UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For
the fiscal year ended May 31, 2020
or
☐ Transition Report Under Section 13 or 15(d) of The Securities
Exchange Act of 1934
For
the transition period from _______ to _______
Commission
File Number: 0-8656
TSR,
Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware |
|
13-2635899 |
(State
or other jurisdiction of
incorporation or organization) |
|
(I.R.S.
Employer
Identification No.) |
400
Oser Avenue, Hauppauge, NY 11788
(Address
of principal executive offices)
Registrant’s
telephone number: 631-231-0333
Securities
registered pursuant to Section 12(b) of the Exchange
Act:
|
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
|
Common
Stock, par value $0.01 per share |
|
TSRI |
|
NASDAQ
Capital Market |
|
Preferred
Share Purchase Rights1 |
|
-- |
|
-- |
Securities
registered pursuant to Section 12(g) of the Exchange
Act:
None
(Title
of Class)
|
1 |
Registered
pursuant to Section 12(b) of the Act pursuant to a Form 8-A filed
by the registrant on March 15, 2019. Until the Distribution Date
(as defined in the registrant’s Rights Agreement dated as of August
29, 2018), the Preferred Share Purchase Rights will be transferred
with and only with the shares of the registrant’s Common Stock to
which the Preferred Share Purchase Rights are attached. |
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. ☐ Yes
☒ No
Indicate
by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15 (d) of the Exchange Act. ☐ Yes
☒ No
Indicate
by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. ☒ Yes ☐ No
Indicate
by check mark whether the Registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulations S-T during the preceding 12 months (or for
such shorter period that the Registrant was required to submit such
files). ☒ Yes ☐ No
Indicate
by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer”, “accelerated filer”, “non-accelerated
filer”, “smaller reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
| ☐ Large
accelerated filer |
☐ Accelerated filer |
☒ Non-accelerated filer |
| ☒ Smaller Reporting
Company |
☐ Emerging growth
company |
|
If an
emerging growth company, indicate by check mark if the Registrant
has elected not to use extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Securities Act. ☐
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
☐
Indicate
by check mark whether the Registrant is a shell Company (as defined
in Rule 12b-2 of the Act). Yes ☐ No ☒
The
aggregate market value of voting and non-voting common equity held
by non-affiliates of the Registrant based upon the closing price of
$3.20 at November 30, 2019 was $3,169,000.
The
number of shares of the Registrant’s common stock outstanding as of
July 31, 2020 was 1,962,062.
Documents
incorporated by Reference:
The
information required in Part III, Items 10, 11, 12, 13 and 14 is
incorporated by reference to the Registrant’s Proxy Statement in
connection with the 2020 Annual Meeting of Stockholders, which will
be filed by the Registrant within 120 days after the close of its
fiscal year.
TSR,
Inc.
Form
10-K
For
the Fiscal Year Ended May 31, 2020
Table
of Contents
PART
I
Item
1. Business
General
TSR,
Inc. (the “Company”) is primarily engaged in the business of
providing contract computer programming services to its customers.
The Company provides its customers with technical computer
personnel to supplement their in-house information technology
(“IT”) capabilities. The Company’s customers for its contract
computer programming services consist primarily of Fortune 1000
companies with significant technology budgets. In the year ended
May 31, 2020, the Company provided IT staffing services to 56
customers. Also, beginning in the year ended May 31, 2017, the
Company has provided and continues to provide contract
administrative (non-IT) workers to two of its significant IT
customers.
The
Company was incorporated in Delaware in 1969. The Company’s
executive offices are located at 400 Oser Avenue, Suite 150,
Hauppauge, NY 11788, and its telephone number is (631) 231-0333.
This annual report, and each of our other periodic and current
reports, including any amendments, are available, free of charge,
on our website, www.tsrconsulting.com, as soon as reasonably
practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission. The
information contained on our website is not incorporated by
reference into this annual report on Form 10-K and should not be
considered part of this report.
STAFFING
SERVICES
The
Company’s contract computer programming services involve the
provision of technical staff to customers to meet the specialized
requirements of their IT operations. The technical personnel
provided by the Company generally supplement the in-house
capabilities of the Company’s customers. The Company’s approach is
to make available to its customers a broad range of technical
personnel to meet their requirements rather than focusing on
specific specialized areas. The Company has staffing capabilities
in the areas of application development in .net and java, mobile
applications for android and IOS platforms, project management, IT
security specialists, cloud development and architecture, business
analysts, UI design and development, network infrastructure and
support and database development and administration. The Company’s
services provide customers with flexibility in staffing their
day-to-day operations, as well as special projects, on a short-term
or long-term basis.
The
Company provides technical employees for projects, which usually
range from three months to one year. Generally, customers may
terminate projects at any time. Staffing services are typically
provided at the client’s facility and are billed primarily on an
hourly basis based on the actual hours worked by technical
personnel provided by the Company and with reimbursement for
out-of-pocket expenses. The Company pays its technical personnel on
a semi-monthly basis and invoices its customers, not less
frequently than monthly.
The
Company’s success is dependent upon, among other things, its
ability to attract and retain qualified professional IT personnel.
The Company believes that there is significant competition for
software professionals with the skills and experience necessary to
perform the services offered by the Company. Although the Company
generally has been successful in attracting employees with the
skills needed to fulfill customer engagements, demand for qualified
professionals conversant with certain technologies may outstrip
supply as new and additional skills are required to keep pace with
evolving computer technology or as competition for technical
personnel increases. Increasing demand for qualified personnel
could also result in increased expenses to hire and retain
qualified technical personnel and could adversely affect the
Company’s profit margins.
In
the past several years, an increasing number of companies are using
or are considering using low cost offshore outsourcing centers,
particularly in India, to perform technology related work and
projects. This trend has contributed to an industry wide decline in
domestic IT staffing revenue. There can be no assurance that this
trend will not continue to adversely impact the Company’s IT
staffing revenue.
Beginning
in the year ended May 31, 2017, the Company also provided contract
administrative (non-IT) workers to two of its significant IT
customers. This service was added at the customers’ request. The
recruiting for these positions is less demanding and the Company
has hired a separate recruiting staff to handle this business,
which includes both-in house and off-shore recruiters. There can be
no assurance that the customers will continue to request these
services. The Company has no plans to attempt to expand this aspect
of its business beyond its existing customers.
OPERATIONS
The
Company provides contract computer programming services primarily
in the New York metropolitan area, New England, and the
Mid-Atlantic region, although there are also customer locations
around the country where the Company places contractors. The
Company provides its services principally through offices located
in New York, New York, Edison, New Jersey and Long Island, New
York. The Company does not currently intend to open additional
offices. Competition from larger competitors for recruiters has
created more turnover than expected and increased the cost of
retaining recruiters, making it more difficult to increase the
number of technical recruiters on staff. As of May 31, 2020, the
Company employed 20 persons who are responsible for recruiting
technical personnel, 4 persons responsible for recruiting
non-technical personnel and 9 persons who are account executives.
As of May 31, 2019, the Company had employed 19 technical
recruiters, 3 non-technical recruiters and 11 account
executives.
MARKETING
AND CUSTOMERS
The
Company focuses its marketing efforts on large businesses and
institutions with significant IT budgets and recurring staffing and
software development needs. The Company provided services to 56
customers during the year ended May 31, 2020 (“fiscal 2020”) as
compared to 54 in the year ended May 31, 2019 (“fiscal 2019”). The
Company has historically derived a significant percentage of its
total revenue from a relatively small number of customers. In the
year ended May 31, 2020, the Company had three customers which each
provided more than 10% of consolidated revenues: Consolidated
Edison (21.2%), Citigroup (20.3%), and AgileOne (11.8%). AgileOne
provides vendor management services under an arrangement where the
Company enters into a subcontract with AgileOne and AgileOne
directly contracts with three end customers. The AgileOne end
customers for which the Company provides services include Bristol
Myers Squibb, which alone constituted 11.1% of the Company’s
consolidated revenue for the year ended May 31, 2020. Additionally,
the Company’s top ten customers (including end customers of vendor
management companies) accounted for 83% of consolidated revenue in
fiscal 2020 and 77% in fiscal 2019. While continuing its efforts to
further expand its client base, including strategically targeted
middle market accounts, the Company’s marketing efforts are focused
primarily on increasing business from its existing accounts.
Approximately 28% of the Company’s revenue is derived from end
customers in the financial services business. Competitive pressures
in financial services, primarily with European based banks, have
negatively affected the net effective rates that the Company
charges to certain of the Company’s end customers in this industry,
which has negatively affected the Company’s gross profit margins.
These banks are no longer willing to pay the premium prices which
they had previously paid for certain high end skills.
Many
of the Company’s major customers, totaling over 30% of revenue,
have retained a third party to provide vendor management services
and centralize the consultant hiring process. Under this system,
the third party retains the Company to provide contract computer
programming services, the Company bills the third party and the
third party bills the ultimate customer. This process has weakened
the relationships the Company has built with its customers’ project
managers, who are the Company’s primary contacts with its customers
and with whom the Company would normally work to place consultants.
Instead, the Company is required to interface with the vendor
management provider, making it more difficult to maintain its
relationships with its customers and preserve and expand its
business. These changes have also reduced the Company’s profit
margins because the vendor management company is retained for the
purpose of keeping costs low for the end client and receives a
processing fee which is deducted from the payment to the
Company.
In
accordance with industry practice, most of the Company’s contracts
for contract computer programming services are terminable by either
the client or the Company on short notice.
PROFESSIONAL
STAFF AND RECRUITMENT
In
addition to using internet based job boards such as Dice, Monster,
Career Builder and Discover.org, the Company maintains a database
of technical personnel with a wide range of skills. The Company
uses a sophisticated proprietary computer system to match potential
employees’ skills and experience with client requirements. The
Company periodically contacts personnel within its database to
update their availability, skills, employment interests and other
matters and continually updates its database. This database is made
available to the account executives and recruiters at each of the
Company’s offices.
The
Company employs technical personnel primarily on an hourly basis,
as required in order to meet the staffing requirements under
particular contracts or for particular projects. The Company
primarily recruits technical personnel by posting jobs on the
Internet and, on occasion, by publishing advertisements in local
newspapers and attending job fairs. The Company devotes significant
resources to recruiting technical personnel, maintaining 20
technical recruiters based in the U.S. and contracting with an
India-based company for 4 recruiters in India. Additionally, the
Company maintains 4 non-technical recruiters and contracts for 5
recruiters in India to assist in locating administrative (non-IT)
workers. Potential applicants are generally interviewed and tested
by the Company’s recruiting personnel, by third parties that have
the required technical backgrounds to review the qualifications of
the applicants, or by on-line testing services. In some cases,
instead of employing technical personnel directly, the Company uses
subcontractors who employ the technical personnel who are provided
to the Company’s customers. For a small fee, the Company may
sometimes process payments on behalf of customers to contractors
identified by the customers directly instead of through the normal
recruiting process; this is known as “payrolling”.
Competition
The
technical staffing industry is highly competitive and fragmented
and has low barriers to entry. The Company competes for potential
customers with providers of outsourcing services, systems
integrators, computer systems consultants, other providers of
technical staffing services and, to a lesser extent, temporary
personnel agencies. Many of the Company’s competitors are
significantly larger and have greater financial resources than the
Company. The Company believes that the principal competitive
factors in obtaining and retaining customers are accurate
assessment of customers’ requirements, timely assignment of
technical employees with appropriate skills and the price of
services. The principal competitive factors in attracting qualified
technical personnel are compensation, availability, quality and
variety of projects and schedule flexibility. The Company believes
that many of the technical personnel included in its database may
also be pursuing other employment opportunities. Therefore, the
Company believes that its responsiveness to the needs of technical
personnel is an important factor in the Company’s ability to fill
projects. Although the Company believes it competes favorably with
respect to these factors, it expects competition to increase and
there can be no assurance that the Company will remain
competitive.
Intellectual
Property Rights
The
Company relies primarily upon a combination of trade secret,
nondisclosure and other contractual arrangements to protect its
proprietary rights. The Company generally enters into
confidentiality agreements with its employees, consultants,
customers and potential customers and limits access to and
distribution of its proprietary information. There can be no
assurance that the steps taken by the Company in this regard will
be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property
rights.
Personnel
As of
May 31, 2020, the Company employed 338 people including its 2
executive officers. Of such employees, 9 were engaged in sales, 20
were recruiters for technical personnel, 4 were recruiters for
non-technical personnel, 292 were IT and administrative (non-IT)
contractors, and 11 were engaged in corporate administrative and
clerical functions. None of the Company’s employees belong to
unions.
Item 1A. Risk
Factors
Certain
statements contained under this Item 1A. “Risk Factors”, Item 7.
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and Item 1. “Business”, including but not
limited to statements concerning the Company’s future prospects and
the Company’s future cash flow requirements are forward-looking
statements, as defined in the Private Securities Litigation Reform
Act of 1995. The words “believe,”
“may,” “will,” “estimate,” “anticipate,” “intend,” “expect,” and
similar expressions are intended to identify forward-looking
statements. Actual results may differ materially from
those projections in the forward-looking statements, which
statements involve risks and uncertainties, including but not
limited to the factors set forth below. These forward-looking
statements reflect our current views with respect to future events
and are based on currently available operating, financial and
competitive information. We undertake no obligation to update any
of these forward-looking statements to reflect circumstances or
events that occur after the statement is made except as required by
law.
COVID-19
Pandemic
Outbreaks
of epidemic, pandemic, or contagious diseases such as COVID-19 have
and may continue to have an adverse effect on our business,
financial condition, and results of operations. The spread of
COVID-19 across the world has resulted in the World Health
Organization declaring the outbreak of COVID-19 as a global
pandemic. As the extent and duration of the COVID-19 outbreak is
still unknown, international stock markets have experienced
volatility reflecting the uncertainty associated with the slow-down
in the global economy and the resulting governmental responses to
the pandemic. If COVID-19 continues to progress in ways that
disrupt our customers’ demand for computer programing services or
staffing needs or otherwise continues to disrupt our operations,
such disruptions may continue to negatively affect, and may in the
future materially affect, our operating results. The majority of
our workforce and customer base is located in New Jersey and New
York and typically works on-site at client locations. However, on
March 20, 2020 New York Governor Cuomo signed the New York State on
PAUSE executive order, which includes a new directive that all
non-essential businesses statewide close in-office personnel
functions effective March 22 to mitigate the impact of the COVID-19
pandemic and we determined that the Company is a non-essential
business. In response to these public health directives and orders,
we have implemented and maintained work-from-home policies for
certain employees. The effects of continued executive orders, stay
at home orders and our work-from-home policies may negatively
impact productivity, disrupt our business and impact our ability to
service our clients and our clients need for our services, the
magnitude of which will depend, in part, on the length and severity
of the restrictions and other limitations on our ability to conduct
our business in the ordinary course. Similar, and perhaps more
severe, disruptions in our operations could negatively impact, and
may materially negatively impact, our business, operating results
and financial condition. Quarantines, shelter-in-place and similar
government orders, or the perception that such orders, shutdowns or
other restrictions on the conduct of business operations could
continue to occur, related to COVID-19 or other infectious diseases
could impact us and the business operations of our vendors and
customers. Additionally, if the spread of COVID-19 limits our
ability to make workers available either because they are ill or
due to work-from-home orders, this likely would negatively affect,
and may materially negatively affect, our operating results, cash
flow and business.
The
full financial impact of the pandemic cannot be reasonably
estimated at this time. The extent to which COVID-19 impacts our
results will depend on future developments, which are highly
uncertain and cannot be predicted, including new information which
may emerge concerning the severity of the COVID-19 pandemic and the
actions taken globally to contain the COVID-19 pandemic or treat
its impact, among others. Existing insurance coverage may not
provide protection for all costs that may arise from all such
possible events. We continue to assess our business operations and
system supports and the impact COVID-19 may have on our results and
financial condition, but there can be no assurance that this
analysis will enable us to avoid part or all of any impact from the
spread of COVID-19 or its consequences, including downturns in
business sentiment generally or in our sector in
particular.
Payroll
Protection Program
On
April 15, 2020, the Company received loan proceeds of $6,659,220
under the Paycheck Protection Program (“PPP”). The 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. The PPP
loan to the Company was made through JPMorgan Chase Bank, N.A., a
national banking association. The application for these funds
required the Company to, in good faith, certify that the current
economic uncertainty made the loan request necessary to support its
ongoing operations. This certification further required the Company
to take into account its current business activity and its ability
to access other sources of liquidity sufficient to support ongoing
operations in a manner that is not significantly detrimental to the
business. The receipt of these funds, and the forgiveness of the
loan attendant to these funds, is dependent on the Company having
initially qualified for the loan and qualifying for the forgiveness
of such loan based on our future adherence to the forgiveness
criteria.
Under
the terms of the CARES Act, the use of the proceeds of the loan is
restricted to payroll costs (as defined in the CARES Act), covered
rent, covered utility payments and certain other expenditures that,
while permitted, would not result in forgiveness of a corresponding
portion of the loan. Following recent amendments to the PPP, after
an eight- or twenty-four-week period starting with the disbursement
of the respective loan proceeds, the Company may apply for
forgiveness of some or all of the loan, with the amount which may
be forgiven equal to the sum of eligible payroll costs, covered
rent, and covered utility payments, in each case incurred during
the eight- or twenty-four-week period following the date of first
disbursement. Certain reductions in the Company’s payroll costs or
full-time equivalent employees (when compared against the
applicable measurement period) may reduce the amount of our loan
eligible for forgiveness.
The
U.S. Department of the Treasury ("Treasury") and the Small Business
Administration (“SBA”) have announced that they will review all PPP
loans that equal or exceed $2.0 million. Guidance from Treasury and
SBA has changed several times and the SBA has updated their
Frequently Asked Questions (“FAQs”) several times since the passage
of the CARES Act. At the same time, the PPP has been amended twice
with the latest series of amendments significantly altering the
timeline associated with the PPP spending and loan forgiveness.
Moreover, the lack of clarity regarding loan eligibility under the
PPP has resulted in significant media coverage and controversy with
respect to public companies applying for and receiving loans. While
the Company believes that it acted in good faith and has complied
with all requirements of the PPP, if Treasury or SBA determined
that the Company’s loan applications were not made in good faith or
that the Company did not otherwise meet the eligibility
requirements of the PPP, the Company may not receive forgiveness of
the loan (in whole or in part) and could be subject to penalties,
including significant civil, criminal and administrative penalties,
and could be required to return the loans or a portion thereof.
Further, there is no guarantee that the Company will receive
forgiveness for any amount, and forgiveness will be subject to the
Company’s submission to its lender of information and documentation
as required by SBA and the lender.
A
failure to obtain forgiveness of the PPP loan may adversely impact
our loan covenants. In the event that our PPP loan is not forgiven
in whole or in part, the Company may need to seek an amendment to,
or a waiver under, the Company’s debt agreements and/or refinance
or restructure its outstanding debt. There can be no assurance that
the Company could obtain such future amendments or waivers, or
refinance or restructure its debt, in each case on commercially
reasonably terms or at all. The Company’s failure to maintain
compliance with debt covenants could result in an event of default,
subject to applicable notice and cure provisions. In addition, the
Company’s receipt of the PPP loan may result in adverse publicity
and damage to our reputation, and a review or audit by the SBA or
other government entity or claims under the False Claims Act could
consume significant financial and management resources.
Dependence
Upon Key Personnel
Christopher
Hughes, former Chairman of the Board, Chief Executive Officer,
President and Treasurer, was terminated on February 29, 2020. The
Board of Directors of the Company elected Thomas Salerno, formerly
branch manager of the New Jersey office of TSR Consulting Services,
Inc. to succeed Mr. Hughes as Chief Executive Officer, President
and Treasurer. The Company is dependent on Thomas Salerno in his
corporate positions and as President of TSR Consulting Services,
Inc. The Company has an employment agreement with Mr. Salerno which
expires July 10, 2021. The Company is also dependent on the
minority owner of its Logixtech Solutions LLC subsidiary. The
Company has an employment agreement with the minority owner which
terminates on August 31, 2020. The Company is also dependent on
certain of its account executives who are responsible for servicing
its principal customers and attracting new customers. The Company
does not have employment contracts with the account executives.
There can be no assurance that the Company will be able to retain
its existing personnel or find and attract additional qualified
employees. The loss of the service of any of these personnel could
have a material adverse effect on the Company.
Litigation
The
Company is currently subject to a litigation involving the
Company’s former Chief Executive Officer, as discussed in the
“Legal Proceedings” section. In connection with this litigation,
the Company may enter into a settlement of claims for significant
monetary damages. The Company may also be subject to a judgment for
significant monetary damages. Defending against and/or prosecuting
the current litigation may be time-consuming, expensive and cause
diversion of management’s attention.
With
respect to any litigation, the Company’s insurance may not
reimburse it or may not be sufficient to reimburse it for the
self-insured retention that the Company is required to satisfy
before any insurance applies to a claim, unreimbursed legal fees or
an adverse result in any litigation. Such event may adversely
impact the Company’s business, operating results or financial
condition.
Dependence
on Significant Customers
In
the fiscal year ended May 31, 2020, the Company’s three largest
customers, Consolidated Edison, Citigroup and AgileOne, accounted
for 21.2%, 20.3%, and 11.8% of the Company’s consolidated revenue,
respectively. Any disruptions in our relationships with our
significant customers may have a materially adverse impact on our
financial condition and results of operations. AgileOne is a vendor
management company through which the Company provides services to
three end customers, of which Bristol Myers Squibb is the most
significant, representing 11.1% of the Company’s consolidated
revenue for fiscal 2020. In total, the Company derives over 30% of
its revenue from accounts with vendor management companies. The
Company’s 10 largest customers provided 83% of consolidated revenue
in fiscal 2020. Client contract terms vary depending on the nature
of the engagement, and there can be no assurance that a client will
renew a contract when it terminates. In addition, the Company’s
contracts are generally cancelable by the client at any time on
short notice, and customers may unilaterally reduce their use of
the Company’s services under such contracts without penalty. For
example, one of the Company’s 10 largest customers has
significantly reduced their use of the Company’s services during
the COVID-19 pandemic. Approximately 28% of the Company’s revenue
is derived from end customers in the financial services business.
Competitive pressures in financial services, primarily with
European based banks, have negatively affected the net effective
rates that the Company charges to certain end customers in this
industry, which has negatively affected the Company’s gross profit
margins. These banks are no longer willing to pay the premium
prices which they had previously paid for certain high end skills.
See “Rapidly Changing Industry” below.
In
accordance with industry practice, most of the Company’s contracts
for contract computer programming services are terminable by either
the client or the Company on short notice.
The
accounts receivable balances associated with the Company’s largest
customers were $3,747,000 for three customers at May 31, 2020 and
$3,657,000 for three customers at May 31, 2019. Because of the
significant amount of outstanding receivables that the Company may
have with its larger customers at any one time, if a client,
including a vendor management company which then contracts with the
ultimate client, filed for bankruptcy protection or otherwise
sought to modify payment terms, it could prevent the Company from
collecting on the receivables and have an adverse effect on the
Company’s results of operations.
Dependence
on Reputation
The
Company’s reputation among its customers, potential customers and
the staffing services industry depends on the performance of the
technical personnel that the Company places with its customers. If
the Company’s customers are not satisfied with the services
provided by the technical personnel placed by the Company, or if
the technical personnel placed by the Company lack the
qualifications or experience necessary to perform the services
required by the Company’s customers, the Company may not be able to
successfully maintain its relationships with its customers or
expand its client base.
Competitive
Market for Technical Personnel
The
Company’s success is dependent upon its ability to attract and
retain qualified computer professionals to provide as temporary
personnel to its customers. Competition for the limited number of
qualified professionals with a working knowledge of certain
sophisticated computer languages, which the Company requires for
its contract computer services business, is intense. The Company
believes that there is a shortage of, and significant competition
for, software professionals with the skills and experience
necessary to perform the services offered by the
Company.
The
Company’s ability to maintain and renew existing engagements and
obtain new business in its contract computer programming business
depends, in large part, on its ability to hire and retain technical
personnel with the IT skills that keep pace with continuing changes
in software evolution, industry standards and technologies, and
client preferences. Although the Company generally has been
successful in attracting employees with the skills needed to
fulfill customer engagements, demand for qualified professionals
conversant with certain technologies may outstrip supply as new and
additional skills are required to keep pace with evolving computer
technology or as competition for technical personnel increases.
Increased demand for qualified personnel has resulted and is
expected to continue to result in increased expenses to hire and
retain qualified technical personnel and has adversely affected the
Company’s profit margins.
Competitive
Market for Account Executives and Technical Recruiters
The
Company faces a highly competitive market for the limited number of
qualified personnel. The competitive market for such personnel
could affect the Company’s ability to hire and retain such
personnel, including increasing the cost of retaining such
personnel and, if the Company is successful in hiring technical
recruiters and account executives, there can be no assurance that
such hiring will result in increased revenue.
Rapidly
Changing Industry
The
computer industry is characterized by rapidly changing technology
and evolving industry standards. These include the overall increase
in the sophistication and interdependency of computer technology
and a focus by IT managers on cost-efficient solutions. There can
be no assurance that these changes will not adversely affect demand
for technical staffing services. Organizations may elect to perform
such services in-house or outsource such functions to companies
that do not utilize temporary staffing, such as that provided by
the Company.
Additionally,
a number of companies have, in recent years, limited the number of
vendors on their approved vendor lists, and are continuing to do
so. In some cases this has required the Company to subcontract with
a company on the approved vendor list to provide services to
customers. The staffing industry has also experienced margin
erosion caused by this increased competition, and customers
leveraging their buying power by consolidating the number of
vendors with which they deal. In addition to these factors, there
has been intense price competition in the area of IT staffing,
pressure on billing rates and pressure by customers for discounts.
The Company has endeavored to increase its technical recruiting
staff in order to better respond to customers’ increasing demands
for both the timeliness, quality and quantities of resume
submittals against job requisitions.
The
Company cannot predict at this time what long-term effect these
changes will have on the Company’s business and results of
operations.
Vendor
Management Companies
There
have been changes in the industry which have affected the Company’s
operating results. Many customers have retained third parties to
provide vendor management services, and in excess of 30% of the
Company’s revenue is derived through vendor management companies.
The third party is then responsible for retaining companies to
provide temporary IT personnel. This results in the Company
contracting with such third parties and not directly with the
ultimate customer. This change weakens the Company’s relationship
with its customer, which makes it more difficult for the Company to
maintain and expand its business with its existing customers. It
also reduces the Company’s profit margins.
In
addition, the agreements with the vendor management companies are
frequently structured as subcontracting agreements, with the vendor
management company entering into a services agreement directly with
the end customers. As a result, in the event of a bankruptcy of a
vendor management company, the Company’s ability to collect its
outstanding receivables and continue to provide services could be
adversely affected.
Effect
of Current Economic Uncertainties and Limited Growth in Company’s
Business
Demand
for the Company’s IT staffing services has been and is
significantly affected by the general economic environment. During
periods of slowing economic activity, customers may reduce their IT
projects and their demand for outside consultants. Therefore, any
significant economic downturn could have a material adverse effect
on the Company’s results of operations. The COVID-19 outbreak in
the United States has caused business disruption through 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 ongoing
economic impact. Therefore, the Company expects this matter to
continue to negatively impact its operating results in future
periods. However, the full financial impact and duration cannot be
reasonably estimated at this time. The Company expects that
economic conditions will continue to affect the number of
consultants on billing with customers and the Company’s
profitability. In addition to the impact of the economic
uncertainties, the Company has not been successful in expanding its
customer base beyond its core customers. There is no assurance that
the Company will achieve growth in its revenue.
Effect
of Increases in Payroll-related Costs
The
Company is required to pay a number of federal, state and local
payroll and related costs, including unemployment insurance,
workers’ compensation insurance, employer’s portion of Social
Security and Medicare taxes, among others, for our employees,
including those placed with customers. Significant increases in the
effective rates of any payroll-related costs would likely have a
material adverse effect on the Company. During the past few years,
many of the states in which the Company conducts business have
significantly increased their state unemployment tax rates in an
effort to increase funding for unemployment benefits. Costs have
continued to increase as a result of health care reforms and the
mandate to provide health insurance to employees under the
Affordable Care Act which went into effect January 1, 2015.
Additionally, the New York City Council approved a measure which
went into effect in April 2014 requiring the Company to provide
five paid sick days per year. Several local municipalities, such as
Newark and Jersey City, New Jersey, have enacted similar statutes.
The State of New Jersey added a similar paid sick time law
effective in October 2018, while New York State added a paid sick
leave mandate on April 1, 2020, with employees eligible to accrue
paid sick leave as of September 30, 2020 for use beginning January
1, 2021. This is in addition to the paid family leave afforded
employees in New York as of 2016. Many other cities around the
country have enacted or are in the process of enacting paid leave
mandates. The Company has not been able to sufficiently increase
the fees charged to its customers to cover these mandated cost
increases. There are also proposals on the federal and state levels
to phase in paid or partially paid family leave. The enacted
mandates have had a negative effect on the Company’s profitability
and additional mandates will continue to negatively impact the
Company’s margins.
Effect
of Offshore Outsourcing
The
current trend of companies moving technology jobs and projects
offshore has caused and could continue to cause revenue to decline.
In the past few years, more companies are using or are considering
using low cost offshore outsourcing centers, particularly in India
and other East Asian countries, to perform technology related work
and projects. This trend has reduced the growth in domestic IT
staffing revenue for the industry. There can be no assurance that
this trend will not continue to adversely impact the Company’s IT
staffing revenue.
Effect of
Immigration Restrictions
The
Company obtains many of its technical personnel by subcontracting
with companies that utilize foreign nationals entering the U.S. on
work visas, primarily under the H-1B visa classification. The
Company also sponsors foreign nationals on H-1B visas on a limited
basis. The H-1B visa classification enables U.S. employers to hire
qualified foreign nationals in positions that require an education
at least equal to a bachelor’s degree. U.S. Immigration laws and
regulations are subject to legislative and administrative changes,
as well as changes in the application of standards and enforcement.
In June 2020, President Donald Trump issued a proclamation
suspending immigration visas for many categories of foreign workers
including H-1B through the end of the year, allegedly to protect
U.S. workers and jobs amid the COVID-19 pandemic. These and future
restrictions on the availability of work visas could restrain the
Company’s ability to acquire the skilled professionals needed to
meet our customers’ requirements, which could have a material
adverse effect on our business. The scope and impact of these
changes on the staffing industry and the Company remain unclear,
however a narrow interpretation and vigorous enforcement of
existing laws and regulations could adversely affect the ability of
entities with which the Company subcontracts to utilize foreign
nationals and/or renew existing foreign national consultants on
assignment. There can be no assurance that the Company or its
subcontractors will be able to keep or replace all foreign
nationals currently on assignment, or continue to acquire foreign
national talent at the same rates as in the past.
Fluctuations
in Quarterly Operating Results
The
Company’s revenue and operating results are subject to significant
variations from quarter-to-quarter. Revenue is subject to
fluctuation based upon a number of factors, including the timing
and number of client projects commenced and completed during the
quarter, delays incurred in connection with projects, the growth
rate of the market for contract computer programming services and
general economic conditions. Unanticipated termination of a project
or the decision by a client not to proceed to the next stage of a
project anticipated by the Company could result in decreased
revenue and lower utilization rates which could have a material
adverse effect on the Company’s business, operating results and
financial condition. Compensation levels can be impacted by a
variety of factors, including competition for highly skilled
employees and inflation.
The
Company’s operating results also fluctuate due to seasonality.
Typically, our billable hours, which directly affect our revenue
and profitability, decrease in our third fiscal quarter. Clients
closing during the holiday season and for winter weather causes the
number of billable work days for consultants on billing with
customers to decrease. Additionally, at the beginning of the
calendar year, which also falls within our third fiscal quarter,
payroll taxes are at their highest. This results in our lowest
gross margins of the year. The Company’s operating results are also
subject to fluctuation as a result of other factors such as
vacations, client mandated furloughs and client budgeting
requirements.
Competition
The
technical staffing industry is highly competitive, fragmented and
has low barriers to entry. The Company competes for potential
customers with providers of outsourcing services, systems
integrators, computer systems consultants, other providers of
technical staffing services and, to a lesser extent, temporary
personnel agencies. The Company competes for technical personnel
with other providers of technical staffing services, systems
integrators, providers of outsourcing services, computer systems
consultants, customers and temporary personnel agencies. Many of
the Company’s competitors are significantly larger and have greater
financial resources than the Company. The Company believes that the
principal competitive factors in obtaining and retaining customers
are accurate assessment of customers’ requirements, timely
assignment of technical employees with appropriate skills and the
price of services. The principal competitive factors in attracting
qualified technical personnel are compensation, availability,
quality and variety of projects and schedule flexibility. The
Company believes that many of the technical personnel included in
its database may also be pursuing other employment opportunities.
Therefore, the Company believes that its responsiveness to the
needs of technical personnel is an important factor in the
Company’s ability to fill projects. Although the Company believes
it competes favorably with respect to these factors, it expects
competition to increase, and there can be no assurance that the
Company will remain competitive.
Potential
for Contract and Other Liability
The
personnel provided by the Company to customers provide services
involving key aspects of its customers’ software applications. A
failure in providing these services could result in a claim for
substantial damages against the Company, regardless of the
Company’s responsibility for such failure. The Company attempts to
limit, contractually, its liability for damages arising from
negligence or omissions in rendering services, but it is not always
successful in negotiating such limits.
Furthermore,
due to increased competition and the requirements of vendor
management companies, the Company may be required to accept less
favorable terms regarding limitations on liability, including
assuming obligations to indemnify customers for damages sustained
in connection with the provision of our services. There can be no
assurance our contracts will include the desired limitations of
liability or that the limitations of liability set forth in our
contracts would be enforceable or would otherwise protect the
Company from liability for damages.
The
Company’s business involves assigning personnel to the workplace of
the client, typically under the client’s supervision. Although the
Company has little control over the client’s workplace, the Company
may be exposed to claims of discrimination and harassment and other
similar claims as a result of inappropriate actions allegedly taken
against the Company’s personnel by customers. As an employer, the
Company is also exposed to other possible employment-related
claims. The Company is exposed to liability with respect to actions
taken by its technical personnel while on a project, such as
damages caused by technical personnel errors, misuse of client
proprietary information or theft of client property. To reduce
these exposures, the Company maintains insurance policies and a
fidelity bond covering general liability, workers’ compensation
claims, errors and omissions and employee theft. In certain
instances, the Company indemnifies its customers for these
exposures. Certain of these costs and liabilities are not covered
by insurance. There can be no assurance that insurance coverage
will continue to be available and at its current price or that it
will be adequate to, or will, cover any such liability.
Data
Security
Our
ability to protect client, employee, and Company data and
information is critical to our reputation and the success of our
business. Our clients and employees expect that their confidential,
personal and private information will be secure in our possession.
Attacks against security systems have become increasingly
sophisticated along with developments in technology, and such
attacks have become more prevalent. Consequently, the regulatory
environment surrounding cybersecurity and privacy has become more
and more demanding and has resulted in new requirements and
increasingly demanding standards for protection of information. As
a result, the Company may incur increased expenses associated with
adequately protecting confidential client, employee, and Company
data and complying with applicable regulatory requirements. There
can be no assurance that we will be able to prevent unauthorized
third parties from breaching our systems and gaining unauthorized
access to confidential client, employee, and Company data even if
our cybersecurity measures are compliant with regulatory
requirements and standards. Unauthorized third party access to
confidential client, employee, and Company data stored in our
system whether as a result of a third party system breach, systems
failure or employee negligence, fraud or misappropriation, could
damage our reputation and cause us to lose customers, and could
subject us to monetary damages, fines and/or criminal prosecution.
Furthermore, unauthorized third party access to or through our
information systems or those we develop for our customers, whether
by our employees or third parties, could result in system
disruptions, negative publicity, legal liability, monetary damages,
and damage to our reputation.
Intellectual
Property Rights
The
Company relies primarily upon a combination of trade secret,
nondisclosure and other contractual agreements to protect its
proprietary rights. The Company generally enters into
confidentiality agreements with its employees, consultants,
customers and potential customers and limits access to and
distribution of its proprietary information. There can be no
assurance that the steps taken by the Company in this regard will
be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property
rights.
Voting
Power of Significant Stockholders
On
July 24, 2018, Joseph F. Hughes and Winifred Hughes filed
Amendments to Schedule 13D with the United States Securities and
Exchange Commission (the “SEC”) in which Joseph F. Hughes and
Winifred Hughes disclosed that they had collectively sold 819,491
shares of the Company’s Common Stock jointly held by them in a
privately-negotiated transaction to Zeff Capital, L.P., QAR
Industries, Inc. and Fintech Consulting LLC. Joseph F. Hughes was
the former Chairman and Chief Executive Officer of the Company.
Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC
acquired, in the aggregate, 41.8% of the Company’s issued and
outstanding Common Stock in this transaction. Amendments to
Schedule 13D previously filed by Joseph F. Hughes and Winifred
Hughes on July 17, 2018 attached an exhibit wherein it was stated
that prior to the transaction described above, Zeff Capital, L.P.
owned 77,615 shares or approximately 4% of the Company’s issued and
outstanding Common Stock.
The
Company became aware on July 30, 2018 that Fintech Consulting LLC
and Tajuddin Haslani filed a Schedule 13D with the SEC disclosing
beneficial ownership of 376,100 shares of Common Stock, which
represents approximately 19.2% of the Company’s issued and
outstanding Common Stock.
The
Company became aware on August 23, 2018 that Zeff Capital, L.P.,
Zeff Holding Company, LLC and Daniel Zeff filed an Amendment to
Schedule 13D with the SEC disclosing the additional purchase by
Zeff Capital, L.P. of an aggregate of 55,680 shares of Common
Stock. As a result of these additional purchases of Common Stock,
Zeff Capital, L.P., Zeff Holding Company, LLC and Daniel Zeff
beneficially own a total of 437,774 shares of Common Stock, which
represents approximately 22.3% of the Company’s issued and
outstanding Common Stock.
The
Company became aware on August 28, 2018 that QAR Industries, Inc.
and Robert Fitzgerald filed an Amendment to Schedule 13D with the
SEC disclosing the additional purchase by QAR Industries, Inc. of
an aggregate of 4,070 shares of Common Stock. As a result of these
additional purchases of Common Stock, QAR Industries, Inc. and
Robert Fitzgerald beneficially own a total of 143,900 shares of
Common Stock, which represents approximately 7.3% of the Company’s
issued and outstanding Common Stock. The Company became aware on
September 10, 2019 that QAR Industries, Inc. and Robert Fitzgerald
filed an Amendment to Schedule 13D with the SEC disclosing
beneficial ownership of an aggregate of 139,200 shares of Common
Stock, which represents approximately 7.1% of the Company’s issued
and outstanding Common Stock.
As a
result of the transactions described above, Zeff Capital, L.P., QAR
Industries, Inc. and Fintech Consulting LLC are the beneficial
owners of an aggregate of 953,074 shares of Common Stock, which
represents approximately 48.6% of the Company’s issued and
outstanding Common Stock. By virtue of such ownership, Zeff
Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC have
the ability to exercise significant influence over the Company. For
example, this concentrated ownership could delay, defer, or prevent
a change in control, merger, consolidation, or sale of all or
substantially all of the Company’s assets in transactions that
other shareholders strongly support or conversely, this
concentrated ownership could result in the consummation of such
transactions that many of the Company’s other shareholders do not
support.
Certain
Anti-Takeover Provisions May Inhibit a Change of Control
In
addition to the significant ownership of Common Stock discussed
above under the caption “Voting Power of Significant Stockholders,”
certain provisions of the Company’s charter and by-laws may have
the effect of discouraging a third party from making an acquisition
proposal for the Company and may thereby inhibit a change in
control of the Company under circumstances that could give the
holders of Common Stock the opportunity to realize a premium over
the then-prevailing market prices. Such provisions include a
classified Board of Directors and advance notice requirements for
nomination of directors and certain stockholder proposals set forth
in the Company’s Certificate of Incorporation and by-laws. In
addition, on August 29, 2018, the Company entered into a Rights
Agreement and paid a related dividend of preferred share purchase
rights to the holders of the Company’s outstanding Common Stock.
The preferred share purchase rights give the holders thereof the
right to purchase shares of the Company’s Class A Preferred Stock
Series One, par value $0.01 per share (“Preferred Stock”). The
Preferred Stock has rights with respect to dividends, voting and
liquidation preferences that are superior to the Common Stock. The
preferred share purchase rights do not become exercisable until the
acquisition by certain persons or entities, or groups of affiliated
persons or entities, of 5% or more of the Company’s outstanding
Common Stock. (See Note 6 to the Consolidated Financial Statements
elsewhere in this report.)
New
Classes and Series of Stock
The
Company’s charter authorizes the Board of Directors to create new
classes and series of preferred stock and to establish the
preferences and rights of any such classes and series without
further action of the stockholders. The issuance of additional
classes and series of capital stock may have the effect of
delaying, deferring or preventing a change in control of the
Company.
On
August 29, 2018, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a “Right”) for each
share of Common Stock of the Company outstanding on August 29, 2018
(the “Record Date”) to the stockholders of record on that date. In
connection with the distribution of the Rights, the Company entered
into a Rights Agreement (the “Rights Agreement”), dated as of
August 29, 2018, between the Company and Continental Stock Transfer
& Trust Company, as Rights Agent. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of
a share of the Company’s Preferred Stock at a price of $24.78 per
one one-hundredth of a share of Preferred Stock represented by a
Right (the “Purchase Price”), subject to adjustment. See Footnote 6
to the Consolidated Financial Statements elsewhere in this
report.
The
Company’s stock price could be extremely volatile and, as a result,
investors may not be able to resell their shares at or above the
price they paid for them.
Among
the factors that have previously affected the Company’s stock price
and may do so in the future are:
| |
- |
limited
float and a low average daily trading volume; |
| |
- |
industry
trends and the performance of the Company’s customers; |
| |
- |
fluctuations
in the Company’s results of operations; |
| |
- |
general
market conditions. |
The
stock market has, and may in the future, experience extreme
volatility that has often been unrelated to the operating
performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company’s
Common Stock.
Item 1B. Unresolved Staff
Comments
None
Item
2. Properties
The
Company leases 8,000 square feet of space in Hauppauge, New York
for a term expiring December 31, 2020, with annual rents of
approximately $87,000. This space is used as executive and
administrative offices for the Company and the Company’s operating
subsidiary. The Company also leases sales and recruiting offices in
New York City (lease expires August 2022) and Edison, New Jersey
(lease expires February 2021), with aggregate annual rents of
approximately $158,000 and $143,000, respectively.
The
Company believes the present locations are adequate for its current
needs as well as for the future expansion of its existing
business.
Item
3. Legal Proceedings
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 former 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
Down, 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 named Directors’ alleged
breaches of fiduciary duties; (3) damages and equitable relief
derivatively on behalf of the Company for the named 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.
On
January 7, 2019, Ms. Paskowitz filed a related action against Zeff
Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR
Industries, Inc., Robert Fitzgerald, Fintech Consulting LLC, and
Tajuddin Haslani in the Southern District of New York, which
asserts claims against them for breach of fiduciary duty and under
federal securities laws similar to those asserted in the Company’s
action. Although the Company is not a party to Ms. Paskowitz’s
action, the court has determined to treat the Company’s and Ms.
Paskowitz’s respective actions as related.
On
August 7, 2019, following the Company’s initial rescheduling of the
2018 Annual Meeting for September 13, 2019 and the filing of
Preliminary Proxy Statements by the Company and Zeff Capital, L.P.,
Zeff Capital, L.P. filed a complaint in the Delaware Court of
Chancery against the Company seeking an order requiring the Company
to hold its next annual meeting of stockholders on or around
September 13, 2019, and obligating the Company to elect Class I and
Class III directors at that annual meeting.
On
August 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 to “make clear that the second set of directors” described by
Zeff 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 “Amended Rights Agreement”), to confirm
that a Distribution Date (as defined in the Amended 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.
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.
In
addition, the Settlement Agreement provides for mutual releases
between the Company and each of the Investor Parties and certain of
their affiliates. Each of the Investor Parties and certain of their
affiliates also agreed to certain customary standstill provisions,
including without limitation, with regard to certain actions in
connection with the 2018 Annual Meeting, Extraordinary Transactions
(as defined in the Settlement Agreement) with the Company, and the
acquisition of any securities (or beneficial ownership thereof) of
the Company, each of which expired on December 30, 2019.
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 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 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.
On
December 24, 2019, Ms. Paskowitz moved for preliminary approval of
the Stipulation. On May 21, 2020, the Court entered an order
preliminarily approving the Stipulation. The parties have agreed on
a proposed scheduling order for final approval of the Stipulation
and a proposed mailing notice of the Stipulation to TSR
stockholders, which are both currently pending Court approval. If
approved, the Court will set a settlement hearing for final
approval of the Stipulation. Although the Company believes that the
Stipulation 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 Stipulation 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 when he was put on leave. He was subsequently
terminated on February 29, 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 ending February 29, 2020, the Company negotiated
a settlement with the Company’s largest shareholder to reimburse it
for legal expenses of $900,000 (net present value of $818,000), 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. (See Note 5 to the Consolidated Financial Statements
elsewhere in this report.)
Christopher
Hughes, the former Chief Executive Officer of the Company
(“Plaintiff”), 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 alleges that he was
terminated without cause or in the alternative, that he resigned
for reason and therefore, pursuant to the Amended and Restated
Employment Agreement, dated August 9, 2018, between the Company and
Plaintiff. Plaintiff seeks contractual 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.
At
this time, it is not possible to predict the outcome of any of
these litigation matters or their effect on the Company and the
Company’s consolidated financial position.
Item 4. Mine Safety
Disclosures
Not
applicable.
PART II
Item
5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
The
Company’s shares of Common Stock trade on the NASDAQ Capital Market
under the symbol TSRI. The following are the high and low sales
prices for each quarter during the fiscal years ended May 31, 2020
and 2019:
|
|
|
JUNE 1, 2019 – MAY 31, 2020 |
|
| |
|
1ST |
|
|
2ND |
|
|
3RD |
|
|
4TH |
|
|
|
|
QUARTER |
|
|
QUARTER |
|
|
QUARTER |
|
|
QUARTER |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| High Sales Price |
|
$ |
4.93 |
|
|
$ |
4.39 |
|
|
$ |
8.88 |
|
|
$ |
3.96 |
|
| Low Sales Price |
|
|
4.23 |
|
|
|
3.20 |
|
|
|
2.64 |
|
|
|
2.70 |
|
|
|
|
JUNE 1, 2018 – MAY 31, 2019 |
|
| |
|
1ST |
|
|
2ND |
|
|
3RD |
|
|
4TH |
|
|
|
|
QUARTER |
|
|
QUARTER |
|
|
QUARTER |
|
|
QUARTER |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| High Sales Price |
|
$ |
9.40 |
|
|
$ |
7.92 |
|
|
$ |
6.96 |
|
|
$ |
6.20 |
|
| Low Sales Price |
|
|
4.40 |
|
|
|
4.65 |
|
|
|
4.50 |
|
|
|
4.67 |
|
There
were 41 holders of record of the Company’s Common Stock as of July
31, 2020. Additionally, the Company estimates that there were
approximately 700 beneficial holders as of that date. The Company
has no current plans to implement a quarterly dividend program or
pay any other special cash dividend.
There
are no securities authorized for issuance under any equity
compensation plans.
Item 6. Selected Financial
Data
(Amounts
in Thousands, Except Per Share Data)
|
|
|
Years Ended |
|
|
|
|
May
31, |
|
|
May
31, |
|
|
May
31, |
|
|
May
31, |
|
|
May
31, |
|
|
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, Net |
|
$ |
59,121 |
|
|
$ |
63,340 |
|
|
$ |
64,990 |
|
|
$ |
62,573 |
|
|
$ |
60,998 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income
(Loss) From Operations |
|
|
(1,751 |
) |
|
|
(1,848 |
) |
|
|
909 |
|
|
|
562 |
|
|
|
839 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
Income (Loss) Attributable to TSR, Inc. |
|
|
(1,126 |
) |
|
|
(1,336 |
) |
|
|
486 |
|
|
|
268 |
|
|
|
399 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Income (Loss) Per TSR, Inc. Common Share |
|
|
(0.57 |
) |
|
|
(0.68 |
) |
|
|
0.25 |
|
|
|
0.14 |
|
|
|
0.20 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital |
|
|
12,239 |
|
|
|
6,225 |
|
|
|
8,113 |
|
|
|
7,689 |
|
|
|
9,391 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
Assets |
|
|
18,876 |
|
|
|
12,534 |
|
|
|
13,372 |
|
|
|
14,535 |
|
|
|
14,090 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total
TSR, Inc. Equity |
|
|
5,762 |
|
|
|
6,888 |
|
|
|
8,224 |
|
|
|
7,738 |
|
|
|
9,432 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Book Value Per
TSR, Inc. Common Share |
|
|
2.94 |
|
|
|
3.51 |
|
|
|
4.19 |
|
|
|
3.94 |
|
|
|
4.81 |
|
|
(Total TSR Equity Divided by Common Shares Outstanding) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Declared Per TSR, Inc. Common Share |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
1.00 |
|
|
$ |
0.00 |
|
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis should be read in conjunction
with the Company’s consolidated financial statements and notes
thereto presented elsewhere in this report.
Results
of Operations
The
following table sets forth for the periods indicated certain
financial information derived from the Company’s consolidated
statements of operations. There can be no assurance that historical
trends in operating results will continue in the future:
|
|
|
Years Ended May 31,
(Dollar Amounts in Thousands) |
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
Amount |
|
|
% of
Revenue |
|
|
Amount |
|
|
% of
Revenue |
|
|
Revenue, Net |
|
$ |
59,121 |
|
|
|
100.0 |
% |
|
$ |
63,340 |
|
|
|
100.0 |
% |
|
Cost of Sales |
|
|
49,943 |
|
|
|
84.5 |
|
|
|
53,515 |
|
|
|
84.5 |
|
| Gross
Profit |
|
|
9,178 |
|
|
|
15.5 |
|
|
|
9,825 |
|
|
|
15.5 |
|
|
Selling, General and Administrative Expenses |
|
|
10,929 |
|
|
|
18.5 |
|
|
|
11,673 |
|
|
|
18.4 |
|
| Loss
from Operations |
|
|
(1,751 |
) |
|
|
(3.0 |
) |
|
|
(1,848 |
) |
|
|
(2.9 |
) |
|
Other Income (Expense), Net |
|
|
(59 |
) |
|
|
(0.1 |
) |
|
|
11 |
|
|
|
0.0 |
|
| Loss
Before Income Taxes |
|
|
(1,810 |
) |
|
|
(3.1 |
) |
|
|
(1,837 |
) |
|
|
(2.9 |
) |
|
Benefit for Income Taxes |
|
|
(712 |
) |
|
|
(1.2 |
) |
|
|
(538 |
) |
|
|
(0.8 |
) |
|
Consolidated Net Loss |
|
|
(1,098 |
) |
|
|
(1.9 |
) |
|
|
(1,299 |
) |
|
|
(2.1 |
) |
|
Net Income Attributable to Noncontrolling Interest |
|
|
28 |
|
|
|
0.0 |
|
|
|
37 |
|
|
|
0.0 |
|
|
Net Loss Attributable to TSR, Inc. |
|
$ |
(1,126 |
) |
|
|
(1.9 |
)% |
|
$ |
(1,336 |
) |
|
|
(2.1 |
)% |
Revenue
Revenue
consists primarily of revenue from computer programming consulting
services. Revenue for the fiscal year ended May 31, 2020 decreased
$4,219,000 or 6.7% from fiscal 2019. Revenue for the current year
decreased due to lower overall average number of consultants on
billing with customers which decreased from 394 for the fiscal year
ended May 31, 2019 to 363 for the fiscal year ended May 31, 2020,
while the average number of computer programming consultants also
decreased from 338 for the fiscal year ended May 31, 2019 to 308 in
the fiscal year ended May 31, 2020. The 363 consultants on billing
for the current period include an equivalent 55 administrative
(non-IT) workers that the Company placed at the customers’ requests
as compared with the prior year which included an equivalent 56
administrative (non-IT) workers.
We
have experienced terminated assignments and a decrease in demand
for new assignments due to the COVID-19 pandemic, which has led to
the lower average number of consultants and negatively impacted the
Company’s revenues. Additionally, the COVID-19 pandemic has created
operational challenges. The start of certain new assignments has
been 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 May 31, 2020, the Company had used
approximately 53% 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 period.
Cost
of Sales
Cost
of sales for the fiscal year ended May 31, 2020 decreased
$3,572,000 or 6.7% to $49,943,000 from $53,515,000 in the prior
fiscal year. The decrease in cost of sales resulted primarily from
the decrease in consultants on billing. Cost of sales as a
percentage of revenue was 84.5% for both the fiscal year ended May
31, 2019 and the fiscal year ended May 31, 2020. This indicates
that the amounts paid to consultants were reduced in line with the
revenue decrease.
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
$744,000 or 6.4% from $11,673,000 in the fiscal year ended May 31,
2019 to $10,929,000 in the fiscal year ended May 31, 2020. The
decrease in these expenses primarily resulted from a decrease of
$1,158,000 in amounts paid for legal services from the prior year
related to shareholder litigation and increased costs surrounding
our annual meeting, as well as a reduction of approximately
$200,000 in compensation expenses for the former CEO who was
terminated on February 29, 2020 (net of additional amounts paid to
the new CEO during the period). The decreases were offset, in part,
by the settlement with an investor for $818,000 (present value) to
offset expenses incurred in its solicitations in connection with
the annual meeting of stockholders and related litigation between
the investor and the Company. Despite the decrease, selling,
general and administrative expenses, as a percentage of revenue,
increased from 18.4% in the fiscal year ended May 31, 2019 to 18.5%
in the fiscal year ended May 31, 2020.
Other Income (Expense)
Other
income (expense) for the fiscal year ended May 31, 2020 resulted
primarily from interest expense of $79,000, offset, to an extent,
by interest and dividend income of $5,000 and by a mark to market
gain of approximately $15,000 on the Company’s marketable equity
securities. Other income for the fiscal year ended May 31, 2019
resulted primarily from interest and dividend income of $22,000
reduced by a mark to market loss of approximately $9,000 on the
Company’s marketable equity securities and a loss of $2,000 on the
sale of a fixed asset.
Income
Taxes
The
effective income tax rates were a benefit of 39.3% for the fiscal
year ended May 31, 2020 and a benefit of 29.3% for the fiscal year
ended May 31, 2019. During the current year, the CARES Act allowed
net operating losses to be carried back five years. The Company has
applied for refunds of approximately $586,000 based on the fiscal
2019 loss. The deferred tax asset provided from the loss in fiscal
2019 was originally recorded at the lower federal rate of 21%. It
is now being used at the higher federal rate of 34% used prior to
2018, resulting in an additional benefit in excess of $200,000. The
rates for both years consist primarily of the new federal corporate
tax rate of 21.0% effective January 1, 2018. The benefit of the
deferred tax asset will be limited to 21% for federal income tax
purposes in fiscal years going forward.
Net
Loss Attributable to TSR, Inc.
Net
loss attributable to TSR, Inc. was a loss of $1,336,000 in the
fiscal year ended May 31, 2019 compared to a net loss of $1,126,000
in the fiscal year ended May 31, 2020. In addition to the
additional tax benefit described above, the decrease in the loss
was primarily attributable to the decrease in selling, general and
administrative expenses from decreased amounts paid for legal
services.
Liquidity,
Capital Resources and Changes in Financial Condition
The
Company’s cash and marketable securities were sufficient to enable
it to meet its liquidity requirements during fiscal 2020. 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 May 31, 2020, the net borrowings outstanding
against this line of credit facility were $501,000. The amount the
Company has borrowed fluctuates and, at times, it has utilized the
maximum amount of $2,000,000 available under this facility to fund
its payroll and other obligations. Additionally, in April 2020, the
Company secured a SBA Paycheck Protection Program Loan (“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 it business operations and the potential
inability of its customers to pay their accounts when due. As of
May 31, 2020, the Company had used approximately 53% 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 plans to seek forgiveness of the PPP
Loan.
At
May 31, 2020, the Company had working capital (total current assets
in excess of total current liabilities) of $12,239,000 including
cash and cash equivalents and marketable securities of $9,780,000
as compared to working capital of $6,225,000 including cash and
cash equivalents and certificates of deposit and marketable
securities of $4,222,000 at May 31, 2019. The increase in working
capital was primarily due to the receipt of PPP loan funds in April
2020.
Net
cash flow of $1,567,000 was used in operations during fiscal 2020
as compared to $1,584,000 of net cash flow used in operations in
fiscal 2019. The cash used in operations for fiscal 2020 primarily
resulted from the consolidated net loss of $1,098,000, an increase
in prepaid and recoverable income taxes of $547,000, an increase in
deferred taxes of $148,000, and a decrease in accounts and other
payables and accrued expenses of $892,000, offset to some extent,
by an increase in accounts receivable of $386,000 and accrued legal
settlement payable of $828,000. The cash used in operations for
fiscal 2019 primarily resulted from the consolidated net loss of
$1,299,000, an increase in deferred taxes of $558,000, primarily
from net operating loss carryforwards, and an increase in accounts
receivable of $216,000, offset, to some extent, by an increase in
accounts and other payables and accrued expenses of $535,000,
primarily from increased accrued legal expenses and customer
discounts.
Net
cash provided by investing activities amounted to $471,000 for
fiscal 2020, compared to $8,000 in net cash provided by investing
activities in fiscal 2019. The cash provided by investing
activities in fiscal 2020 primarily resulted from maturing
certificates of deposit offset, to an extent, by purchases of fixed
assets. The cash provided by investing activities in 2019 primarily
resulted from the proceeds of the sale of a fixed asset, less
purchases of fixed assets.
Net
cash provided by financing activities of $7,132,000 during the
fiscal year ended May 31, 2020 resulted from the proceeds of a PPP
Loan of $6,659,000 and net drawings on the line of credit of
$501,000 offset by distributions of $29,000 to the holder of the
noncontolling interest in the Company’s subsidiary, Logixtech
Solutions, LLC. Net cash used in financing activities of $53,000
during the fiscal year ended May 31, 2019 resulted primarily from
the distributions to the holder of the noncontrolling
interest.
The
Company’s capital resource commitments at May 31, 2020 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 $381,000 and $828,000,
respectively, as of May 31, 2020. The Company intends to finance
these commitments primarily from the Company’s available cash and
line of credit.
Impact
of New Accounting Standards
Effective
June 1, 2018, the Company adopted Accounting Standards Update
("ASU") No. 2014-09, Revenue from Contracts with Customers
(Topic 606), using the modified retrospective method. This
update outlined a comprehensive new revenue recognition model
designed to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services. The new standard also requires additional quantitative
and qualitative disclosures. The adoption allows companies to apply
the new revenue standard to reporting periods beginning in the year
the standard is first implemented, while prior periods continue to
be reported in accordance with previous accounting guidance. Since
the adoption of Accounting Standards Codification (“ASC”) 606 did
not have a significant impact on the recognition of revenue, the
Company did not have an opening retained earnings
adjustment.
In
March 2016, the Financial Accounting Standards Board (“FASB”)
issued ASU 2016-08, Principal versus Agent Consideration
(Topic 606). This update contains guidance on principal versus
agent assessments when a third party is involved in providing goods
or services to a customer. It specifies that an entity is a
principal, and thus records revenue on a gross basis, if it
controls a good or service before transferring the good or service
to the customer. An entity is an agent, and thus records revenue on
a net basis, if it arranges for a good or service to be provided by
another entity. The Company adopted this ASU on June 1, 2018 as
part of the adoption of ASC 606 and it did not have a significant
impact.
In
May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements
and Practical Expedients (Topic 606). This update provides
certain clarifications to reduce potential diversity in practice
and to simplify the standard. The amendments in ASU 2016-12 clarify
the following key areas: assessing collectibility; presenting sales
taxes and other similar taxes collected from customers; noncash
consideration; contract modifications at transition; completed
contracts at transition; and disclosing the accounting change in
the period of adoption. The Company adopted this ASU on June 1,
2018 as part of the adoption of ASC 606 and it did not have a
significant impact.
In
February 2016, the FASB issued ASU No. 2016-02, Leases,
which sets out the principle for the recognition, measurement,
presentation and disclosure of leases for both parties to a
contract (i.e., lessees and lessors). The new standard requires
lessees to classify leases as either finance or operating leases
and record a right-of-use asset and a lease liability for all
leases with a term of greater than 12 months regardless of their
classification. An accounting policy election may be made to
account for leases with a term of 12 months or less similar to
existing guidance for operating leases today. ASU No. 2016-02
supersedes the existing guidance on accounting for leases. In July
2018, the FASB issued ASU No. 2018-11, Leases (Topic 842):
Targeted Improvements, which allows for an optional transition
method for the adoption of Topic 842. The two permitted transition
methods are now the modified retrospective approach, which applies
the new lease requirements at the beginning of the earliest period
presented, and the optional transition method, which applies the
new lease requirements through a cumulative-effect adjustment to
the opening balance of retained earnings in the period of adoption.
ASU 2016-02 is effective for our fiscal year ending May 31, 2020
and the interim periods within that year. The Company will adopt
this standard in the first quarter of fiscal 2020 using the
optional transition method. The Company also intends to elect the
practical expedients that allow us to carry forward the historical
lease classification. The Company has established an inventory of
existing leases and implemented a new process of evaluating the
classification of each lease. The financial impact of the adoption
of the new standard in the first quarter of fiscal year 2020 was an
increase in total assets and total liabilities of approximately
$691,000 as of June 1, 2019. The financial impact of the adoption
primarily relates to the capitalization of right-of-use assets and
recognition of lease liability related to operating leases. The
Company will implement changes to its processes and internal
controls, as necessary, to meet the reporting and disclosure
requirements of the new standard.
Critical
Accounting Policies
The
SEC defines “critical accounting policies” as those that require
the application of management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The
Company’s significant accounting policies are described in Note 1
to its consolidated financial statements, contained elsewhere in
this report. The Company believes that the following accounting
policies require the application of management’s most difficult,
subjective or complex judgments:
Revenue
Recognition
Revenues
are recognized as control of the promised service is transferred to
customers, in an amount that reflects the consideration expected in
exchange for the services. Revenues from contract assignments are
recognized over time, based on hours worked by the Company’s
contract professionals. The performance of the requested service
over time is the single performance obligation for assignment
revenues. Certain customers may receive discounts (e.g., volume
discounts, rebates, prompt-pay discounts) and adjustments to the
amounts billed. These discounts, rebates and adjustments are
considered variable consideration. Volume discounts are the largest
component of variable consideration and are estimated using the
most likely amount method prescribed by ASC 606, contracts terms
and estimates of revenue. Revenues are recognized net of variable
consideration to the extent that it is probable that a significant
reversal of revenues will not occur in subsequent periods. Payment
terms vary and the time between invoicing and when payment is due
is not significant. There are no financing components to the
Company’s arrangements. There are no incremental costs to obtain
contracts and costs to fulfill contracts are expensed as incurred.
The Company’s operations are primarily located in the United
States. The Company recognizes most of its revenue on a gross basis
when it acts as a principal in its transactions. The Company has
direct contractual relationships with its customers, bears the
risks and rewards of its arrangements, and has the discretion to
select the contract professionals and establish the price for the
services to be provided. Additionally, the Company retains control
over its contract professionals based on its contractual
arrangements. The Company primarily provides services through its
employees and to a lesser extent, through subcontractors; the
related costs are included in cost of sales. The Company includes
billable expenses (out-of-pocket reimbursable expenses) in revenue
and the associated expenses are included in cost of
sales.
Estimating
Allowances for Doubtful Accounts Receivable
We
perform ongoing credit evaluations of our customers and adjust
credit limits based upon payment history and the customer’s current
creditworthiness, as determined by our review of their current
credit information. We continuously monitor collections and
payments from our customers and maintain a provision for estimated
credit losses based on our historical experience, customer types,
creditworthiness, economic trends and any specific customer
collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions
established, we cannot guarantee that we will continue to
experience the same credit loss rates that we have in the past. A
significant change in the liquidity or financial position of any of
our significant customers, or in their willingness to pay, could
have a material adverse effect on the collectability of our
accounts receivable and our future operating results.
Valuation
of Marketable Securities
The
Company classifies its marketable securities at acquisition as
either (i) held-to-maturity, (ii) trading or (iii)
available-for-sale. Based upon the Company’s intent and ability to
hold its certificates of deposit to maturity (which maturities
range up to 12 months), such securities have been classified as
held-to-maturity and are carried at amortized cost, which
approximates fair value. The Company’s equity securities are
classified as trading securities, which are carried at fair value,
as determined by quoted market price, which is Level 1 input, as
established by the fair value hierarchy. The related unrealized
gains and losses are included in earnings.
Valuation
of Deferred Tax Assets
We
regularly evaluate our ability to recover the reported amount of
our deferred income tax assets considering several factors,
including our estimate of the likelihood of the Company generating
sufficient taxable income in future years during the period over
which temporary differences reverse. Presently, the Company
believes that it is more likely than not that it will realize the
benefits of its deferred tax assets based primarily on the
Company’s history of and projections for taxable income in the
future. In the event that actual results differ from our estimates
or we adjust these estimates in future periods, we may need to
establish a valuation allowance against a portion or all of our
deferred tax assets, which could materially impact our financial
position or results of operations.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
The
Company is a smaller reporting company and is therefore not
required to provide this information.
Item
8. Financial Statements and Supplementary Data
Index
to Consolidated Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of TSR, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of TSR,
Inc. and Subsidiaries (the Company) as of May 31, 2020 and 2019,
and the related consolidated statements of operations, equity, and
cash flows for each of the years then ended, and the related notes
(collectively referred to as the financial statements). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of May 31, 2020
and 2019, and the results of its operations and its cash flows for
each of the years then ended, in conformity with accounting
principles generally accepted in the United States of
America.
Change
in Accounting Principle
As
discussed in Notes 1 and 3 to the consolidated financial
statements, the Company has changed its method for accounting for
leases as of June 1, 2019 due to the adoption of Accounting
Standards Codification Topic 842 Leases.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ CohnReznick LLP
We have served as the
Company’s auditor since 2008.
Jericho,
New York
August
17, 2020
TSR,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
May
31, 2020 and 2019
|
|
|
2020 |
|
|
2019 |
|
|
ASSETS |
|
|
|
|
|
|
| Current
Assets: |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,730,022 |
|
|
$ |
3,694,989 |
|
|
Certificates of deposit and marketable securities |
|
|
50,344 |
|
|
|
527,232 |
|
|
Accounts receivable: |
|
|
|
|
|
|
|
|
|
Trade, net of allowance for doubtful accounts of $181,000 in 2020
and 2019 |
|
|
7,057,365 |
|
|
|
7,443,581 |
|
|
Other |
|
|
5,088 |
|
|
|
5,321 |
|
| |
|
|
7,062,453 |
|
|
|
7,448,902 |
|
| |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
202,862 |
|
|
|
118,482 |
|
|
Prepaid and recoverable income taxes |
|
|
598,893 |
|
|
|
52,385 |
|
|
Total Current Assets |
|
|
17,644,574 |
|
|
|
11,841,990 |
|
| |
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, at cost: |
|
|
|
|
|
|
|
|
|
Equipment |
|
|
112,435 |
|
|
|
104,223 |
|
|
Furniture and fixtures |
|
|
124,371 |
|
|
|
111,107 |
|
|
Leasehold improvements |
|
|
60,058 |
|
|
|
60,058 |
|
| |
|
|
296,864 |
|
|
|
275,388 |
|
| |
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
276,673 |
|
|
|
268,886 |
|
| |
|
|
20,191 |
|
|
|
6,502 |
|
| |
|
|
|
|
|
|
|
|
| Other
assets |
|
|
49,653 |
|
|
|
49,653 |
|
|
Right-of-use asset |
|
|
377,182 |
|
|
|
- |
|
|
Deferred income taxes |
|
|
784,000 |
|
|
|
636,000 |
|
|
Total Assets |
|
$ |
18,875,600 |
|
|
$ |
12,534,145 |
|
See
accompanying notes to consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
May
31, 2020 and 2019
LIABILITIES
AND EQUITY
|
|
|
2020 |
|
|
2019 |
|
| Current
Liabilities: |
|
|
|
|
|
|
|
Accounts and other payables |
|
$ |
503,166 |
|
|
$ |
574,540 |
|
|
Accrued expenses and other current liabilities: |
|
|
|
|
|
|
|
|
|
Salaries, wages and commissions |
|
|
2,240,063 |
|
|
|
2,895,603 |
|
|
Other |
|
|
791,570 |
|
|
|
956,965 |
|
| |
|
|
3,031,633 |
|
|
|
3,852,568 |
|
| |
|
|
|
|
|
|
|
|
|
Advances from customers |
|
|
1,181,234 |
|
|
|
1,190,014 |
|
|
Revolving line of credit |
|
|
501,134 |
|
|
|
- |
|
|
Operating lease liability- current |
|
|
188,799 |
|
|
|
- |
|
|
Total Current Liabilities |
|
|
5,405,966 |
|
|
|
5,617,122 |
|
|
Operating lease liability, net of current portion |
|
|
192,409 |
|
|
|
- |
|
| Legal
settlement payable |
|
|
827,822 |
|
|
|
- |
|
|
SBA Paycheck Protection Program loan payable |
|
|
6,659,220 |
|
|
|
- |
|
| |
|
|
- |
|
|
|
- |
|
|
Total Liabilities |
|
|
13,085,417 |
|
|
|
5,617,122 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Equity: |
|
|
|
|
|
|
|
|
| TSR,
Inc. |
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value, authorized 500,000 shares; none
issued |
|
|
- |
|
|
|
- |
|
|
Class A Preferred Stock, Series One, authorized 30,000 shares; none
issued |
|
|
- |
|
|
|
- |
|
|
Common stock, $0.01 par value, authorized 12,500,000 shares; issued
3,114,163 shares; 1,962,062 outstanding |
|
|
31,142 |
|
|
|
31,142 |
|
|
Additional paid-in capital |
|
|
5,102,868 |
|
|
|
5,102,868 |
|
|
Retained earnings |
|
|
14,141,796 |
|
|
|
15,268,224 |
|
|
|
|
|
19,275,806 |
|
|
|
20,402,234 |
|
|
Less: treasury stock, 1,152,101 shares, at cost |
|
|
13,514,003 |
|
|
|
13,514,003 |
|
|
Total TSR, Inc. Equity |
|
|
5,761,803 |
|
|
|
6,888,231 |
|
|
Noncontrolling Interest |
|
|
28,380 |
|
|
|
28,792 |
|
|
Total Equity |
|
|
5,790,183 |
|
|
|
6,917,023 |
|
|
Total Liabilities and Equity |
|
$ |
18,875,600 |
|
|
$ |
12,534,145 |
|
See
accompanying notes to consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended May 31, 2020 and 2019
|
|
|
2020 |
|
|
2019 |
|
| |
|
|
|
|
|
|
|
Revenue, net |
|
$ |
59,121,401 |
|
|
$ |
63,340,028 |
|
| Cost of
sales |
|
|
49,943,405 |
|
|
|
53,514,636 |
|
|
Selling, general and administrative expenses |
|
|
10,928,648 |
|
|
|
11,672,946 |
|
|
|
|
|
60,872,053 |
|
|
|
65,187,582 |
|
|
Loss from operations |
|
|
(1,750,652 |
) |
|
|
(1,847,554 |
) |
| Other
income (expense): |
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
|
4,877 |
|
|
|
22,309 |
|
|
Interest expense |
|
|
(79,386 |
) |
|
|
- |
|
|
Loss on sale of fixed asset |
|
|
- |
|
|
|
(2,882 |
) |
|
Unrealized gain (loss) from marketable securities, net |
|
|
15,112 |
|
|
|
(8,928 |
) |
|
|
|
|
(59,397 |
) |
|
|
10,499 |
|
| Loss
before income taxes |
|
|
(1,810,049 |
) |
|
|
(1,837,055 |
) |
|
Benefit for income taxes |
|
|
(712,000 |
) |
|
|
(538,000 |
) |
|
Consolidated net loss |
|
|
(1,098,049 |
) |
|
|
(1,299,055 |
) |
|
Less: Net income attributable to noncontrolling interest |
|
|
28,379 |
|
|
|
36,940 |
|
|
Net loss attributable to TSR, Inc. |
|
$ |
(1,126,428 |
) |
|
$ |
(1,335,995 |
) |
|
Basic and diluted net loss per TSR, Inc. common share |
|
$ |
(0.57 |
) |
|
$ |
(0.68 |
) |
|
Basic and diluted weighted average number of common shares
outstanding |
|
|
1,962,062 |
|
|
|
1,962,062 |
|
See
accompanying notes to consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EQUITY
Years
Ended May 31, 2020 and 2019
|
|
|
Shares of |
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
common |
|
|
Common |
|
|
paid-in |
|
|
Retained |
|
|
Treasury |
|
|
TSR,
Inc. |
|
|
controlling |
|
|
Total |
|
|
|
|
stock |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
stock |
|
|
equity |
|
|
interest |
|
|
equity |
|
|
Balance at June 1, 2018 |
|
|
3,114,163 |
|
|
$ |
31,142 |
|
|
$ |
5,102,868 |
|
|
$ |
16,604,219 |
|
|
$ |
(13,514,003 |
) |
|
$ |
8,224,226 |
|
|
$ |
44,552 |
|
|
$ |
8,268,778 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
36,940 |
|
|
|
36,940 |
|
|
Distribution to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(52,700 |
) |
|
|
(52,700 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to TSR, Inc. |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,335,995 |
) |
|
|
- |
|
|
|
(1,335,995 |
) |
|
|
- |
|
|
|
(1,335,995 |
) |
|
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 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
28,379 |
|
|
|
28,379 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to noncontrolling interest |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(28,791 |
) |
|
|
(28,791 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to TSR, Inc. |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,126,428 |
) |
|
|
- |
|
|
|
(1,126,428 |
) |
|
|
- |
|
|
|
(1,126,428 |
) |
|
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 |
|
See
accompanying notes to consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended May 31, 2020 and 2019
|
|
|
2020 |
|
|
2019 |
|
| Cash flows
from operating activities: |
|
|
|
|
|
|
|
Consolidated net loss |
|
$ |
(1,098,049 |
) |
|
$ |
(1,299,055 |
) |
|
Adjustments to reconcile consolidated net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,787 |
|
|
|
11,586 |
|
|
Unrealized (gain) loss from marketable securities, net |
|
|
(15,112 |
) |
|
|
8,928 |
|
|
Loss on sale of fixed asset |
|
|
- |
|
|
|
2,882 |
|
|
Noncash lease expense |
|
|
4,026 |
|
|
|
- |
|
|
Deferred income taxes |
|
|
(148,000 |
) |
|
|
(558,000 |
) |
| |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable-trade |
|
|
386,216 |
|
|
|
(215,758 |
) |
|
Other receivables |
|
|
233 |
|
|
|
(3,227 |
) |
|
Prepaid expenses |
|
|
(84,380 |
) |
|
|
(20,138 |
) |
|
Prepaid and recoverable income taxes |
|
|
(546,508 |
) |
|
|
(24,171 |
) |
|
Accounts and other payables and accrued expenses and other current
liabilities |
|
|
(892,309 |
) |
|
|
534,667 |
|
|
Legal settlement payable |
|
|
827,822 |
|
|
|
- |
|
|
Advances from customers |
|
|
(8,780 |
) |
|
|
(21,218 |
) |
|
Net cash used in operating activities |
|
|
(1,567,054 |
) |
|
|
(1,583,504 |
) |
| Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from maturities of marketable securities |
|
|
492,000 |
|
|
|
740,000 |
|
|
Purchases of marketable securities |
|
|
- |
|
|
|
(739,000 |
) |
|
Proceeds from sale of fixed asset |
|
|
- |
|
|
|
10,000 |
|
|
Purchases of equipment and leasehold improvements |
|
|
(21,476 |
) |
|
|
(3,244 |
) |
|
Net cash provided by investing activities |
|
|
470,524 |
|
|
|
7,756 |
|
| Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
Net drawings on line of credit |
|
|
501,134 |
|
|
|
- |
|
|
Proceeds from SBA Paycheck Protection Program loan |
|
|
6,659,220 |
|
|
|
- |
|
|
Distributions to noncontrolling interest |
|
|
(28,791 |
) |
|
|
(52,700 |
) |
|
Net cash provided by (used in) financing activities |
|
|
7,131,563 |
|
|
|
(52,700 |
) |
| Net
increase (decrease) in cash and cash equivalents |
|
|
6,035,033 |
|
|
|
(1,628,448 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
3,694,989 |
|
|
|
5,323,437 |
|
|
Cash and cash equivalents at end of year |
|
$ |
9,730,022 |
|
|
$ |
3,694,989 |
|
|
Supplemental disclosures of cash flow data: |
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
30,000 |
|
|
$ |
52,000 |
|
See
accompanying notes to consolidated financial statements.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
May
31, 2020 and 2019
|
(1) |
Summary
of Business and Significant Accounting Policies |
|
(a) |
Business,
Nature of Operations and Customer Concentrations |
TSR,
Inc. and Subsidiaries (the “Company”) are primarily engaged in
providing contract computer programming services to commercial
customers located primarily in the Metropolitan New York area. The
Company provides its customers with technical computer personnel to
supplement their in-house information technology (“IT”)
capabilities. In addition, beginning in fiscal 2017, the Company
has provided and continues to provide administrative (non-IT)
workers on a contract basis to two of its existing customers. In
fiscal 2020, three customers each accounted for more than 10% of
the Company’s consolidated revenue, constituting a combined 53.3%.
The largest of these constituted 21.2% of consolidated revenue. In
fiscal 2019, three customers each accounted for more than 10% of
the Company’s consolidated revenue, constituting a combined 51.4%.
The largest of these constituted 22.5% of consolidated revenue. The
accounts receivable balances associated with the Company’s largest
customers were $3,747,000 for three customers at May 31, 2020 and
$3,657,000 for three customers at May 31, 2019. The Company
operates in one business segment, contract staffing
services.
|
(b) |
Principles
of Consolidation |
The
consolidated financial statements include the accounts of TSR, Inc.
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Effective
June 1, 2018, the Company adopted Accounting Standards Update
("ASU") No. 2014-09, Revenue from Contracts with Customers
(Topic 606), using the modified retrospective method. This
update outlined a comprehensive new revenue recognition model
designed to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services. The new standard also requires additional quantitative
and qualitative disclosures. The adoption allows companies to apply
the new revenue standard to reporting periods beginning in the year
the standard is first implemented, while prior periods continue to
be reported in accordance with previous accounting guidance. Since
the adoption of Accounting Standards Codification (“ASC”) 606 did
not have a significant impact on the recognition of revenue, the
Company did not have an opening retained earnings
adjustment.
In
March 2016, the Financial Accounting Standards Board (“FASB”)
issued ASU 2016-08, Principal versus Agent Consideration
(Topic 606). This update contains guidance on principal versus
agent assessments when a third party is involved in providing goods
or services to a customer. It specifies that an entity is a
principal, and thus records revenue on a gross basis, if it
controls a good or service before transferring the good or service
to the customer. An entity is an agent, and thus records revenue on
a net basis, if it arranges for a good or service to be provided by
another entity. The Company adopted this ASU on June 1, 2018 as
part of the adoption of ASC 606 and it did not have a significant
impact.
In
May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements
and Practical Expedients (Topic 606). This update provides
certain clarifications to reduce potential diversity in practice
and to simplify the standard. The amendments in ASU 2016-12 clarify
the following key areas: assessing collectibility; presenting sales
taxes and other similar taxes collected from customers; noncash
consideration; contract modifications at transition; completed
contracts at transition; and disclosing the accounting change in
the period of adoption. The Company adopted this ASU on June 1,
2018 as part of the adoption of ASC 606 and it did not have a
significant impact.
Revenues
are recognized as control of the promised service is transferred to
customers, in an amount that reflects the consideration expected in
exchange for the services. Revenues from contract assignments are
recognized over time, based on hours worked by the Company’s
contract professionals. The performance of the requested service
over time is the single performance obligation for assignment
revenues. Certain customers may receive discounts (e.g., volume
discounts, rebates, prompt-pay discounts) and adjustments to the
amounts billed. These discounts, rebates and adjustments are
considered variable consideration. Volume discounts are the largest
component of variable consideration and are estimated using the
most likely amount method prescribed by ASC 606, contracts terms
and estimates of revenue.
Revenues are recognized net of variable consideration to the extent
that it is probable that a significant reversal of revenues will
not occur in subsequent periods. Payment terms vary and the time
between invoicing and when payment is due is not significant. There
are no financing components to the Company’s arrangements. There
are no incremental costs to obtain contracts and costs to fulfill
contracts are expensed as incurred. The Company’s operations are
primarily located in the United States.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
The
Company recognizes most of its revenue on a gross basis when it
acts as a principal in its transactions. The Company has direct
contractual relationships with its customers, bears the risks and
rewards of its arrangements, and has the discretion to select the
contract professionals and establish the price for the services to
be provided. Additionally, the Company retains control over its
contract professionals based on its contractual arrangements. The
Company primarily provides services through its employees and to a
lesser extent, through subcontractors; the related costs are
included in cost of sales. The Company includes billable expenses
(out-of-pocket reimbursable expenses) in revenue and the associated
expenses are included in cost of sales.
|
(d) |
Cash
and Cash Equivalents |
The Company
considers short-term highly liquid investments with maturities of
three months or less at the time of purchase to be cash
equivalents. Cash and cash equivalents were comprised of the
following as of May 31, 2020 and 2019:
|
|
|
2020 |
|
|
2019 |
|
|
Cash in banks |
|
$ |
9,677,848 |
|
|
$ |
3,072,218 |
|
|
Money market funds |
|
|
52,174 |
|
|
|
622,771 |
|
|
|
|
$ |
9,730,022 |
|
|
$ |
3,694,989 |
|
|
(e) |
Certificates
of Deposit and Marketable Securities |
The
Company has characterized its investments in marketable securities,
based on the priority of the inputs used to value the investments,
into a three-level fair value hierarchy. The fair value hierarchy
gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1), and lowest priority to
unobservable inputs (Level 3). If the inputs used to measure the
investments fall within different levels of the hierarchy, the
categorization is based on the lowest level input that is
significant to the fair value measurement of the
instrument.
Investments
recorded in the accompanying consolidated balance sheets are
categorized based on the inputs to valuation techniques as
follows:
| |
Level
1- |
These are investments where
values are based on unadjusted quoted prices for identical assets
in an active market the Company has the ability to
access. |
| |
|
|
| |
Level
2- |
These are investments where
values are based on quoted market prices that are not active or
model derived valuations in which all significant inputs are
observable in active markets. |
| |
|
|
| |
Level
3- |
These are investments where
values are derived from techniques in which one or more significant
inputs are unobservable. |
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
The
following are the major categories of assets measured at fair value
on a recurring basis as of May 31, 2020 and 2019 using quoted
prices in active markets for identical assets (Level 1),
significant other observable inputs (Level 2), and significant
unobservable inputs (Level 3):
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
| May 31,
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
$ |
50,344 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
50,344 |
|
|
|
|
$ |
50,344 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
50,344 |
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
| May 31,
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit |
|
$ |
- |
|
|
$ |
492,000 |
|
|
$ |
- |
|
|
$ |
492,000 |
|
|
Equity Securities |
|
|
35,232 |
|
|
|
- |
|
|
|
- |
|
|
|
35,232 |
|
|
|
|
$ |
35,232 |
|
|
$ |
492,000 |
|
|
$ |
- |
|
|
$ |
527,232 |
|
Based
upon the Company’s intent and ability to hold its certificates of
deposit to maturity (which maturities range up to 12 months at
purchase), such securities have been classified as held-to-maturity
and are carried at amortized cost, which approximates market value.
The Company’s equity securities are classified as trading
securities, which are carried at fair value, as determined by
quoted market prices, which is a Level 1 input, as established by
the fair value hierarchy. The related unrealized gains and losses
are included in earnings. The Company’s certificates of deposit and
marketable securities at May 31, 2020 and 2019 are summarized as
follows:
| |
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
| |
|
Amortized |
|
|
Holding |
|
|
Holding |
|
|
Recorded |
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| May 31,
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
| Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
$ |
16,866 |
|
|
$ |
33,478 |
|
|
$ |
- |
|
|
$ |
50,344 |
|
|
|
|
$ |
16,866 |
|
|
$ |
33,478 |
|
|
$ |
- |
|
|
$ |
50,344 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| May 31,
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Certificates
of Deposit |
|
$ |
492,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
492,000 |
|
|
Equity Securities |
|
|
16,866 |
|
|
|
18,366 |
|
|
|
- |
|
|
|
35,232 |
|
|
|
|
$ |
508,866 |
|
|
$ |
18,366 |
|
|
$ |
- |
|
|
$ |
527,232 |
|
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
The
Company’s investments in marketable securities consist primarily of
investments in certificates of deposit and equity securities.
Market values were determined for each individual security in the
investment portfolio. When evaluating the investments for
other-than-temporary impairment, the Company reviews factors such
as length of time and extent to which fair value has been below
cost basis, the financial condition of the issuer, and the
Company’s ability and intent to hold the investment for a period of
time, which may be sufficient for anticipated recovery in market
values.
|
(f) |
Accounts
Receivable and Credit Policies |
The
carrying amount of accounts receivable is reduced by a valuation
allowance that reflects management’s best estimate of the amounts
that will not be collected. In addition to reviewing delinquent
accounts receivable, management considers many factors in
estimating its general allowance, including historical data,
experience, customer types, creditworthiness and economic trends.
From time to time, management may adjust its assumptions for
anticipated changes in any of those or other factors expected to
affect collectability.
|
(g) |
Depreciation
and Amortization |
Depreciation
and amortization of equipment and leasehold improvements has been
computed using the straight-line method over the following useful
lives:
|
Equipment |
3
years |
| Furniture
and fixtures |
3
years |
| Automobiles |
3
years |
| Leasehold
improvements |
Lesser
of lease term or useful life |
|
(h) |
Net
Loss Per Common Share |
Basic net
loss per common share is computed by dividing loss available to
common stockholders of TSR, Inc. by the weighted average number of
common shares outstanding. The Company had no stock options or
other potentially dilutive securities outstanding during the fiscal
years ended May 31, 2020 or 2019.
Deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the
financial reporting and tax bases of the Company’s assets and
liabilities at enacted rates expected to be in effect when such
amounts are realized or settled. The effect of enacted tax law or
rate changes is reflected in income in the period of
enactment.
|
(j) |
Fair
Value of Financial Instruments |
ASC Topic
825, Financial Instruments, requires disclosure of the fair
value of certain financial instruments. For cash and cash
equivalents, accounts receivable, accounts and other payables,
accrued liabilities and advances from customers, the amounts
presented in the consolidated financial statements approximate fair
value because of the short-term maturities of these instruments.
The reported amounts of the revolving line of credit and the loan
payable approximate fair value, given management’s evaluation of
the instruments’ current rates compared to market rates of interest
and other factors.
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during
the reporting period. Such estimates include, but are not limited
to, provisions for doubtful accounts receivable and assessments of
the recoverability of the Company’s deferred tax assets. Actual
results could differ from those estimates.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
The
Company reviews its long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of
the expected cash flows undiscounted and without interest is less
than the carrying amount of the asset, an impairment loss is
recognized for the amount by which the carrying amount of the asset
exceeds its fair value.
|
(m) |
Impact
of New Accounting Standards |
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 ending May 31, 2020
and the interim periods within that year. The Company adopted this
standard in the first quarter of fiscal 2020 using the optional
transition method. The Company also intends to elect the practical
expedients that allow us to carry forward the historical lease
classification. The Company has established an inventory of
existing leases and implemented a new process of evaluating the
classification of each lease. The financial impact of the adoption
of the new standard at June 1, 2019 increased total assets and
total liabilities by approximately $690,000. The financial impact
of the adoption primarily relates to the capitalization of
right-of-use assets and recognition of lease liabilities related to
operating leases. The Company will implement changes to its
processes and internal controls, as necessary, to meet the
reporting and disclosure requirements of the new
standard.
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents,
certificates of deposit, marketable securities and accounts
receivable. The Company places its cash equivalents with
high-credit quality financial institutions and brokerage houses.
The Company has substantially all of its cash in four bank
accounts. At times, such amounts may exceed federally insured
limits. The Company holds its marketable securities in brokerage
accounts. The Company has not experienced losses in any such
accounts. As a percentage of revenue, the three largest customers
consisted of 53.1% of the net accounts receivable balance at May
31, 2020.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
A
reconciliation of the provision for income taxes computed at the
federal statutory rates of 21.0% for fiscal 2020 and fiscal 2019 to
the reported amounts is as follows:
|
|
|
2020 |
|
|
2019 |
|
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amounts at statutory federal tax rate |
|
$ |
(380,000 |
) |
|
|
(21.0 |
)% |
|
$ |
(386,000 |
) |
|
|
(21.0 |
)% |
|
Noncontrolling interest |
|
|
(6,000 |
) |
|
|
(0.3 |
) |
|
|
(8,000 |
) |
|
|
(0.4 |
) |
| State
and local taxes, net of federal income tax effect |
|
|
(147,000 |
) |
|
|
(8.1 |
) |
|
|
(115,000 |
) |
|
|
(6.3 |
) |
|
Benefit of NOL at higher federal rate |
|
|
(202,000 |
) |
|
|
(11.2 |
) |
|
|
- |
|
|
|
- |
|
|
Non-deductible expenses and other |
|
|
23,000 |
|
|
|
1.3 |
|
|
|
(29,000 |
) |
|
|
(1.6 |
) |
|
|
|
$ |
(712,000 |
) |
|
|
(39.3 |
)% |
|
$ |
(538,000 |
) |
|
|
(29.3 |
)% |
The
components of the provision for income taxes are as
follows:
|
|
|
Federal |
|
|
State |
|
|
Total |
|
|
2020: Current |
|
$ |
(586,000 |
) |
|
$ |
22,000 |
|
|
$ |
(564,000 |
) |
|
Deferred |
|
|
16,000 |
|
|
|
(164,000 |
) |
|
|
(148,000 |
) |
|
|
|
$ |
(570,000 |
) |
|
$ |
(142,000 |
) |
|
$ |
(712,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2019: Current |
|
$ |
(10,000 |
) |
|
$ |
30,000 |
|
|
$ |
20,000 |
|
|
Deferred |
|
|
(383,000 |
) |
|
|
(175,000 |
) |
|
|
(558,000 |
) |
|
|
|
$ |
(393,000 |
) |
|
$ |
(145,000 |
) |
|
$ |
(538,000 |
) |
The
tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets at May 31, 2020 and 2019
are as follows:
| |
|
2020 |
|
|
2019 |
|
| Allowance for doubtful
accounts receivable |
|
$ |
52,000 |
|
|
$ |
52,000 |
|
| Accrued compensation and other accrued
expenses |
|
|
23,000 |
|
|
|
33,000 |
|
| Net operating loss carryforwards |
|
|
487,000 |
|
|
|
554,000 |
|
| Equipment and leasehold improvement
depreciation and amortization |
|
|
(3,000 |
) |
|
|
1,000 |
|
| Unrealized gain |
|
|
(10,000 |
) |
|
|
(5,000 |
) |
| Legal settlement with investor |
|
|
233,000 |
|
|
|
- |
|
| Other items,
net |
|
|
2,000 |
|
|
|
1,000 |
|
|
Total deferred income tax assets |
|
$ |
784,000 |
|
|
$ |
636,000 |
|
The
Company believes that it is more likely than not that it will
realize the benefits of its deferred tax assets based primarily on
the Company’s history of and projections for taxable income in the
future. The federal net operating loss carryforwards may be used
indefinitely and the state carryforwards are generally usable for
20 years.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
The
Company recognizes interest and penalties associated with tax
matters as selling, general and administrative expenses and
includes accrued interest and penalties with accrued and other
liabilities in the consolidated balance sheets.
On
March 27, 2020, the Coronavirus Aid, Relief and Economic Security
Act (the “CARES Act”) was signed into law in response to the
COVID-19 pandemic. The CARES Act provides numerous tax provisions
and stimulus measures, including temporary changes regarding the
prior and future utilization of net operating losses, temporary
changes to the prior and future limitations on interest deductions,
and technical corrections from prior tax legislation for tax
depreciation of certain qualified improvement property. The Company
has evaluated the provisions of the CARES Act relating to income
taxes which resulted in the ability to carryback net operating
losses and file for a federal tax refund of approximately $586,000
which has been recorded in the May 31, 2020 consolidated balance
sheet.
In
the third quarter of fiscal 2018, the Company discovered it had not
filed required information returns related to a foreign bank
account opened by a subsidiary in fiscal 2016 with contributions
totaling approximately $25,000. The Company has accrued an expense
of $30,000 with a charge to selling, general and administrative
expenses for potential penalties that may be assessed. The Company
will monitor this reserve periodically to determine if it is
more-likely-than-not that penalties will be assessed. Changes to
the reserve may occur due to changes in judgment, abatement,
negotiation or expiration of the statute of limitations on the
returns.
A
reconciliation of the beginning and ending amount of unrecognized
tax benefit as follows:
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of fiscal year |
|
$ |
30,000 |
|
|
$ |
30,000 |
|
|
Additions based on tax positions related to current year |
|
|
- |
|
|
|
- |
|
|
Additions for tax positions of prior years |
|
|
- |
|
|
|
- |
|
|
Reductions for tax positions of prior years |
|
|
- |
|
|
|
- |
|
|
Settlements |
|
|
- |
|
|
|
- |
|
|
Balance at end of fiscal year |
|
$ |
30,000 |
|
|
$ |
30,000 |
|
The
Company’s federal and state income tax returns prior to fiscal year
2017 are closed.
The
Company leases the space for its three offices. Under ASC 842, at
contract inception we determine whether the contract is or contains
a lease and whether the lease should be classified as an operating
or finance lease. Operating leases are in right-of-use assets and
operating lease liabilities in our consolidated balance
sheets.
The
Company’s leases for its three offices are classified as operating
leases.
The
lease agreements expire on December 31, 2020, February 28, 2021 and
August 31, 2022, respectively, and do not include any renewal
options.
In
addition to the monthly base amounts in the lease agreements, the
Company is required to pay real estate taxes and operating expenses
during the lease terms.
For
the fiscal years ended May 31, 2020 and 2019, the Company’s
operating lease expense for these leases was $417,000 and
$388,000.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
Future
minimum lease payments under non-cancelable operating leases as of
May 31, 2020 were as follows:
(note:
payments related to the lease expiring February 28, 2021 are not
included below because it is a one-year lease)
| Twelve
Months Ended May 31, |
|
|
|
|
2021 |
|
$ |
208,777 |
|
|
2022 |
|
|
160,912 |
|
|
2023 |
|
|
40,629 |
|
|
|
|
|
|
|
| Total
undiscounted operating lease payments |
|
|
410,318 |
|
|
Less imputed interest |
|
|
29,110 |
|
|
Present value of operating lease payments |
|
$ |
381,208 |
|
The
following table sets forth the right-of-use assets and operating
lease liabilities as of May 31, 2020:
| Assets |
|
|
|
|
Right-of-use assets |
|
$ |
377,182 |
|
| |
|
|
|
|
|
Liabilities |
|
|
|
|
|
Current operating lease liabilities |
|
$ |
188,799 |
|
|
Long-term operating lease liabilities |
|
|
192,409 |
|
|
|
|
|
- |
|
|
Total operating lease liabilities |
|
$ |
381,208 |
|
The
weighted average remaining lease term for the Company’s operating
leases is 1.9 years.
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 May 31, 2020 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.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
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.
As of
May 31, 2020, the net borrowings outstanding against this line of
credit facility were $501,134. The amount the Company has borrowed
fluctuates and, at times, it has utilized the maximum amount of
$2,000,000 available under the facility to fund its payroll and
other obligations.
|
(5) |
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 mutual 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 $300,00 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.
Common
Stock Transactions
On
July 24, 2018, Joseph F. Hughes and Winifred Hughes filed
Amendments to Schedule 13D with the United States Securities and
Exchange Commission (the “SEC”) in which Joseph F. Hughes and
Winifred Hughes disclosed that they had collectively sold 819,491
shares of the Company’s Common Stock jointly held by them in a
privately-negotiated transaction to Zeff Capital, L.P., QAR
Industries, Inc. and Fintech Consulting LLC. Joseph F. Hughes was
the former Chairman and Chief Executive Officer of the Company.
Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC
acquired, in the aggregate, 41.8% of the Company’s issued and
outstanding Common Stock in this transaction. Amendments to
Schedule 13D previously filed by Joseph F. Hughes and Winifred
Hughes on July 17, 2018 attached an exhibit wherein it was stated
that prior to the transaction described above, Zeff Capital, L.P.
owned 77,615 shares or approximately 4% of the Company’s issued and
outstanding Common Stock.
The
Company became aware on July 30, 2018 that Fintech Consulting LLC
and Tajuddin Haslani filed a Schedule 13D with the SEC disclosing
beneficial ownership of 376,100 shares of Common Stock, which
represents approximately 19.2% of the Company’s issued and
outstanding Common Stock.
The
Company became aware on August 23, 2018 that Zeff Capital, L.P.,
Zeff Holding Company, LLC and Daniel Zeff filed an Amendment to
Schedule 13D with the SEC disclosing the additional purchase by
Zeff Capital, L.P. of an aggregate of 55,680 shares of Common
Stock. As a result of these additional purchases of Common Stock,
Zeff Capital, L.P., Zeff Holding Company, LLC and Daniel Zeff
beneficially own a total of 437,774 shares of Common Stock, which
represents approximately 22.3% of the Company’s issued and
outstanding Common Stock.
The
Company became aware on August 28, 2018 that QAR Industries, Inc.
and Robert Fitzgerald filed an Amendment to Schedule 13D with the
SEC disclosing the additional purchase by QAR Industries, Inc. of
an aggregate of 4,070 shares of Common Stock. As a result of these
additional purchases of Common Stock, QAR Industries, Inc. and
Robert Fitzgerald beneficially own a total of 143,900 shares of
Common Stock, which represents approximately 7.3% of
the Company’s issued and outstanding Common Stock. The Company
became aware on September 10, 2019 that QAR Industries, Inc. and
Robert Fitzgerald filed an Amendment to Schedule 13D with the SEC
disclosing beneficial ownership of an aggregate of 139,200 shares
of Common Stock, which represents approximately 7.1% of the
Company’s issued and outstanding Common Stock.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
Rights
Plan / Preferred Stock
On
August 29, 2018, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a “Right”) for each
share of Common Stock of the Company outstanding on August 29, 2018
(the “Record Date”) to the stockholders of record on that date. In
connection with the distribution of the Rights, the Company entered
into a Rights Agreement (the “Rights Agreement”), dated as of
August 29, 2018, between the Company and Continental Stock Transfer
& Trust Company, as Rights Agent. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of
a share of Class A Preferred Stock, Series One, par value $0.01 per
share (“Preferred Stock”), of the Company at a price of $24.78 per
one one-hundredth of a share of Preferred Stock represented by a
Right (the “Purchase Price”), subject to adjustment.
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.”)
Distribution
Date; Exercisability; Expiration
Initially,
the Rights will be attached to all certificates for shares of
Common Stock and no separate certificates evidencing the Rights
(“Rights Certificates”) will be issued. Until the Distribution Date
(as defined below), the Rights will be transferred with and only
with shares of Common Stock. As long as the Rights are attached to
the shares of Common Stock, the Company will issue one Right with
each new share of Common Stock so that all such shares of Common
Stock will have Rights attached.
The
Rights will separate and begin trading separately from the Common
Stock, and Rights Certificates will be issued to evidence the
Rights, on the earlier to occur of (a) the Close of Business
(as such term is defined in the Rights Agreement) on the tenth day
following a public announcement, or the public disclosure of facts
indicating, that a Person (as such term is defined in the Rights
Agreement), group of affiliated or associated Persons or any other
Person with whom such Person is Acting in Concert (as defined
below) has acquired Beneficial Ownership (as defined below) of 5%
or more of the outstanding Common Stock (an “Acquiring Person”)
(or, in the event an exchange is effected in accordance with
Section 27 of the Rights Agreement and the Board of Directors
determines that a later date is advisable, then such later date) or
(b) the Close of Business on the tenth Business Day (as
such term is defined in the Rights Agreement) (or such later date
as may be determined by action of the Board of Directors prior to
such time as any Person becomes an Acquiring Person) following the
commencement of a tender offer or exchange offer the consummation
of which would result in the Beneficial Ownership by a Person or
group of 5% or more of the outstanding Common Stock (the earlier of
such dates, the “Distribution Date”). As soon as practicable after
the Distribution Date, unless the Rights are recorded in book-entry
or other uncertificated form, the Company will prepare and cause
the Right Certificates to be sent to each record holder of Common
Stock as of the Close of Business on the Distribution
Date.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
An
“Acquiring Person” will not include (i) the Company,
(ii) any Subsidiary (as such term is defined in the Rights
Agreement) of the Company, (iii) any employee benefit plan or
employee stock plan of the Company or any Subsidiary of the
Company, or any trust or other entity organized, appointed,
established or holding Common Stock for or pursuant to the terms of
any such plan, or (iv) any Person who or which, at the time of
the first public announcement of the Rights Agreement, is a
Beneficial Owner of 5% or more of the Common Shares then
outstanding (a “Grandfathered Stockholder”). However, if a
Grandfathered Stockholder becomes, after such time, the Beneficial
Owner of any additional shares of Common Stock (regardless of
whether, thereafter or as a result thereof, there is an increase,
decrease or no change in the percentage of shares of Common Stock
then outstanding beneficially owned by such Grandfathered
Stockholder) then such Grandfathered Stockholder shall be deemed to
be an Acquiring Person unless, upon such acquisition of Beneficial
Ownership of additional shares of Common Stock, such Person is not
the Beneficial Owner of 5% or more of the Common Stock then
outstanding. In addition, upon the first decrease of a
Grandfathered Stockholder’s Beneficial Ownership below 5%, such
Grandfathered Stockholder will cease to be a Grandfathered
Stockholder. In the event that after the time of the first public
announcement of the Rights Agreement, any agreement, arrangement or
understanding pursuant to which any Grandfathered Stockholder is
deemed to be the Beneficial Owner of Common Stock expires,
terminates or no longer confers any benefit to or imposes any
obligation on the Grandfathered Stockholder, any direct or indirect
replacement, extension or substitution of such agreement,
arrangement or understanding with respect to the same or different
shares of Common Stock that confers Beneficial Ownership of Common
Stock shall be considered the acquisition of Beneficial Ownership
of additional shares of Common Stock by the Grandfathered
Stockholder and render such Grandfathered Stockholder an Acquiring
Person for purposes of the Rights Agreement unless, upon such
acquisition of Beneficial Ownership of additional shares of Common
Stock, such Person is not the Beneficial Owner of 5% or more of the
Common Stock then outstanding.
The
Rights are not exercisable until the Distribution Date. The Rights
will expire on the Close of Business on August 29, 2021 (the
“Expiration Date”).
Redemption
At
any time prior to the Close of Business on the earlier of (a) the
tenth day following the Stock Acquisition Date or (b) the
Expiration Date, the Board of Directors may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right (the
“Redemption Price”). The “Stock Acquisition Date” is the first date
on which there is a public announcement by the Company or an
Acquiring Person that an Acquiring Person has become such, or such
earlier date as a majority of the Board of Directors becomes aware
of the existence of an Acquiring Person. The redemption of the
Rights may be made effective at such time, on such basis and with
such conditions as the Board of Directors in its sole discretion
may establish. Immediately upon the action of the Board of
Directors ordering the redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption
Price.
Preferred
Stock Rights
The
Preferred Stock will not be redeemable. Each share of Preferred
Stock will be entitled to receive, when, as and if declared by the
Board of Directors, (a) cash dividends in an amount per share
(rounded to the nearest cent) equal to 100 times the aggregate per
share amount of all cash dividends declared or paid on the Common
Stock and (b) a preferential quarterly cash dividend (the
“Preferential Dividends”) in an amount equal to $50.00 per share of
Preferred Stock less the per share amount of all cash dividends
declared on the Preferred Stock pursuant to clause (a) of this
sentence. Each share of Preferred Stock will entitle the holder
thereof to 100 votes per share, voting together with the holders of
the Common Stock as a single class, except as otherwise provided in
the Certificate of Designations of Class A Preferred Stock Series
One filed by the Company with the Delaware Secretary of State or
the Company’s Amended and Restated Certificate of Incorporation, as
amended, or Amended and Restated By-laws. In the event of any
consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any
such case each outstanding share of Preferred Stock shall at the
same time be similarly exchanged for or changed into the aggregate
amount of stock, securities, cash and/or other property (payable in
like kind), as the case may be, for which or into which each share
of Common Stock is changed or exchanged, multiplied by 100. Upon
any voluntary or involuntary liquidation, dissolution or winding up
of the Company, (a) no distribution shall be made to the holders of
shares of stock ranking junior to the Preferred Stock unless the
holders of the Preferred Stock shall have received the greater of
(i) $100 per share of Preferred Stock plus an amount equal to
accrued and unpaid dividends and distributions thereon or (ii) an
amount equal to 100 times the aggregate amount to be distributed
per share to holders of the Common Stock, and (b) no distribution
shall be made to the holders of stock ranking on a parity upon
liquidation,
dissolution or winding up with the Preferred Stock unless
simultaneously therewith distributions are made ratably to the
holders of the Preferred Stock and all other shares of such parity
stock in proportion to the total amounts to which the holders of
shares of Preferred Stock are entitled under clause (a)(i) of this
sentence and to which the holders of such parity shares are
entitled, in each case upon such liquidation, dissolution or
winding up.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
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.
Pursuant
to the Settlement Agreement, the Company amended and restated the
Rights Agreement on September 3, 2019 to confirm that a
Distribution Date (as defined in the Amended and Restated Rights
Agreement) shall not occur as a result of any request by any of the
Investor Parties for a special meeting of the Company’s
stockholders.
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.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
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.
On
January 7, 2019, Ms. Paskowitz filed a related action against Zeff
Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR
Industries, Inc., Robert Fitzgerald, Fintech Consulting LLC, and
Tajuddin Haslani in the Southern District of New York, which
asserts claims against them for breach of fiduciary duty and under
federal securities laws similar to those asserted in the Company’s
action. Although the Company is not a party to Ms. Paskowitz’s
action, the court has determined to treat the Company’s and Ms.
Paskowitz’s respective actions as related.
On
August 7, 2019, following the Company’s initial rescheduling of the
2018 Annual Meeting for September 13, 2019 and the filing of
Preliminary Proxy Statements by the Company and Zeff Capital, L.P.,
Zeff Capital, L.P. filed a complaint in the Delaware Court of
Chancery against the Company seeking an order requiring the Company
to hold its next annual meeting of stockholders on or around
September 13, 2019, and obligating the Company to elect Class I and
Class III directors at that annual meeting.
On
August 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 to “make clear that the second set of directors” described by
Zeff 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;
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
(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 “Amended Rights Agreement”), to confirm
that a Distribution Date (as defined in the Amended 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.
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.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 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.
On
December 24, 2019, Ms. Paskowitz moved for preliminary approval of
the Stipulation. On May 21, 2020, the Court entered an order
preliminarily approving the Stipulation. The parties have agreed on
a proposed scheduling order for final approval of the Stipulation
and a proposed mailing notice of the stipulation to TSR
stockholders, which are both currently pending Court approval. If
approved, the Court will set a settlement hearing for final
approval of the Stipulation. Although the Company believes that the
Stipulation 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 Stipulation 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.
(Continued)
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2020 and 2019
During the quarter ending 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. (See Note 5.)
|
(8) |
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”) and 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 Amended and Restated
Employment Agreement, dated August 9, 2018, between the Company and
Plaintiff. Plaintiff Hughes seeks contractual 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.
The
COVID-19 outbreak in the United States has caused business
disruption through 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. Therefore, the Company expects this matter to
negatively impact its operating results in future periods. However,
the full financial impact and duration cannot be reasonably
estimated at this time.
|
(10) |
Payroll
Protection Program Loan |
On
April 15, 2020, TSR, Inc. (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 “Lender”).
The
original term of the PPP Loan was two years. The term has been
extended to five years by the SBA. 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 plans to seek
forgiveness of the PPP Loan, no assurance can be provided that the
Company will obtain forgiveness of the PPP Loan in whole or in
part.
TSR,
INC. AND SUBSIDIARIES
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item
9A. Controls and Procedures
Disclosure
Controls and Procedures. The Company conducted an evaluation,
under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)). Based on this evaluation, the principal
executive officer and principal financial officer concluded that,
as of the end of the period covered by this report, the Company’s
disclosure controls and procedures are effective.
Internal
Control Over Financial Reporting. There was no change in the
Company’s internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the Company’s most recently reported completed fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting. The
Company’s management is responsible for establishing and
maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Under the supervision and with the participation of the Company’s
management, including its principal executive officer and principal
financial officer, the Company conducted an evaluation of the
effectiveness of its internal control over financial reporting
based on criteria established in the framework in Internal
Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, the Company’s management concluded that its
internal control over financial reporting was effective as of May
31, 2020.
Internal
control over financial reporting, no matter how well designed, has
inherent limitations. Therefore, internal control over financial
reporting determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and may
not prevent or detect all misstatements. Moreover, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
This
annual report does not include an attestation report of the
Company’s independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was
not subject to attestation by the Company’s independent registered
public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit the Company to provide only
management’s report in this annual report.
Item 9B. Other
Information
As
previously disclosed, 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. In
exchange for certain mutual 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 $300,00 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 common stock.
The foregoing descriptions do not purport to be complete and are
qualified in their entirety by the full text of the agreement,
which is attached to this Annual Report as Exhibit 10.6 and
incorporated herein by reference.
Part III
Item
10. Directors, Executive Officers and Corporate
Governance
The
information required by this Item 10 is incorporated by reference
to the Company’s definitive proxy statement in connection with the
2020 Annual Meeting of Stockholders.
Item
11. Executive Compensation
The
information required by this Item 11 is incorporated by reference
to the Company’s definitive proxy statement in connection with the
2020 Annual Meeting of Stockholders.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this Item 12 is incorporated by reference
to the Company’s definitive proxy statement in connection with the
2020 Annual Meeting of Stockholders.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
The
information required by this Item 13 is incorporated by reference
to the Company’s definitive proxy statement in connection with the
2020 Annual Meeting of Stockholders.
Item
14. Principal Accounting Fees and Services
The
information required by this Item 14 is incorporated by reference
to the Company’s definitive proxy statement in connection with the
2020 Annual Meeting of Stockholders.
Part IV
Item
15. Exhibits and Financial Statement Schedules
|
(a) |
The
following documents are filed as part of this report: |
|
1. |
The
consolidated financial statements as indicated in the index set
forth on page 21. |
Financial
Statement Schedules have been omitted, since they are either not
applicable, not required or the information is included elsewhere
herein.
|
2. |
Exhibits
as listed in Exhibit Index on page 47. |
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the Undersigned, thereunto duly
authorized.
| TSR, INC. |
|
| |
|
| By: |
/s/ Thomas Salerno |
|
| |
Thomas Salerno, |
|
| |
Chief Executive Officer,
President, |
|
| |
Treasurer and Principal Executive
Officer |
|
Dated:
August 17, 2020
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates
indicated.
|
/s/ Thomas Salerno |
|
| Thomas Salerno, Chief
Executive Officer, President, Treasurer and Principal Executive
Officer |
| |
|
| /s/ John G. Sharkey |
|
| John G. Sharkey, Sr.
Vice President and Principal Accounting Officer |
| |
|
| /s/ Bradley M. Tirpak |
|
| Bradley M. Tirpak, Chairman of
the Board of Directors |
|
| |
|
| /s/ H. Timothy Eriksen |
|
| H. Timothy Eriksen,
Director |
|
| |
|
| /s/ Robert Fitzgerald |
|
| Robert Fitzgerald,
Director |
|
Dated:
August 17, 2020
TSR,
INC. AND SUBSIDIARIES
EXHIBIT
INDEX
FORM
10-K, MAY 31, 2020
|
Exhibit
Number
|
|
Exhibit
|
| 3.1 |
|
Certificate of Incorporation, as
amended, incorporated by reference to Exhibit 3.1 to the Annual
Report on Form 10-K for the fiscal year ended May 31, 1998 filed by
the Company on August 26, 1998. |
| |
|
|
| 3.2 |
|
Certificate of Designations of Class
A Preferred Stock, Series One, incorporated by reference to Exhibit
3.2 to the Current Report on Form 8-K by the Company filed on
August 29, 2018. |
| |
|
|
| 3.3 |
|
Amended and Restated Bylaws, as
amended. |
| |
|
|
| 4.1 |
|
Description of Registered
Securities. |
| |
|
|
| 4.2 |
|
Amended and Restated Rights Agreement dated as of September 3, 2019
between the Company and Continental Stock Transfer & Trust
Company as Rights Agent, incorporated by reference to Exhibit 4.1
to the Current Report on Form 8-K filed by the Company on September
3, 2019. |
| |
|
|
| 10.1 |
|
Amended and Restated Employment
Agreement dated as of June 1, 2019 between the Company and
John G. Sharkey, incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by the Company on May 24,
2019. |
| |
|
|
| 10.2 |
|
Employment Agreement dated
as of July 11, 2018 between the Company and Thomas
Salerno. |
| |
|
|
| 10.3 |
|
Note, dated as of April 8, 2020
between JPMorgan Chase Bank, N.A. and the Company, incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
by the Company on April 17, 2020. |
| |
|
|
| 10.4 |
|
Loan and Security Agreement dated as
of November 27, 2019 among Access Capital, Inc., TSR, Inc., TSR
Consulting Services, Inc., Logixtech Solutions, LLC and Eurologix
S.A.R.L., incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed by the Company on December 2,
2019. |
| |
|
|
|
10.5
|
|
Term Sheet, dated as of April 1, 2020, by and between Zeff Capital,
L.P. and the Company, incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed by the Company on April 6,
2020.
|
| |
|
|
| 10.6 |
|
Agreement dated August 13,
2020 by and among the Company, Zeff Capital L.P., Zeff Holding
Company, LLC and Daniel Zeff. |
| |
|
|
|
10.7
|
|
Settlement and Release Agreement,
dated as of August 30, 2019, by and among TSR, Inc., Zeff Capital,
L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc.,
Robert Fitzgerald, Fintech Consulting, LLC and Tajuddin Haslani,
incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed by the Company on September 3, 2019. |
| |
|
|
|
10.8
|
|
Share Repurchase Agreement, dated as of August 30, 2019, by and
among TSR, Inc., Christopher Hughes, Zeff Capital, L.P., Zeff
Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert
Fitzgerald, Fintech Consulting, LLC and Tajuddin Haslani,
incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K filed by the Company on September 3, 2019.
|
| |
|
|
| 21 |
|
List of Subsidiaries. |
| |
|
|
| 31.1 |
|
Certification by Thomas
Salerno Pursuant to Securities Exchange Act Rule 13a-14(a).
|
TSR,
INC. AND SUBSIDIARIES
EXHIBIT
INDEX (continued)
FORM
10-K, MAY 31, 2020
|
Exhibit
Number
|
|
Exhibit
|
| 31.2 |
|
Certification by John G. Sharkey Pursuant to
Securities Exchange Act Rule 13a-14(a). |
| |
|
|
| 32.1 |
|
Certification of Thomas Salerno Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
| |
|
|
|
32.2
|
|
Certification of John G.
Sharkey Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
| |
|
|
|
99.1
|
|
Stipulation and Agreement of Settlement, dated as of December 16,
2019, incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed by the Company on December 17,
2019.
|
| |
|
|
| 101 |
|
XBRL (extensible Business Reporting Language). The following
materials from the Company’s Annual Report on Form 10-K for the
year ended May 31, 2020 formatted in XBRL: (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Operations,
(iii) the Consolidated Statements of Stockholders’ Equity
(Deficit), (iv) the Consolidated Statements of Cash Flows, and (v)
the Notes to the Consolidated Financial Statements.
|
Page
48
