TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
The accompanying condensed consolidated interim financial
statements include the accounts of TSR, Inc. and its subsidiaries. Unless otherwise stated or the context otherwise requires, the terms
“we,” “us,” “our,” and the “Company” refer to TSR, Inc. and its subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation. The condensed balance sheet as of May 31, 2021, which
has been derived from audited financial statements, and the unaudited interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America applying to interim financial information and with the instructions
to Form 10-Q of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and
footnote disclosures required by accounting principles generally accepted in the United States of America and normally included in the
Company’s annual financial statements have been condensed or omitted. These condensed consolidated interim financial statements
as of and for the three months ended August 31, 2021 are unaudited; however, in the opinion of management, such statements include all
adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of
operations and cash flows of the Company for the periods presented. The results of operations for the interim periods presented are not
necessarily indicative of the results that might be expected for future interim periods or for the full year ending May 31, 2022. These
condensed consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2021.
2.
|
Net Income (Loss) Per Common Share
|
Basic net income (loss) per common share is computed by
dividing net income (loss) available to common stockholders of TSR, Inc. by the weighted average number of common shares outstanding
during the reporting period, excluding the effects of any potentially dilutive securities. During the quarter ended February 28, 2021,
the Company granted time and performance vesting restricted stock awards under its 2020 Equity Incentive Plan (see Note 18 for further
information). Diluted earnings per share gives effect to all potentially dilutive common shares outstanding during the reporting period.
The common stock equivalents associated with these restricted stock awards of 52,637 in the three months ended August 31, 2021 have been
included for dilutive shares outstanding for the three months ended August 31, 2021.
3.
|
Cash and Cash Equivalents
|
The Company considers short-term highly liquid investments
with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents were comprised of the
following as of August 31, 2021 and May 31, 2021:
|
|
August 31,
2021
|
|
|
May 31,
2021
|
|
|
|
|
|
|
|
|
Cash in banks
|
|
$
|
7,552,534
|
|
|
$
|
7,317,517
|
|
Money market funds
|
|
|
53,408
|
|
|
|
53,129
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,605,942
|
|
|
$
|
7,370,646
|
|
4.
|
Fair Value of Financial Instruments
|
Accounting Standards Codification (“ASC”) 820-10,
Fair Value Measurements and Disclosures (“ASC 820-10”), defines fair value, establishes a framework for measuring
fair value under accounting principles generally accepted in the United States of America (“GAAP”) and provides for expanded
disclosure about fair value measurements. ASC 820-10 applies to all other accounting pronouncements that require or permit fair value
measurements.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
The Company determines or calculates
the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate
present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information
for similar types of instruments while estimating for non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads and estimates of future cash flows.
Assets and liabilities typically recorded
at fair value on a non-recurring basis to which ASC 820-10 applies include:
|
●
|
non-financial
assets and liabilities initially measured at fair value in an acquisition or business combination,
and
|
|
|
|
|
●
|
long-lived
assets measured at fair value due to an impairment assessment under ASC 360-10-15, Impairment
or Disposal of Long-Lived Assets.
|
This
topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 requires that assets and liabilities
recorded at fair value be classified and disclosed in one of the following three categories:
|
●
|
Level
1 - inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities
that the Company has the ability to access.
|
|
|
|
|
●
|
Level
2 - inputs utilize other-than-quoted prices that are observable, either directly or indirectly.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets,
and inputs such as interest rates and yield curves that are observable at commonly quoted
intervals.
|
|
|
|
|
●
|
Level
3 - inputs are unobservable and are typically based on the Company’s own assumptions,
including situations where there is little, if any, market activity. Both observable and
unobservable inputs may be used to determine the fair value of positions that are
classified within the Level 3 classification.
|
In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company classifies such financial assets
or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors
specific to the asset or liability.
ASC Topic 825, Financial Instruments,
requires disclosure of the fair value of certain financial instruments. For cash and cash equivalents, accounts receivable, accounts and
other payables, accrued liabilities and advances from customers, the amounts presented in the condensed consolidated financial statements
approximate fair value because of the short-term maturities of these instruments.
The Company has characterized its investments in marketable
securities, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value
hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and lowest priority
to unobservable inputs (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization
is based on the lowest level input that is significant to the fair value measurement of the instrument.
Investments recorded in the accompanying
condensed consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:
|
●
|
Level
1 - These are investments where values are based on unadjusted quoted prices for identical
assets in an active market the Company has the ability to access.
|
|
|
|
|
●
|
Level
2 - These are investments where values are based on quoted market prices that are not active
or model derived valuations in which all significant inputs are observable in active markets.
|
|
|
|
|
●
|
Level
3 - These are investments where values are derived from techniques in which one or more significant
inputs are unobservable.
|
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
The following are the major categories
of assets measured at fair value on a recurring basis as of August 31, 2021 and May 31, 2021 using quoted prices in active markets for
identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable inputs (Level 3):
August 31, 2021
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equity Securities
|
|
$
|
43,248
|
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
43,248
|
|
May 31, 2021
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equity Securities
|
|
$
|
45,696
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,696
|
|
The Company’s equity securities
are classified as trading securities, which are carried at fair value, as determined by quoted market prices, which is a Level 1 input,
as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings. The Company’s marketable
securities at August 31, 2021 and May 31, 2021 are summarized as follows:
August 31, 2021
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Equity Securities
|
|
$
|
16,866
|
|
|
$
|
26,382
|
|
|
$
|
-
|
|
|
$
|
43,248
|
|
May 31, 2021
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Equity Securities
|
|
$
|
16,866
|
|
|
$
|
28,830
|
|
|
$
|
-
|
|
|
$
|
45,696
|
|
The Company’s investments in
marketable securities consist primarily of investments in equity securities. Market values were determined for each individual security
in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as
length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s
ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market values.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
Rights Plan / Preferred Stock
Amended
and Restated Rights Agreement
On
August 29, 2018, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a “Right”)
for each share of common stock, par value $0.01 per share (“Common Stock”), of the Company outstanding on August 29, 2018
to the stockholders of record on that date. In connection with the distribution of the Rights, the Company entered into a Rights Agreement,
dated as of August 29, 2018, between the Company and Continental Stock Transfer & Trust Company, as Rights Agent. Each Right entitled
the registered holder to purchase from the Company one one-hundredth of a share of Class A Preferred Stock, Series One, par value $0.01
per share (“Preferred Stock”), of the Company at a price of $24.78 per one one-hundredth of a share of Preferred Stock represented
by a Right, subject to adjustment.
On
August 30, 2019, the Company entered into a settlement and release agreement (the “Settlement Agreement”) with Zeff
Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert Fitzgerald, Fintech Consulting LLC and Tajuddin Haslani
(collectively, the “Investor Parties”), pursuant to which the Company agreed to, among
other things, amend and restate the Rights Agreement to provide that a “Distribution Date” (as defined below) shall not occur
as a result of any request by any of the Investor Parties calling for a special meeting pursuant to Article II, Section 5 of the Amended
and Restated By-Laws of the Company in accordance with the terms of the Settlement Agreement (see Note 7, “Other Matters.”).
Pursuant to the Settlement Agreement, the Company amended and restated the Rights Agreement on September 3, 2019 (the “A&R Rights
Agreement”) to confirm that a Distribution Date (as defined in the A&R Rights Agreement) shall not occur as a result of any
request by any of the Investor Parties for a special meeting of the Company’s stockholders.
First
Amendment to A&R Rights Agreement
On January
5, 2021, the disinterested members of the Board of Directors of the Company approved a waiver for QAR Industries, Inc. to complete its
proposed acquisition of shares owned by Fintech Consulting LLC (the “Acquisition”) under the Company’s A&R Rights
Agreement so that a Distribution Date would not occur as a result of the Acquisition. On February 4, 2021, the Company entered into that
certain First Amendment to the A&R Rights Agreement with the Rights Agent, which provides that a Distribution Date shall not occur
as a result of the Acquisition.
Second
Amendment to A&R Rights Agreement and Termination of A&R Rights Agreement as of March 31, 2021
At the Company’s
combined 2019 and 2020 annual meeting of stockholders held on November 19, 2020, the Company’s stockholders approved an advisory
vote to terminate the Company’s A&R Rights Agreement no later than August 29, 2021. On March 31, 2021, the Company entered
into that certain Second Amendment to A&R Rights Agreement with the Rights Agent, pursuant to which the Expiration Date will be advanced
from August 29, 2021 to March 31, 2021. As a result of this amendment, effective as of the close of business on March 31, 2021, the A&R
Rights Agreement expired and are no longer outstanding and the A&R Rights Agreement was terminated by its terms.
Following
the expiration of the Rights and the termination of the A&R Rights Agreement on April 1, 2021, the Company filed a Certificate of
Elimination (the “Certificate of Elimination”) with the Secretary of State of the State of Delaware eliminating the Class
A Preferred Shares and returning them to authorized but undesignated shares of the Company’s preferred stock.
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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
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 purported to be a class
action lawsuit asserting claims on behalf of all minority stockholders of the Company. Ms. Paskowitz alleged 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 asserted 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 asserted substantially
similar allegations to those contained in the October 11, 2018 complaint, but omitted 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 named
former directors Ira Cohen, Joseph Pennacchio, and William Kelly as defendants. The amended complaint also asserted a derivative claim
purportedly on behalf of the Company against the named former members of the Board of Directors. The amended complaint sought declaratory
judgment and unspecified monetary damages. The complaint requested: (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.
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 requested that the court, among other things, declare that the defendants have solicited proxies without
filing timely, accurate and complete reports on Schedule 13D and Schedule 14A in violation of Sections 13(d) and 14(a) of the Exchange
Act, direct the defendants to file with the SEC complete and accurate disclosures, enjoin the defendants from voting any of their shares
prior to such time as complete and accurate disclosures have been filed, and enjoin the defendants from further violations of the Exchange
Act with respect to the securities of the Company.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
On January 7, 2019,
Ms. Paskowitz filed a related action against Zeff Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert
Fitzgerald, Fintech Consulting LLC, and Tajuddin Haslani in the Southern District of New York, which asserted claims against them for
breach of fiduciary duty and under federal securities laws similar to those asserted in the Company’s action. Although the Company
is not a party to Ms. Paskowitz’s action, the court has determined to treat the Company’s and Ms. Paskowitz’s respective
actions as related.
On August 7, 2019,
following the Company’s initial rescheduling of the 2018 annual meeting of stockholders (the “2018 Annual Meeting”)
for September 13, 2019 and the filing of Preliminary Proxy Statements by the Company and Zeff Capital, L.P., Zeff Capital, L.P. filed
a complaint in the Delaware Court of Chancery against the Company seeking an order requiring the Company to hold its next annual meeting
of stockholders on or around September 13, 2019, and obligating the Company to elect Class I and Class III directors at that annual meeting.
On August 13, 2019, the Company filed
a motion for preliminary injunction in the SDNY Action in advance of the Company’s 2018 Annual Meeting originally scheduled for
September 13, 2019, and requested leave to file a motion for expedited discovery. The Court denied the Company’s motion for preliminary
injunction but ordered Zeff Capital, L.P. to “make clear that the second set of directors” described by Zeff Capital, L.P.
in its preliminary proxy statement “is contingent upon the resolution of a proceeding in Delaware Chancery Court.”
On August, 30, 2019,
the Company entered into a settlement and release agreement (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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
Pursuant to the terms
of the Settlement Agreement, the two nominees for director made by Zeff Capital, L.P. were elected as directors at the Company’s
2018 Annual Meeting held on October 22, 2019. Please see the Company’s current Report on Form 8-K filed with the SEC on October
21, 2019 for more information about the background of the election of directors at the Company’s 2018 Annual Meeting.
Pursuant to the terms of the Settlement
Agreement, inasmuch as the Repurchase was not completed and the Settlement Payment was not made by December 30, 2019, the members of the
Board of Directors (other than the two directors who were nominated by Zeff Capital, L.P. and elected as directors at the 2018 Annual
Meeting) resigned from the Board effective 5:00 p.m. Eastern Time on December 30, 2019. Immediately thereafter, the two remaining directors
appointed Robert Fitzgerald to the Board of Directors. Please see the Company’s Current Report on Form 8-K filed with the SEC on
December 31, 2019 for more information about the background and the appointment of Robert Fitzgerald.
The foregoing is
not a complete description of the terms of the Settlement Agreement and the Share Repurchase Agreement. For a further description of the
terms of the Settlement Agreement and the Share Repurchase Agreement, including copies of the Settlement Agreement and Share Repurchase
Agreement, please see the Company’s Current Report on Form 8-K filed by the Company with the SEC on September 3, 2019.
On October 21, 2019,
the Company entered into a Memorandum of Understanding (the “MOU”) with Susan Paskowitz providing for the settlement of the
Stockholder Litigation filed by Ms. Paskowitz on October 11, 2018. The MOU provides for the settlement of the claims by Ms. Paskowitz
that (1) the 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, which retained 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 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
Stipulation is independent of the Settlement Agreement and Share Repurchase Agreement that the Company had entered into with the Investor
Parties.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
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 Court conducted a settlement hearing on April 20, 2021 to consider final approval of the Stipulation. On May 25, 2021, the Court issued
a final order and judgment approving all material terms in the Stipulation. Pursuant to the terms of the final order, the Court fully
and finally approved the settlement set forth in the Stipulation and dismissed the Stockholder Litigation with prejudice. The settlement
payment was paid by the Company’s insurance provider under its insurance policy.
Please also refer
to Note 10, Termination of Former CEO, regarding an ongoing lawsuit originally filed by the Company’s former Chief Executive Officer
against the Company in the Supreme Court of the State of New York in March 2020.
The Company leases the space for its three offices in New
York City, Hauppauge and New Jersey. Under ASC 842, at contract inception we determine whether the contract is or contains a lease and
whether the lease should be classified as an operating or finance lease. Operating leases are in right-of-use assets and operating lease
liabilities are in our condensed consolidated balance sheets.
The Company’s leases for its
three offices are classified as operating leases.
The lease agreements for New York City,
Hauppauge and New Jersey expire on August 31, 2022, December 31, 2023 and May 31, 2027, respectively, and do not include any renewal options.
During the fiscal year ended May 31, 2021, the Company extended its lease in Hauppauge, entered into a lease in a new location for its
New Jersey office expiring May 31, 2027 and entered into an agreement to sublease the space in New York City expiring August 31, 2022.
Due to the fact that the future sublease cash inflows will be less than the carrying value of the corresponding right-of-use asset, the
Company recorded a right-of-use asset impairment charge of $136,599 in the quarter ended November 30, 2020.
In addition to the monthly base amounts
in the lease agreements, the Company is required to pay real estate taxes and operating expenses during the lease terms.
For the three months ended August 31,
2021, the Company’s operating lease expense for these leases was $72,935.
Future minimum lease payments under
non-cancellable operating leases as of August 31, 2021 were as follows:
Twelve Months Ending August 31,
|
|
|
|
2022
|
|
$
|
373,376
|
|
2023
|
|
|
217,439
|
|
2024
|
|
|
154,841
|
|
2025
|
|
|
124,614
|
|
2026
|
|
|
127,729
|
|
Thereafter
|
|
|
97,582
|
|
Total undiscounted operating lease payments
|
|
|
1,095,581
|
|
Less imputed interest
|
|
|
153,214
|
|
Present value of operating lease payments
|
|
$
|
942,367
|
|
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
The following table sets forth the
right-of-use assets and operating lease liabilities as of August 31, 2021:
Assets
|
|
|
|
Right-of-use assets, net
|
|
$
|
835,166
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
317,417
|
|
Long-term operating lease liabilities
|
|
|
624,950
|
|
Total operating lease liabilities
|
|
$
|
942,367
|
|
The weighted average remaining lease
term for the Company’s operating leases is 3.1 years.
On November 27, 2019, 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 (as defined above) and make the Settlement Payment (as defined above); 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 August 31, 2021 was 3.25%,
indicating an interest rate of 5.0% on the line of credit. The initial term of the Credit Facility is five years, which shall automatically
renew for successive five-year periods unless either TSR or the Lender gives written notice to the other of termination at least 60 days
prior to the expiration date of the then-current term.
TSR is obliged to satisfy certain financial
covenants and minimum borrowing requirements under the Credit Facility, and to pay certain fees, including prepayment fees, and provide
certain financial information to the Lender. The Company was in compliance with all covenants at August 31, 2021.
As of August 31, 2021, the net borrowings
outstanding against this line of credit facility were $34,777. 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.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
10.
|
Termination of Former CEO
|
The Company terminated Christopher
Hughes, the former Chief Executive Officer of the Company (“Hughes”), effective February 29, 2020 for “Cause”
as defined in Section 6(a) of his Amended and Restated Employment Agreement dated August 9, 2018 (the “Employment Agreement”).
Despite having already been terminated from employment, on March 2, 2020, the Company received a letter from Mr. Hughes, providing notice
of his intent to resign for “Good Reason” as defined in Section 7(c) of the Employment Agreement pursuant to which he claimed
to be entitled to the “Enhanced Severance Amount” under the Employment Agreement. Hughes filed a complaint against the Company
in the Supreme Court of the State of New York in March 2020 alleging two causes of action: (1) breach of his employment contract; and
(2) breach of duty of good faith and fair dealing. Plaintiff Hughes alleges that he was terminated without cause or in the alternative
that he resigned for good reason and therefore, pursuant to the Employment Agreement, Hughes seeks severance pay in the amount of $1,000,000
and reasonable costs and attorney’s fees. The Company denies Plaintiff’s allegations in their entirety and has filed counterclaims
against Plaintiff for (1) declaratory relief; (2) breach of confidence/non-compete agreement; (3) declaratory and injunctive relief –
confidence/non-compete; (4) tortious interference with current and prospective contractual and economic relations; (5) breach of fiduciary
duty; (6) misappropriation of trade secrets; (7) declaratory and injunctive relief – unfair competition; and (8) conversion.
In October 2021, the Company and Hughes
agreed through mediation to settle this matter. In order to avoid lengthy and costly litigation and discovery expenses, the Company will
pay Hughes $705,000 to settle all claims. After adjusting for estimated expected insurance reimbursement, the Company has accrued a charge
of $580,000 to selling, general and administrative expenses in the quarter ended August 31, 2021.
11.
|
Legal Settlement with Investor
|
On April 1, 2020, the Company entered
into a binding term sheet (“Term Sheet”) with Zeff Capital, L.P. (“Zeff”) pursuant to which it agreed to pay
Zeff an amount of $900,000 over a period of three years in cash or cash and stock in settlement of expenses incurred by Zeff during its
solicitations in 2018 and 2019 in connection with the annual meetings of the Company, the costs incurred in connection with the litigation
initiated by and against the Company as well as negotiation, execution and enforcement of the Settlement and Release Agreement, dated
as of August 30, 2019, by and between the Company, Zeff and certain other parties (see Note 7). In exchange for certain releases, the
Term Sheet calls for a cash payment of $300,000 on June 30, 2021, a second cash payment of $300,000 on June 30, 2022 and a third payment
of $300,000 also on June 30, 2022, which can be paid in cash or common stock at the Company’s option. There is no interest due
on these payments. The $300,000 payment due June 30, 2021 was paid during the quarter ended August 31, 2021. The agreement also has protections
to defer such payment dates so that the debt covenants with the Company’s lender are not breached. On
August 13, 2020, the Company, Zeff, Zeff Holding Company, LLC and Daniel Zeff entered into a settlement agreement to reflect these terms.
Any installment payment which is deferred as permitted above will accrue interest at the prime rate plus 3.75%, and Zeff shall thereby
have the option to convert such deferred amounts (plus accrued interest if any) into shares of the Company’s stock. The Company
accrued $818,000, the estimated present value of these payments using an effective interest rate of 5%, in the quarter ended February
29, 2020, as the events relating to the expense occurred prior to such date. The estimated present value of the remaining payments is
$576,000 at August 31, 2021.
The COVID-19 outbreak in the United
States has caused business disruption including mandated and voluntary closing of various businesses. While the disruption is currently
expected to be temporary, there is considerable uncertainty around the duration of the closings and the impact of the pandemic on our
business. Therefore, the Company expects this matter to continue to negatively impact its operating results in future periods. The full
financial impact and duration cannot be reasonably estimated at this time.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
13.
|
Paycheck Protection Program Loan
|
On April 15, 2020, the Company received
loan proceeds of $6,659,220 under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (“PPP”)
was established under the recent congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)
and is administered by the U.S. Small Business Administration (“SBA”). The PPP Loan to the Company was made through JPMorgan
Chase Bank, N.A., a national banking association.
In March 2021, the Company submitted
a PPP Loan Forgiveness application to the SBAS through the PPP Lender. On July 7, 2021, the Company received notification from the PPP
Lender that the SBA approved the Company’s application for forgiveness of the entire principal amount of the PPP Loan plus accrued
interest. The PPP Lender will apply the forgiveness amount to satisfy the PPP Loan. The Company has no further obligations with respect
to the PPP Loan. The Company recognized “Other Income” of $6,735,246 in the quarter ended August 31, 2021 related to the forgiveness
of the loan principal and accrued interest.
14.
|
Geneva Consulting Group Acquisition
|
On September 1, 2020, the Company
completed the acquisition of all of the outstanding stock of Geneva Consulting Group, Inc., a New York corporation (“Geneva”)
and provider of temporary and permanent information technology personnel based in Port Washington, New York. The stock of Geneva was
purchased from the three shareholders of Geneva (the “Sellers”), none of which had, or will have following the acquisition,
a material relationship with the Company or its affiliates.
The purchase price for the shares of
Geneva is comprised of the following: (i) $1,452,000 in cash paid to Sellers at the closing of the acquisition, (ii) an amount of $748,000,
that is equal to the amount of Geneva’s loan under the PPP that was not assumed by the Company and expected to be substantially
forgiven by the SBA, (iii) an amount up to $300,000, which may be paid as an earnout payment in part in February 2021 and in part in August
2021 (the “Earnout Payments”), (iv) bonus payments payable in $10,000 increments, (v) $747,000 for the net working capital
of Geneva as of closing and (vi) other purchase price adjustments of which $36,000 has been paid to date. Any Earnout Payments and bonus
payments will be determined based upon the achievement of certain criteria relating to the number the Company’s contractors working
full-time at the Company’s clients on such dates.
The purchase agreement for the Geneva
acquisition provided for a earn-out of up to $300,000 plus bonus amounts in $10,000 increments which are earned through August 31, 2021.
The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using
Black Scholes due to the option-like nature of the earn-out payment structure (Level 3 of the fair value hierarchy). The earn-out was
revalued quarterly prior to the resolution discussed below, using a present value approach and any resulting increase or decrease was
recorded into selling, general and administrative expenses. Any changes in the amount of the actual results and forecasted scenarios could
impact the fair value. Significant judgment was employed in determining the appropriateness of the assumptions used in calculating the
fair value of the earn-out as of the acquisition date and subsequent period ends.
On March 17, 2021, the Company entered
into an agreement with the Sellers’ representatives pursuant to which the parties agreed to resolve certain interpretive differences
regarding the Sellers’ entitlement to the bonus payments described above. Pursuant to this agreement, and in full satisfaction of
the Company’s obligations for deferred payments under the purchase agreement for the Geneva acquisition, the Sellers’ representative
acknowledged receipt of the first Earnout Payment in the amount of $100,000, the parties agreed that the Company would make aggregate
bonus payments to the Sellers’ representatives in the amount of $260,000, and the Company agreed to instruct the escrow agent to
release to the Sellers’ representatives the second Earnout Payment in the amount of $200,000. All amounts relating to the Earnout
Payments and bonus payments that had not been paid as of the date of the agreement were either paid by the Company or released by the
escrow agent on March 18, 2021. No further earnout or bonus amounts can be earned or will be paid subsequent to March 18, 2021. This agreement
resulted in a charge to selling, general and administrative expenses of $210,000 in the quarter ended February 28, 2021. No further earnout
or bonus amounts can be earned or will be paid subsequent to March 18, 2021.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
The acquisition was accounted for as
an acquisition of a business in accordance with the acquisition method of accounting. The acquired assets and assumed liabilities have
been recorded at their fair values. The Company determined the fair values with the assistance of valuations performed by an independent
third-party specialist.
The Company has incurred approximately
$498,000 in legal fees, business broker fees, valuation services, accounting fees and other expenses to complete the Geneva acquisition.
Included in this amount is additional bonus payments to the Sellers of $210,000 related to the March 17, 2021 agreement discussed above.
All acquisition related costs have been expensed as incurred and included in selling, general and administrative expenses.
The following table summarizes the
components of the purchase price at fair values at September 1, 2020:
Cash consideration paid to date
|
|
$
|
2,983,264
|
|
Estimated earnout and other liabilities
|
|
|
358,796
|
|
Total purchase price
|
|
$
|
3,342,060
|
|
The following table summarizes the
allocation of purchase price at estimated fair values at September 1, 2020:
Cash
|
|
$
|
241,946
|
|
Accounts receivable
|
|
|
778,930
|
|
Prepaid expenses
|
|
|
5,249
|
|
Intangible assets (see Note 16)
|
|
|
1,800,000
|
|
Goodwill
|
|
|
785,883
|
|
Accrued expenses
|
|
|
(269,948
|
)
|
Net assets
|
|
$
|
3,342,060
|
|
The following unaudited pro forma financial
information presents the combined operating results of the Company and Geneva as if the acquisition had occurred as of the beginning of
the earliest period presented. Pro forma data is subject to various assumptions and estimates and is presented for informational purposes
only. This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported
had the transaction been completed as described herein, and the data should not be taken as indicative of future operating results.
Unaudited pro forma financial information
assuming the acquisition of Geneva as of June 1, 2020 is presented in the following table (in thousands):
|
|
Three Months Ended
|
|
|
|
August 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue
|
|
$
|
22,866
|
|
|
$
|
15,951
|
|
Net income (loss)
|
|
$
|
6,402
|
|
|
$
|
(221
|
)
|
Earnings (loss) per share
|
|
$
|
3.26
|
|
|
$
|
(0.11
|
)
|
TSR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021
(Unaudited)
Goodwill is recorded when the purchase
price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill
is not amortized but is subject to impairment analysis at least once annually or more frequently upon the occurrence of an event or when
circumstances indicate that the carrying amount of a unit is greater than its fair value.
The Company amortizes its intangible
assets over their estimated useful lives and will review these assets for impairment when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparing
the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If intangible assets are considered to
be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.
Intangible assets identified in the
Geneva acquisition are as follows:
|
|
May 31,
|
|
|
|
|
|
August 31,
|
|
|
|
2021
|
|
|
Amortization
|
|
|
2021
|
|
Database (estimated life 5 years)
|
|
$
|
195,500
|
|
|
$
|
11,500
|
|
|
$
|
184,000
|
|
Non-compete agreement (estimated life 2 years)
|
|
|
6,250
|
|
|
|
1,250
|
|
|
|
5,000
|
|
Trademark (estimated life 3 years)
|
|
|
45,000
|
|
|
|
5,000
|
|
|
|
40,000
|
|
Customer relationships (estimated life 15 years)
|
|
|
1,425,000
|
|
|
|
25,000
|
|
|
|
1,400,000
|
|
Total
|
|
$
|
1,671,750
|
|
|
$
|
42,750
|
|
|
$
|
1,629,000
|
|
No instances of triggering events or
impairment indicators were identified at August 31, 2021.
17.
|
Related Party Transactions
|
On January 5, 2021, the members of
the Board of Directors of TSR, Inc. other than Robert Fitzgerald approved providing a waiver to QAR Industries, Inc. for its contemplated
acquisition of shares owned by Fintech Consulting LLC under the Company’s A&R Rights Agreement so that a Distribution Date would
not occur as a result of the Acquisition. QAR Industries, Inc. and Fintech Consulting LLC were both principal stockholders of the Company,
each owning more than 5% of the Company’s outstanding common stock prior to the consummation of the Acquisition. Robert Fitzgerald
is the President and majority shareholder of QAR Industries, Inc. The other directors of the Company are not affiliated with QAR Industries,
Inc.
On February 3, 2021, the transaction
was completed and QAR Industries, Inc. purchased 348,414 shares of TSR, Inc. common stock from Fintech Consulting LLC at a price of $7.25
per share. At the same time, Bradley M. Tirpak, Chairman of TSR, Inc., purchased 27,586 shares of TSR, Inc. common stock from Fintech
Consulting LLC at a price of $7.25 per share.
TSR, INC. AND SUBSIDIARIES