The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
The
accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries. Unless
otherwise stated or the context otherwise requires, the terms “we,” “us,” “our,” and the “Company”
refer to TSR, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
The condensed balance sheet as of May 31, 2020, which has been derived from audited financial statements, and the unaudited interim
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
applying to interim financial information and with the instructions to Form 10-Q of Regulation S-X of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in
the United States of America and normally included in the Company’s annual financial statements have been condensed or omitted.
These condensed consolidated interim financial statements as of and for the three months and six months ended November 30, 2020
are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company
for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results
that might be expected for future interim periods or for the full year ending May 31, 2021. These condensed consolidated interim
financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2020.
|
2.
|
Net
Income (Loss) Per Common Share
|
Basic
net income (loss) per common share is computed by dividing net income (loss) available to common stockholders of TSR, Inc. by
the weighted average number of common shares outstanding. The Company had no stock options or other common stock equivalents outstanding
during any of the periods presented.
|
3.
|
Cash
and Cash Equivalents
|
The
Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash
equivalents. Cash and cash equivalents were comprised of the following as of November 30, 2020 and May 31, 2020:
|
|
November 30,
2020
|
|
|
May 31,
2020
|
|
Cash
in banks
|
|
$
|
7,140,043
|
|
|
$
|
9,677,848
|
|
Money
market funds
|
|
|
52,705
|
|
|
|
52,174
|
|
|
|
$
|
7,192,748
|
|
|
$
|
9,730,022
|
|
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
4.
|
Fair Value of Financial Instruments
|
ASC 820-10, Fair
Value Measurements and Disclosures (“ASC 820-10”), defines fair value, establishes a framework for measuring fair
value under GAAP and provides for expanded disclosure about fair value measurements. ASC 820-10 applies to all other accounting
pronouncements that require or permit fair value measurements.
The Company determines
or calculates the fair value of financial instruments using quoted market prices in active markets when such information is available
or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available
market discount rate information for similar types of instruments while estimating for non-performance and liquidity risk. These
techniques are significantly affected by the assumptions used, including the discount rate, credit spreads and estimates of future
cash flows.
Assets and liabilities
typically recorded at fair value on a non-recurring basis to which ASC 820-10 applies include:
|
●
|
non-financial assets and liabilities initially measured at fair value in an acquisition or business
combination, and
|
|
●
|
long-lived assets measured at fair value due to an impairment assessment under ASC 360-10-15, Impairment
or Disposal of Long-Lived Assets.
|
This topic defines
fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date and establishes a three-level hierarchy, which encourages an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 requires that assets
and liabilities recorded at fair value be classified and disclosed in one of the following three categories:
|
●
|
Level 1 - inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities
that the Company has the ability to access.
|
|
|
|
|
●
|
Level 2 - inputs utilize other-than-quoted prices that are observable, either directly or indirectly.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and
yield curves that are observable at commonly quoted intervals.
|
|
|
|
|
●
|
Level 3 - inputs are unobservable and are typically based on the Company’s own assumptions,
including situations where there is little, if any, market activity. Both observable and unobservable inputs may be used to determine
the fair value of positions that are classified within the Level 3 classification.
|
In certain cases, the
inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company classifies
such financial assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or liability.
ASC Topic 825, Financial Instruments, requires disclosure
of the fair value of certain financial instruments. For cash and cash equivalents, accounts receivable, accounts and other payables,
accrued liabilities and advances from customers, the amounts presented in the condensed consolidated financial statements approximate
fair value because of the short-term maturities of these instruments.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
The
Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments,
into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs (Level 3). If the inputs used to measure
the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant
to the fair value measurement of the instrument.
Investments
recorded in the accompanying condensed consolidated balance sheets are categorized based on the inputs to valuation techniques
as follows:
Level
1 - These are investments where values are based on unadjusted quoted prices for identical assets in an active market the
Company has the ability to access.
Level
2 - These are investments where values are based on quoted market prices that are not active or model derived valuations in
which all significant inputs are observable in active markets.
Level
3 - These are investments where values are derived from techniques in which one or more significant inputs are
unobservable.
The
following are the major categories of assets measured at fair value on a recurring basis as of November 30, 2020 and May 31, 2020
using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant
unobservable inputs (Level 3):
November
30, 2020
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Equity
Securities
|
|
$
|
38,680
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,680
|
|
|
|
$
|
38,680
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,680
|
|
May
31, 2020
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Equity
Securities
|
|
$
|
50,344
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50,344
|
|
|
|
$
|
50,344
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50,344
|
|
The
Company’s equity securities are classified as trading securities, which are carried at fair value, as determined by quoted
market prices, which is a Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are
included in earnings. The Company’s marketable securities at November 30, 2020 and May 31, 2020 are summarized as follows:
November 30, 2020
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Equity Securities
|
|
$
|
16,866
|
|
|
$
|
21,814
|
|
|
$
|
-
|
|
|
$
|
38,680
|
|
|
|
$
|
16,866
|
|
|
$
|
21,814
|
|
|
$
|
-
|
|
|
$
|
38,680
|
|
May 31, 2020
Current
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Equity Securities
|
|
$
|
16,866
|
|
|
$
|
33,478
|
|
|
$
|
-
|
|
|
$
|
50,344
|
|
|
|
$
|
16,866
|
|
|
$
|
33,478
|
|
|
$
|
-
|
|
|
$
|
50,344
|
|
The
Company’s investments in marketable securities consist primarily of investments in equity securities. Market values were
determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary
impairment, the Company reviews factors such as length of time and extent to which fair value has been below cost basis, the financial
condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time, which may be
sufficient for anticipated recovery in market values.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
Rights
Plan / Preferred Stock
On
August 29, 2018, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a “Right”)
for each share of common stock, par value $0.01 per share (“Common Stock”), of the Company outstanding on August 29,
2018 (the “Record Date”) to the stockholders of record on that date. In connection with the distribution of the Rights,
the Company entered into a Rights Agreement (the “Rights Agreement”), dated as of August 29, 2018, between the Company
and Continental Stock Transfer & Trust Company, as Rights Agent. Each Right entitles the registered holder to purchase from
the Company one one-hundredth of a share of Class A Preferred Stock, Series One, par value $0.01 per share (“Preferred Stock”),
of the Company at a price of $24.78 per one one-hundredth of a share of Preferred Stock represented by a Right (the “Purchase
Price”), subject to adjustment.
On
August 30, 2019, the Company entered into a settlement and release agreement (the “Settlement Agreement”) with Zeff
Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert Fitzgerald, Fintech Consulting LLC and Tajuddin
Haslani (collectively, the “Investor Parties”), pursuant to which the Company agreed to, among other things, amend
and restate the Rights Agreement to provide that a “Distribution Date” (as defined below) shall not occur as a result
of any request by any of the Investor Parties calling for a special meeting pursuant to Article II, Section 5 of the Amended and
Restated By-Laws of the Company in accordance with the terms of the Settlement Agreement. (See Note 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 in the Rights Agreement) has acquired Beneficial Ownership (as defined in the Rights Agreement) of 5% or more of the outstanding
Common Stock (an “Acquiring Person”) (or, in the event an exchange is effected in accordance with Section 27
of the 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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
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 on the holders of the Preferred
Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Preferred
Stock are entitled under clause (a)(i) of this sentence and to which the holders of such parity shares are entitled, in each case
upon such liquidation, dissolution or winding up.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
The
foregoing rights are protected by customary anti-dilution provisions.
The
foregoing description of the rights of the Preferred Stock does not purport to be complete and is qualified in its entirety by
reference to the Certificate of Designations of Class A Preferred Stock Series One.
Rights
of Holders
Until
a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
Amended
and Restated Rights Agreement
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.
TSR,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
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 of stockholders (the “2018
Annual Meeting”) for September 13, 2019 and the filing of Preliminary Proxy Statements by the Company and Zeff Capital,
L.P., Zeff Capital, L.P. filed a complaint in the Delaware Court of Chancery against the Company seeking an order requiring the
Company to hold its next annual meeting of stockholders on or around September 13, 2019, and obligating the Company to elect Class
I and Class III directors at that annual meeting.
On
August 13, 2019, the Company filed a motion for preliminary injunction in the SDNY Action in advance of the Company’s 2018
Annual Meeting originally scheduled for September 13, 2019, and requested leave to file a motion for expedited discovery. The
Court denied the Company’s motion for preliminary injunction but ordered Zeff Capital, L.P. to “make clear that the
second set of directors” described by Zeff Capital, L.P. in its preliminary proxy statement “is contingent upon the
resolution of a proceeding in Delaware Chancery Court.”
On
August, 30, 2019, the Company entered into the Settlement Agreement with the Investor Parties with respect to the proxy contest
pertaining to the election of directors at the 2018 Annual Meeting, which was held on October 22, 2019. Pursuant to the Settlement
Agreement, the parties agreed to forever settle and resolve any and all disputes between the parties, including without limitation
disputes arising out of or relating to the following litigations:
(i)
The complaint relating to alleged breaches of fiduciary duties filed on November 1, 2018 by Fintech Consulting LLC against the
Company in the Delaware Court of Chancery, which was previously dismissed voluntarily;
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
(ii)
The complaint for declaratory and injunctive relief for violations of the federal securities laws filed on December 21, 2018 by
the Company against the Investor Parties in the United States District Court in the Southern District of New York;
(iii)
Cross-claims relating to alleged breaches of fiduciary duties and for indemnification and contribution filed on July 26, 2019
by the Company against the Investor Parties in New York Supreme Court, Queens County; and
(iv)
The complaint to compel annual meeting of stockholders filed on August 7, 2019 by Zeff Capital, L.P. against the Company in the
Delaware Court of Chancery.
No
party admitted any liability by entering into the Settlement Agreement. The Settlement Agreement did not resolve the 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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
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 Stockholder Litigation Settlement. On May 21, 2020, the Court entered an order preliminarily
approving the Stockholder Litigation Settlement. On July 9, 2020, the parties submitted an agreed upon proposed scheduling order
for final approval of the Stockholder Litigation Settlement and a proposed mailing notice of the Stockholder Litigation Settlement
to the Company’s stockholders. On December 16, 2020, the Court entered a scheduling order, which approved the form of the
parties’ mailing notice, and provided that the hearing for final approval of the Stockholder Litigation Settlement will be
held on April 20, 2021. Among other deadlines, the scheduling order provided that TSR must provide notice of the Stockholder Litigation
Settlement to applicable stockholders by December 31, 2021, and that any objections to the Stockholder Litigation Settlement must
be filed by April 5, 2021. Although the Company believes that the Stockholder Litigation Settlement represents a fair and reasonable
compromise of the matters in dispute in the Stockholder Litigation, there can be no assurance that the court will approve the Stockholder
Litigation Settlement as proposed, or at all.
Inasmuch
as the Company did not complete the Repurchase and make the Settlement Payment prior to the December 30, 2019 deadline, the members
of the Board of Directors (other than the two directors who were elected as directors at the 2018 Annual Meeting) resigned from
the Board effective at 5:00 p.m. Eastern Time on December 30, 2019. Immediately thereafter, the two remaining directors, Bradley
M. Tirpak and H. Timothy Eriksen, appointed Robert Fitzgerald as a new director. Each of Messrs. Tirpak, Eriksen and Fitzgerald
qualifies as an “independent director” under the NASDAQ Stock Market Rules. These three individuals were also appointed
to the Audit Committee, Nominating Committee, Compensation Committee and Special Committee. The Board appointed Mr. Tirpak as
Chairman of the Board to succeed Christopher Hughes. Mr. Hughes continued to serve as the Chief Executive Officer, President and
Treasurer of the Company until January 17, 2020. Additionally, the Board appointed Mr. Eriksen as Lead Independent Director, Chairman
of the Audit Committee and Chairman of the Nominating Committee. The Board also appointed Mr. Fitzgerald as the Chairman of the
Compensation Committee and Chairman of the Special Committee.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
During the quarter ended February
29, 2020, the Company negotiated a settlement with Zeff Capital, L.P. to reimburse it for legal expenses of $900,000 (net present
value of $818,000 accrued at February 29, 2020) by entering into a binding term sheet on April 1, 2020. The parties entered into
a final agreement reflecting these terms on August 13, 2020. For additional information about this matter, please refer to Note
12, Legal Settlement with Investor.
Please
also refer to Note 11, Termination of Former CEO, regarding an ongoing lawsuit originally filed by the Company’s former
Chief Executive Officer against the Company in the Supreme Court of the State of New York in March 2020.
|
8.
|
Recently
Adopted Accounting Pronouncements
|
Effective June 1, 2019, the Company
adopted ASU No. 2016-02, Leases, which sets out the principle for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to classify leases as either
finance or operating leases and record a right-of-use asset and a lease liability for all leases with a term of greater than 12
months regardless of their classification. An accounting policy election may be made to account for leases with a term of 12 months
or less similar to existing guidance for operating leases today. ASU No. 2016-02 supersedes the existing guidance on accounting
for leases. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an
optional transition method for the adoption of Topic 842. The two permitted transition methods are now the modified retrospective
approach, which applies the new lease requirements at the beginning of the earliest period presented, and the optional transition
method, which applies the new lease requirements through a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. ASU 2016-02 is effective for our fiscal year ended May 31, 2020 and the interim periods within that
year. The Company adopted this standard in the first quarter of fiscal 2020 using the optional transition method. The Company also
elected the practical expedients that allow us to carry forward the historical lease classification. The Company has established
an inventory of existing leases and implemented a new process of evaluating the classification of each lease. The financial impact
of the adoption of the new standard at June 1, 2019 increased total assets and total liabilities by approximately $690,000. The
financial impact of the adoption primarily relates to the capitalization of right-of-use assets and recognition of lease liabilities
related to operating leases.
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 are in our consolidated condensed 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. During the current quarter, the Company extended its lease expiring December 31, 2020 to December 31, 2023. Additionally,
the Company entered into a sublease agreement on its lease 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 November 30, 2020 and 2019, the Company’s operating lease expense for these leases was $230,922 and
$198,803, respectively.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
Future
minimum lease payments under non-cancellable operating leases as of November 30, 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 Ending November 30,
|
|
|
|
2021
|
|
$
|
252,848
|
|
2022
|
|
|
218,006
|
|
2023
|
|
|
99,557
|
|
2024
|
|
|
8,317
|
|
Total undiscounted operating lease payments
|
|
|
578,728
|
|
Less imputed interest
|
|
|
46,909
|
|
Present value of operating lease payments
|
|
$
|
531,819
|
|
The
following table sets forth the right-of-use assets and operating lease liabilities as of November 30, 2020:
Assets
|
|
|
|
Right-of-use assets, net
|
|
$
|
391,212
|
|
Liabilities
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
224,256
|
|
Long-term operating lease liabilities
|
|
|
307,563
|
|
Total operating lease liabilities
|
|
$
|
531,819
|
|
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 November
30, 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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
TSR
is obliged to satisfy certain financial covenants and minimum borrowing requirements under the Credit Facility, and to pay certain
fees, including prepayment fees, and provide certain financial information to the Lender. The Company was in compliance with all
covenants as of November 30, 2020 and through the date of this filing.
As
of November 30, 2020, the net borrowings outstanding against this line of credit facility were $100,037. The amount the Company
has borrowed fluctuates and, at times in the prior fiscal year, it has utilized the maximum amount of $2,000,000 available under
the facility to fund its payroll and other obligations.
|
11.
|
Termination
of Former CEO
|
The
Company terminated Christopher Hughes, the former Chief Executive Officer of the Company (“Hughes”), effective February
29, 2020 for “Cause” as defined in Section 6(a) of his Amended and Restated Employment Agreement dated August 9, 2018
(the “Employment Agreement”). Despite having already been terminated from employment, on March 2, 2020, the Company
received a letter from Mr. Hughes, providing notice of his intent to resign for “Good Reason” as defined in Section
7(c) of the Employment Agreement pursuant to which he claimed to be entitled to the “Enhanced Severance Amount” under
the Employment Agreement. Hughes filed a complaint against the Company in the Supreme Court of the State of New York in March
2020 alleging two causes of action: (1) breach of his employment contract; and (2) breach of duty of good faith and fair dealing.
Plaintiff Hughes alleges that he was terminated without cause or in the alternative that he resigned for good reason and therefore,
pursuant to the Employment Agreement, Hughes seeks severance pay in the amount of $1,000,000 and reasonable costs and attorney’s
fees. The Company denies Plaintiff’s allegations in their entirety and has filed counterclaims against Plaintiff for (1)
declaratory relief; (2) breach of confidence/non-compete agreement; (3) declaratory and injunctive relief – confidence/non-compete;
(4) tortious interference with current and prospective contractual and economic relations; (5) breach of fiduciary duty; (6) misappropriation
of trade secrets; (7) declaratory and injunctive relief – unfair competition; and (8) conversion.
|
12.
|
Legal
Settlement with Investor
|
On
April 1, 2020, the Company entered into a binding term sheet (“Term Sheet”) with Zeff Capital, L.P. (“Zeff”)
pursuant to which it agreed to pay Zeff an amount of $900,000 over a period of three years in cash or cash and stock in settlement
of expenses incurred by Zeff during its solicitations in 2018 and 2019 in connection with the annual meetings of the Company,
the costs incurred in connection with the litigation initiated by and against the Company as well as negotiation, execution and
enforcement of the Settlement and Release Agreement, dated as of August 30, 2019, by and between the Company, Zeff and certain
other parties. (See Note 7) In exchange for certain releases, the Term Sheet calls for a cash payment of $300,000 on June 30,
2021, a second cash payment of $300,000 on June 30, 2022 and a third payment of $300,000 also on June 30, 2022, which can be paid
in cash or common stock at the Company’s option. There is no interest due on these payments. The agreement also has protections
to defer such payment dates so that the debt covenants with the Company’s lender are not breached. On August 13, 2020, the
Company, Zeff, Zeff Holding Company, LLC and Daniel Zeff entered into a settlement agreement to reflect these terms. Any installment
payment which is deferred as permitted above will accrue interest at the prime rate plus 3.75%, and Zeff shall thereby have the
option to convert such deferred amounts (plus accrued interest if any) into shares of the Company’s stock. The Company accrued
$818,000, the estimated present value of these payments using an effective interest rate of 5%, in the quarter ended February
29, 2020, as the events relating to the expense occurred prior to such date. The estimated present value of these payments is
$847,000 at November 30, 2020.
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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
|
14.
|
Payroll
Protection Program Loan
|
On
April 15, 2020, the Company received loan proceeds of $6,659,220 under the Paycheck Protection Program (the “PPP Loan”).
The Paycheck Protection Program (“PPP”) was established under the recent congressionally-approved Coronavirus Aid,
Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration
(“SBA”). The PPP Loan to the Company is being made through JPMorgan Chase Bank, N.A., a national banking association.
The
original term of the PPP Loan was two years. The term may be extended to five years by the SBA and the lender. The annual interest
rate on the PPP Loan is 0.98%. Payments of principal and interest on the loan will be deferred for the first six months of the
term of the loan. The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things,
payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of
default may trigger the immediate repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or
filing suit and obtaining a judgment against the Company.
Under
the terms of the CARES Act, PPP Loan recipients may apply for and be granted forgiveness for all or a portion of loans granted
under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs
and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. While the Company believes
that it has acted in compliance with the program and 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.
|
15.
|
Geneva
Consulting Group Acquisition
|
On
September 1, 2020, the Company completed the acquisition of all of the outstanding stock of Geneva Consulting Group, Inc., a New
York corporation (“Geneva”) and provider of temporary and permanent information technology personnel based in Port
Washington, New York. The stock of Geneva was purchased from the three shareholders of Geneva (the “Sellers”), none
of which had, or will have following the acquisition, a material relationship with the Company or its affiliates.
The purchase price for the shares
of Geneva is comprised of the following: (i) $1,452,000 in cash paid to Sellers at the closing of the acquisition, (ii) an amount
of $748,000, that is equal to the amount of Geneva’s loan under the PPP that was not assumed by the Company and is expected
to be substantially forgiven by the SBA, (iii) an amount, up to $300,000 which may be paid as an earnout payment in part in February
2021 and in part in August 2021 (the “Earnout Payments”), (iv) bonus payments payable in $10,000 increments, (v) $747,000
for the net working capital of Geneva as of closing and (vi) other purchase price adjustments of which $36,000 has been paid to
date. Any Earnout Payments and bonus payments will be determined based upon the achievement of certain criteria relating to the
number the Company’s contractors working full-time at Company clients on such dates.
The
acquisition was accounted for as an acquisition of a business in accordance with the acquisition method of accounting. The acquired
assets and assumed liabilities have been recorded at their preliminary estimated fair values. The Company determined the preliminary
estimated fair values with the assistance of valuations performed by an independent third-party specialist. We expect to complete
the valuation of the net assets in the third quarter of fiscal 2021.
The
Company has incurred approximately $278,000 in legal fees, business broker fees, valuation services, accounting fees and other
expenses to complete the Geneva acquisition, of which $122,000 of these expenses were recorded in the quarter ended August 31,
2020 and $156,000 in the quarter ended November 30, 2020. All acquisition related costs have been expensed as incurred and included
in selling, general and administrative expenses.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(Unaudited)
The
following table summarizes the components of the purchase price at fair values at September 1, 2020:
Cash consideration paid to date
|
|
$
|
2,983,264
|
|
Estimated earnout and other liabilities
|
|
|
358,796
|
|
Total purchase price
|
|
$
|
3,342,060
|
|
The
following table summarizes the allocation of purchase price at preliminary estimated fair values at September 1, 2020:
Cash
|
|
$
|
241,946
|
|
Accounts receivable
|
|
|
778,930
|
|
Prepaid expenses
|
|
|
5,249
|
|
Intangible assets (see Note 17)
|
|
|
1,800,000
|
|
Goodwill
|
|
|
785,883
|
|
Accrued expenses
|
|
|
(269,948
|
)
|
Net assets
|
|
$
|
3,342,060
|
|
The
purchase agreement for the Geneva acquisition provides for earn-out payments of up to $300,000 plus bonus amounts in $10,000 increments
which are earned through August 2021. The initial earn-out liability was valued at its fair value using an option pricing based
approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure (Level
3 of the fair value hierarchy). The earn-out was and will continue to be revalued quarterly using a present value approach and
any resulting increase or decrease will be 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 judgement is 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. Accordingly, significant variances between actual and forecasted results or changes in the assumptions can materially
impact the amount of contingent consideration expense we record in future periods.
The
following unaudited pro forma financial information presents the combined operating results of the Company and Geneva Consulting
Group 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 Consulting group as of June 1, 2019 is presented in the following
table (in thousands):
|
|
Three Months Ended
November 30,
|
|
|
Six Months Ended
November 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
16,069
|
|
|
$
|
17,889
|
|
|
$
|
32,020
|
|
|
$
|
34,990
|
|
Net income (loss)
|
|
$
|
(247
|
)
|
|
$
|
193
|
|
|
$
|
(488
|
)
|
|
$
|
(482
|
)
|
Earnings (loss) per share
|
|
$
|
(0.13
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.25
|
)
|
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November
30, 2020
(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 Consulting Group acquisition are as follows:
|
|
September 1,
2020
|
|
|
Amortization
|
|
|
November 30,
2020
|
|
Database (estimated life 5 years)
|
|
$
|
230,000
|
|
|
$
|
11,500
|
|
|
$
|
218,500
|
|
Non-compete agreement (estimated life 2 years)
|
|
|
10,000
|
|
|
|
1,250
|
|
|
|
8,750
|
|
Trademark (estimated life 3 years)
|
|
|
60,000
|
|
|
|
5,000
|
|
|
|
55,000
|
|
Customer relationships (estimated life 15 years)
|
|
|
1,500,000
|
|
|
|
25,000
|
|
|
|
1,475,000
|
|
Total
|
|
$
|
1,800,000
|
|
|
$
|
42,750
|
|
|
$
|
1,757,250
|
|
No
instances of triggering events or impairment indicators were identified at November 30, 2020.
TSR,
INC. AND SUBSIDIARIES