371 for the nine months ended February 29, 2020 to 379 for the nine months ended February 28,
2021, with Geneva contributing 37 of the 379 average number of consultants on billing for the nine month period.
We have experienced and continue to experience
terminated assignments and a decrease in demand for new assignments due to the COVID-19 pandemic, which has led to the lower number of
consultant placements and negatively impacted the Company’s revenues. Additionally, the COVID-19 pandemic has created operational
challenges. The start of certain new assignments has been and continues to be delayed due to delays in obtaining necessary clearances,
as many of the agencies required to be contacted in obtaining the information needed for background checks have been fully or partially
closed. As of February 28, 2021, the Company had used 100% of the PPP Loan funds to fund its payroll and other allowable expenses. The
use of these funds allowed the Company to avoid certain salary reductions, furloughs and layoffs of employees during the covered period.
Cost of Sales
Cost of sales for the nine months ended February 28, 2021 increased
approximately $2,251,000 or 6.0% to $39,831,000 from $37,580,000 in the prior year period. The increase in cost of sales resulted
primarily from an increase in consultants placed with customers, primarily from the new business development activity within the
existing Geneva client base. Cost of sales as a percentage of revenue decreased from 84.8% in the nine months ended February 29,
2020 to 83.4% in the nine months ended February 28, 2021. The percentage increase in cost of sales for the current period as compared
to the prior year period (6.0% increase) was lower the percentage increase in revenue for the current period as compared to the
prior year period (7.7% increase), causing an increase in gross margins.
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 decreased approximately $432,000 or 4.9% from $8,846,000 in the nine months ended February 29, 2020 to $8,414,000 in the nine
months ended February 28, 2021. The decrease in these expenses primarily resulted from a decrease of $951,000 in amounts paid for legal
and advisory services from the prior year related to Shareholder Litigation and increased costs surrounding our proxy and annual meeting.
There was also an accrual for $818,000 related to a settlement with an investor in the prior year. These decreases were partially offset
by an additional $997,000 in selling, general and administrative expenses from the newly acquired Geneva operation in fiscal 2021 and
an accrual of $210,000 for the final performance bonus payments to the sellers of Geneva. Additionally, the Company recorded an asset
impairment charge of $137,000 in the current nine-month period due to the signing of a subletting agreement for one of its offices. Selling,
general and administrative expenses, as a percentage of revenue, decreased from 20.0% in the nine months ended February 29, 2020 to 17.6%
in the nine months ended February 28, 2021.
TSR, INC. AND SUBSIDIARIES
Other Expense
Other expense for the nine months ended February 28, 2021 resulted
primarily from interest expense of approximately $155,000 and a mark to market loss of approximately $2,000 on the Company’s
marketable equity securities. Other expense for the nine months ended February 29, 2020 resulted primarily from interest expense
of $38,000, interest and dividend income of $5,000 and a mark to market gain of approximately $9,000 on the Company’s marketable
equity securities.
Income Tax Benefit
The income tax benefit included in the Company’s results
of operations for the nine months ended February 28, 2021 and February 29, 2020 reflects the Company’s estimated effective
tax rate for the fiscal years ending May 31, 2021 and 2020, respectively. These rates resulted in a benefit of 17.3% for the nine
months ended February 28, 2021 and a benefit of 27.8% for the nine months ended February 29, 2020.
Net Loss Attributable to TSR, Inc.
Net loss attributable to TSR, Inc. was approximately $555,000
in the nine months ended February 28, 2021 compared to a loss of $1,547,000 in the nine months ended February 29, 2020. The decrease
in the net loss was primarily attributable to the increase in revenue and gross profit from the Geneva acquisition and a decrease
in selling, general and administrative expenses due to the prior year accrual of the settlement with an investor and decreased
legal and advisory fees.
Liquidity and Capital Resources
The Company’s cash was sufficient to enable
it to meet its liquidity requirements during the nine months ended February 28, 2021. The Company expects that its cash and cash equivalents
and the Company’s line of credit pursuant to a Loan and Security Agreement with Access Capital, Inc. will be sufficient to provide
the Company with adequate resources to meet its liquidity requirements for the 12 month period following the issuance of these financial
statements. Utilizing its accounts receivable as collateral, the Company has secured the line of credit to increase its liquidity as necessary.
As of February 28, 2021, the net borrowings outstanding against this line of credit facility were approximately $28,000. The amount the
Company has borrowed fluctuates and, at times, it has utilized the maximum amount of $2,000,000 available under this facility in the prior
fiscal year to fund its payroll and other obligations. The Company was in compliance with all covenants under the line of Credit Facility
as of February 28, 2021 and through the date of this filing. Additionally, in April 2020, the Company secured a PPP Loan in the amount
of $6,659,000. At the time of application, the Company determined that the loan was necessary in order to secure the Company’s ability
to meet its obligations in the face of potential disruptions in its business operations and the potential inability of its customers to
pay their accounts when due. As of February 28, 2021, the Company had used 100% of the PPP Loan funds to fund its payroll and for other
allowable expenses under the PPP Loan. The use of these funds allowed the Company to avoid certain salary reductions, furloughs and layoffs
of employees during the period. While there is no guarantee that the Company will receive forgiveness for any outstanding amounts under
the PPP Loan, it believes that it has acted in compliance with the terms of the program and submitted its application for forgiveness
of the PPP Loan on March 29, 2021.
At February 28, 2021, the Company had working capital (total
current assets in excess of total current liabilities) of approximately $8,784,000 including cash and cash equivalents and marketable
securities of $6,682,000 as compared to working capital of $12,239,000 including cash and cash equivalents and marketable securities
of $9,780,000 at May 31, 2020.
Net cash flow of approximately $510,000 was provided
by operations during the nine months ended February 28, 2021 as compared to $1,614,000 of net cash flow used in operations in the prior
year period. The cash provided by operations for the nine months ended February 28, 2021 primarily resulted from an increase in accounts
payable and other payables and accrued expenses of $2,121,000 offset by the consolidated net loss of $555,000 and increases in accounts
receivable and prepaid expenses of $1,037,000 and $143,000, respectively. The increase in accounts payable and accrued expenses primarily
resulted from the deferral of $1,269,000 in payroll taxes as allowed by the CARES Act. The cash used in operations for the nine months
ended February 29, 2020 primarily resulted from the consolidated net loss of $1,534,000, a decrease in accounts payable and accrued expenses
of $861,000 and an increase in deferred taxes of $613,000, which were offset, to an extent, by a decrease in accounts receivable of $625,000
and the accrual of $818,000 for a legal settlement.
TSR, INC. AND SUBSIDIARIES
Net cash used in investing activities of approximately $3,133,000
for the nine months ended February 28, 2021 primarily resulted from the acquisition of Geneva Consulting Group, Inc. in the amount
of $3,100,000. Net cash provided by investing activities of $481,000 for the nine months ended February 29, 2020 primarily resulted
from not reinvesting the proceeds of matured certificates of deposit of $492,000.
Net cash used in financing activities of approximately
$473,000 during the nine months ended February 28, 2021 resulted from net payments on the Company’s line of credit with Access Capital,
Inc. Net cash provided by financing activities during the nine months ended February 29, 2020 of $912,000 primarily resulted from net
drawings under the Company’s line of credit.
The Company’s capital resource commitments
at February 28, 2021 consisted of lease obligations on its branch and corporate facilities and an accrued legal settlement payable. The
net present value of its future lease and Settlement Payments were approximately $1,062,000 and $857,000, respectively, as of February
28, 2021. The Company intends to finance these commitments primarily from the Company’s available cash and line of credit.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Recently Adopted Accounting Pronouncements
Effective June 1, 2019, the Company adopted 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 ended 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 elected 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 liabilities related to operating
leases.
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, 2020 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. Other than the consideration of the policies disclosed in
Notes 16, 17 and 19 to the condensed consolidated financial statements regarding the accounting for goodwill, intangible assets
and stock-based compensation, there have been no changes in the Company’s significant accounting policies as of February
28, 2021.