NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
May
31, 2021 and 2020
|
(1)
|
Summary
of Business and Significant Accounting Policies
|
|
(a)
|
Business,
Nature of Operations and Customer Concentrations
|
TSR,
Inc. and Subsidiaries (the “Company,” “TSR,” “we,” “us” and “our”)
are primarily engaged in providing contract computer programming services to commercial customers located primarily in the Metropolitan
New York area. The Company provides its customers with technical computer personnel to supplement their in-house information technology
(“IT”) capabilities. In addition, beginning in fiscal 2017, the Company has provided and continues to provide administrative
(non-IT) workers on a contract basis to some of its significant customers, including new customers acquired following the Geneva acquisition. In fiscal 2021, three customers each accounted for more
than 10% of the Company’s consolidated revenue, constituting a combined 54.3%. The largest of these constituted 22.4% of
consolidated revenue. In fiscal 2020, three customers each accounted for more than 10% of the Company’s consolidated revenue,
constituting a combined 53.3%. The largest of these constituted 21.2% of consolidated revenue. The accounts receivable balances
associated with the Company’s largest customers were $4,585,000 for three customers at May 31, 2021 and $3,747,000 for three
customers at May 31, 2020. The Company operates in one business segment, contract staffing services.
|
(b)
|
Principles
of Consolidation
|
The
consolidated financial statements include the accounts of TSR and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenues
are recognized as control of the promised service is transferred to customers, in an amount that reflects the consideration expected
in exchange for the services. Revenues from contract assignments are recognized over time, based on hours worked by the Company’s
contract professionals. The performance of the requested service over time is the single performance obligation for assignment
revenues. Certain customers may receive discounts (e.g., volume discounts, rebates, prompt-pay discounts) and adjustments to the
amounts billed. These discounts, rebates and adjustments are considered variable consideration. Volume discounts are the largest
component of variable consideration and are estimated using the most likely amount method prescribed by Accounting Standards Codification
(“ASC”) 606, contracts terms and estimates of revenue. Revenues are recognized net of variable consideration to the
extent that it is probable that a significant reversal of revenues will not occur in subsequent periods. Payment terms vary and
the time between invoicing and when payment is due is not significant. There are no financing components to the Company’s
arrangements. There are no incremental costs to obtain contracts and costs to fulfill contracts are expensed as incurred. The
Company’s operations are primarily located in the United States.
The
Company recognizes most of its revenue on a gross basis when it acts as a principal in its transactions. The Company has direct
contractual relationships with its customers, bears the risks and rewards of its arrangements, and has the discretion to select
the contract professionals and establish the price for the services to be provided. Additionally, the Company retains control
over its contract professionals based on its contractual arrangements. The Company primarily provides services through its employees
and to a lesser extent, through subcontractors; the related costs are included in cost of sales. The Company includes billable
expenses (out-of-pocket reimbursable expenses) in revenue and the associated expenses are included in cost of sales.
|
(d)
|
Cash
and Cash Equivalents
|
The
Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash
equivalents. Cash and cash equivalents were comprised of the following as of May 31, 2021 and 2020:
|
|
2021
|
|
|
2020
|
|
Cash
in banks
|
|
$
|
7,317,517
|
|
|
$
|
9,677,848
|
|
Money
market funds
|
|
|
53,129
|
|
|
|
52,174
|
|
|
|
$
|
7,370,646
|
|
|
$
|
9,730,022
|
|
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
|
(e)
|
Marketable
Securities
|
The
Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments,
into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs (Level 3). If the inputs used to measure
the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant
to the fair value measurement of the instrument.
Investments
recorded in the accompanying consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:
Level
1- These are investments where values are based on unadjusted quoted prices for identical assets in an active market the Company
has the ability to access.
Level
2- These are investments where values are based on quoted market prices that are not active or model derived valuations in which
all significant inputs are observable in active markets.
Level
3- These are investments where values are derived from techniques in which one or more significant inputs are unobservable.
The
following are the major categories of assets measured at fair value on a recurring basis as of May 31, 2021 and 2020 using quoted
prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable
inputs (Level 3):
May
31, 2021
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Equity
Securities
|
|
$
|
45,696
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,696
|
|
May
31, 2020
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Equity
Securities
|
|
$
|
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 May 31, 2021 and 2020 are summarized as follows:
May
31, 2021
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Recorded
Value
|
|
Equity
Securities
|
|
$
|
16,866
|
|
|
$
|
28,830
|
|
|
$
|
-
|
|
|
$
|
45,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Securities
|
|
$
|
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 CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
|
(f)
|
Accounts
Receivable and Credit Policies
|
The
carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the
amounts that will not be collected. In addition to reviewing delinquent accounts receivable, management considers many factors
in estimating its general allowance, including historical data, experience, customer types, creditworthiness and economic trends.
From time to time, management may adjust its assumptions for anticipated changes in any of those or other factors expected to
affect collectability.
|
(g)
|
Depreciation
and Amortization
|
Depreciation
and amortization of equipment and leasehold improvements has been computed using the straight-line method over the following useful
lives:
Equipment
|
|
3
years
|
|
Furniture
and fixtures
|
|
3
years
|
|
Automobiles
|
|
3
years
|
|
Leasehold
improvements
|
|
Lesser
of lease term or useful life
|
|
|
(h)
|
Net
Loss Per Common Share
|
Basic
net loss per common share is computed by dividing net loss available to common stockholders of TSR by the weighted average number
of common shares outstanding during the reporting period, excluding the effects of any potentially dilutive securities. During
the fiscal year ended May 31, 2021, the Company granted time and performance vesting stock awards under its 2020 Equity Incentive
Plan (see Note 15 for further information). Diluted earnings per share gives effect to all potentially dilutive common shares
outstanding during the reporting period. The common stock equivalents associated with these stock awards of 78,901 in the fiscal
year ended May 31, 2021 have not been included for dilutive shares outstanding for the fiscal year May 31, 2021 since the effect
would be anti-dilutive due to the net loss incurred for the period. The Company had no stock options or other potentially dilutive
securities outstanding during the fiscal year ended May 31, 2020.
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial
reporting and tax bases of the Company’s assets and liabilities at enacted rates expected to be in effect when such amounts
are realized or settled. The effect of enacted tax law or rate changes is reflected in income in the period of enactment.
|
(j)
|
Fair
Value of Financial Instruments
|
ASC
820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), defines fair value, establishes a framework
for measuring fair value under accounting principles generally accepted in the United States of America (“GAAP”) and
provides for expanded disclosure about fair value measurements. ASC 820-10 applies to all other accounting pronouncements that
require or permit fair value measurements.
The
Company determines or calculates the fair value of financial instruments using quoted market prices in active markets when such
information is available or using appropriate present value or other valuation techniques, such as discounted cash flow analyses,
incorporating available market discount rate information for similar types of instruments while estimating for non-performance
and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads
and estimates of future cash flows.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
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 consolidated financial statements approximate fair value because of the short-term maturities of these instruments.
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not
limited to, provisions for doubtful accounts receivable and assessments of the recoverability of the Company’s deferred
tax assets. Actual results could differ from those estimates.
The
Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than
the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds
its fair value.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
|
(m)
|
Impact
of New Accounting Standards
|
Effective
June 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, which sets out the
principle for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees
and lessors). The new standard requires lessees to classify leases as either finance or operating leases and record a right-of-use
asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. An accounting
policy election may be made to account for leases with a term of 12 months or less similar to existing guidance for operating
leases today. ASU No. 2016-02 supersedes the existing guidance on accounting for leases. In July 2018, the Financial Accounting
Standards Board issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an optional transition
method for the adoption of Topic 842. The two permitted transition methods are now the modified retrospective approach, which
applies the new lease requirements at the beginning of the earliest period presented, and the optional transition method, which
applies the new lease requirements through a cumulative-effect adjustment to the opening balance of retained earnings in the period
of adoption. ASU 2016-02 is effective for our fiscal year ended May 31, 2020 and the interim periods within that year. The Company
adopted this standard in the first quarter of fiscal 2020 using the optional transition method. The Company also elected the practical
expedients that allow us to carry forward the historical lease classification. The Company has established an inventory of existing
leases and implemented a new process of evaluating the classification of each lease. The financial impact of the adoption of the
new standard at June 1, 2019 increased total assets and total liabilities by approximately $690,000. The financial impact of the
adoption primarily relates to the capitalization of right-of-use assets and recognition of lease liabilities related to operating
leases.
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents,
certificates of deposit, marketable securities and accounts receivable. The Company places its cash equivalents with high-credit
quality financial institutions and brokerage houses. The Company has substantially all of its cash in four bank accounts. At times,
such amounts may exceed federally insured limits. The Company holds its marketable securities in brokerage accounts. The Company
has not experienced losses in any such accounts. As a percentage of revenue, the three largest customers consisted of 54.3% of
the net accounts receivable balance at May 31, 2021.
A
reconciliation of the provision for income taxes computed at the federal statutory rates of 21.0% for fiscal 2021 and fiscal 2020
to the reported amounts is as follows:
|
|
2021
|
|
|
2020
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Amounts
at statutory federal tax rate
|
|
$
|
(144,000
|
)
|
|
|
(21.0
|
)%
|
|
$
|
(380,000
|
)
|
|
|
(21.0
|
)%
|
Noncontrolling
interest
|
|
|
(5,000
|
)
|
|
|
(0.7
|
)
|
|
|
(6,000
|
)
|
|
|
(0.3
|
)
|
State
and local taxes, net of federal income tax effect
|
|
|
(23,000
|
)
|
|
|
(3.4
|
)
|
|
|
(147,000
|
)
|
|
|
(8.1
|
)
|
Federal
benefit of state NOL
|
|
|
50,000
|
|
|
|
7.3
|
|
|
|
-
|
|
|
|
-
|
|
Benefit
of NOL at higher federal rate
|
|
|
-
|
|
|
|
-
|
|
|
|
(202,000
|
)
|
|
|
(11.2
|
)
|
Non-deductible
expenses and other
|
|
|
13,000
|
|
|
|
1.9
|
|
|
|
23,000
|
|
|
|
1.3
|
|
|
|
$
|
(109,000
|
)
|
|
|
(15.9
|
)%
|
|
$
|
(712,000
|
)
|
|
|
(39.3
|
)%
|
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
The
components of the provision for income taxes are as follows:
|
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
2021:
|
Current
|
|
|
$
|
-
|
|
|
$
|
48,000
|
|
|
$
|
48,000
|
|
|
Deferred
|
|
|
|
(96,000
|
)
|
|
|
(61,000
|
)
|
|
|
(157,000
|
)
|
|
|
|
|
$
|
(96,000
|
)
|
|
$
|
(13,000
|
)
|
|
$
|
(109,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020:
|
Current
|
|
|
$
|
(586,000
|
)
|
|
$
|
22,000
|
|
|
$
|
(564,000
|
)
|
|
Deferred
|
|
|
|
16,000
|
|
|
|
(164,000
|
)
|
|
|
(148,000
|
)
|
|
|
|
|
$
|
(570,000
|
)
|
|
$
|
(142,000
|
)
|
|
$
|
(712,000
|
)
|
The
tax effects of temporary differences that give rise to significant portions of the deferred income tax assets at May 31, 2021
and 2020 are as follows:
|
|
2021
|
|
|
2020
|
|
Allowance
for doubtful accounts receivable
|
|
$
|
52,000
|
|
|
$
|
52,000
|
|
Accrued
compensation and other accrued expenses
|
|
|
26,000
|
|
|
|
23,000
|
|
Net
operating loss carryforwards
|
|
|
421,000
|
|
|
|
487,000
|
|
Equipment
and leasehold improvement depreciation and amortization
|
|
|
(32,000
|
)
|
|
|
(3,000
|
)
|
Unrealized
gain
|
|
|
(8,000
|
)
|
|
|
(10,000
|
)
|
Legal
settlement with investor
|
|
|
275,000
|
|
|
|
233,000
|
|
Non-cash
stock compensation
|
|
|
70,000
|
|
|
|
-
|
|
Non-cash
lease expense
|
|
|
36,000
|
|
|
|
-
|
|
Accumulated
amortization
|
|
|
95,000
|
|
|
|
-
|
|
Other
items, net
|
|
|
6,000
|
|
|
|
2,000
|
|
Total
deferred income tax assets
|
|
$
|
941,000
|
|
|
$
|
784,000
|
|
The
Company believes that it is more likely than not that it will realize the benefits of its deferred tax assets based primarily
on the Company’s history of and projections for taxable income in the future. The federal net operating loss carryforwards
may be used indefinitely, and the state carryforwards are generally usable for 20 years.
The
Company recognizes interest and penalties associated with tax matters as selling, general and administrative expenses and includes
accrued interest and penalties with accrued and other liabilities in the consolidated balance sheets.
On
March 27, 2020, the CARES Act was signed into law in response to the COVID-19 pandemic. The CARES Act provides numerous tax provisions
and stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary
changes to the prior and future limitations on interest deductions, and technical corrections from prior tax legislation for tax
depreciation of certain qualified improvement property. The Company has evaluated the provisions of the CARES Act relating to
income taxes which resulted in the ability to carryback net operating losses and file for a federal tax refund of approximately
$586,000 which was recorded in the May 31, 2020 consolidated balance sheet. The amount was subsequently collected in April 2021.
In
the third quarter of fiscal 2018, the Company discovered it had not filed required information returns related to a foreign bank
account opened by a subsidiary in fiscal 2016 with contributions totaling approximately $25,000. The Company accrued an expense
of $30,000 with a charge to selling, general and administrative expenses for potential penalties that may be assessed. The Company
monitored this reserve periodically to determine if it was more-likely-than-not that penalties will be assessed. The reserve was
reversed in fiscal 2021 due to the expiration of the statute of limitations on the returns.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
A
reconciliation of the beginning and ending amount of unrecognized tax benefit as follows:
|
|
2021
|
|
|
2020
|
|
Balance
at beginning of fiscal year
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
Additions
based on tax positions related to current year
|
|
|
-
|
|
|
|
-
|
|
Additions
for tax positions of prior years
|
|
|
-
|
|
|
|
-
|
|
Reductions
for tax positions of prior years
|
|
|
(30,000
|
)
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
-
|
|
Balance
at end of fiscal year
|
|
$
|
-
|
|
|
$
|
30,000
|
|
The
Company’s federal and state income tax returns prior to fiscal year 2018 are closed.
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 in our 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, and entered into a sublease agreement for the remainder of the
lease in New York City. Due to the fact that the future sublease lease 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 fiscal years ended May 31, 2021 and 2020, the Company’s operating lease expense for these leases was $385,000 and $417,000.
Future
minimum lease payments under non-cancelable operating leases as of May 31, 2021 were as follows:
Twelve
Months Ended May 31,
|
|
|
|
2022
|
|
$
|
371,155
|
|
2023
|
|
|
256,605
|
|
2024
|
|
|
179,035
|
|
2025
|
|
|
123,840
|
|
2026
|
|
|
126,936
|
|
Thereafter
|
|
|
130,109
|
|
Total
undiscounted operating lease payments
|
|
|
1,187,680
|
|
Less
imputed interest
|
|
|
170,580
|
|
Present
value of operating lease payments
|
|
$
|
1,017,100
|
|
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
The
following table sets forth the right-of-use assets and operating lease liabilities as of May 31, 2021:
Assets
|
|
|
|
Right-of-use
assets
|
|
$
|
895,573
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
operating lease liabilities
|
|
$
|
309,731
|
|
Long-term
operating lease liabilities
|
|
|
707,369
|
|
|
|
|
|
|
Total
operating lease liabilities
|
|
$
|
1,017,100
|
|
The
weighted average remaining lease term for the Company’s operating leases is 3.3 years.
On
November 27, 2019, TSR closed on the Credit Facility pursuant to a Loan and Security Agreement with 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 below) and make the Settlement Payment (as defined below); however, TSR
did not complete the Repurchase and make the Settlement Payment prior to the December 30, 2019 deadline established in the Credit
Facility for such use.
Because
TSR did not complete the Repurchase and make the Settlement Payment prior to the December 30, 2019 deadline, the maximum amount
that may now be advanced under the Credit Facility at any time shall not exceed $2,000,000.
Advances
under the Credit Facility accrue interest at a rate per annum equal to (x) the “base rate” or “prime rate”
announced by Citibank, N.A. from time to time, which shall be increased or decreased, as the case may be, in an amount equal to
each increase or decrease in such “base rate” or “prime rate,” plus (y) 1.75%. The prime rate as of May
31, 2021 was 3.25%, indicating an interest rate of 5.0% on the Credit Facility. The initial term of the Credit Facility is 5 years,
which shall automatically renew for successive 5-year periods unless either TSR or the Lender gives written notice to the other
of termination at least 60 days prior to the expiration date of the then-current term.
TSR
is obliged to satisfy certain financial covenants and minimum borrowing requirements under the Credit Facility, and to pay certain
fees, including prepayment fees, and provide certain financial information to the Lender.
As
of May 31, 2021, the net borrowings outstanding against this Credit Facility were $92,527. 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 CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
|
(5)
|
Legal
Settlement with Investor
|
On
April 1, 2020, the Company entered into a binding term sheet (“Term Sheet”) with Zeff Capital, L.P. (“Zeff”)
pursuant to which it agreed to pay Zeff an amount of $900,000 over a period of three years in cash or cash and stock in settlement
of expenses incurred by Zeff during its solicitations in 2018 and 2019 in connection with the annual meetings of the Company,
the costs incurred in connection with the litigation initiated by and against the Company as well as negotiation, execution and
enforcement of the Settlement and Release Agreement, dated as of August 30, 2019, by and between the Company, Zeff and certain
other parties (See Note 7). In exchange for certain 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 on
June 30, 2021 was paid subsequent to the end of the fiscal year. 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 $867,000 at May 31, 2021.
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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
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 March 31, 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 was 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 Rights 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 be authorized but unissued and non-designated shares of the Company’s
preferred stock.
From
time to time, the Company is party to various lawsuits, some involving material amounts. Except for the litigation disclosed below,
management is not aware of any lawsuits that would have a material adverse impact on the consolidated financial position of the
Company.
Paskowitz
Stockholder Litigation
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 Capital, L.P., QAR Industries, Inc. and Fintech Consulting
LLC 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 with the court 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 did not assign any monetary values to alleged damages.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
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.
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 for September 13, 2019 and the filing
of Preliminary Proxy Statements by the Company and Zeff Capital, L.P., Zeff Capital, L.P. filed a complaint in the Delaware Court
of Chancery against the Company seeking an order requiring the Company to hold its next annual meeting of stockholders on or around
September 13, 2019, and obligating the Company to elect Class I and Class III directors at that annual meeting.
On
August 13, 2019, the Company filed a motion for preliminary injunction in the SDNY Action in advance of the Company’s 2018
Annual Meeting originally scheduled for September 13, 2019, and requested leave to file a motion for expedited discovery. The
Court denied the Company’s motion for preliminary injunction but ordered Zeff to “make clear that the second set of
directors” described by Zeff in its preliminary proxy statement “is contingent upon the resolution of a proceeding
in Delaware Chancery Court.”
On
August 30, 2019, the Company entered into 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”) 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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
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.
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.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
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 Repurchase
Agreement that the Company had entered into with the Investor Parties.
On
December 24, 2019, Ms. Paskowitz moved for preliminary approval of the Stipulation. On May 21, 2020, the Court entered an order
preliminarily approving the Stipulation. The 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 8, 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)
|
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. The Company intends
to vigorously defend and litigate this matter while recognizing the costs of litigation, including that it may divert the attention
of management and key personnel from business operations.
The
COVID-19 outbreak in the United States has caused business disruption through mandated and voluntary closing of various businesses.
While the disruption is currently expected to be temporary, there is considerable uncertainty around the duration of the closings
and the impact of the pandemic on our business. Therefore, the Company expects this matter to continue to negatively impact its
operating results in future periods. However, the full financial impact and duration cannot be reasonably estimated at this time.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
|
(10)
|
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 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 “PPP Lender”).
In
March 2021, the Company submitted a PPP Loan forgiveness application to the SBA 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 all 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 forgiveness of the PPP
Loan will be recognized during the Company’s fiscal 2022 first quarter ending August 31, 2021.
|
(11)
|
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 was comprised of the following: (i) $1,452,000 in cash paid to Sellers at the closing
of the acquisition, (ii) an amount of $748,000, that is equal to the amount of Geneva’s loan under the PPP that was not
assumed by the Company and is expected to be substantially forgiven by the SBA, (iii) an amount up to $300,000 which may be paid
as an earnout payment in part in February 2021 and in part in August 2021 (the “Earnout Payments”), (iv) bonus payments
payable in $10,000 increments, (v) $747,000 for the net working capital of Geneva as of closing and (vi) other purchase price
adjustments of which $36,000 has been paid to date. Any Earnout Payments and bonus payments will be determined based upon the
achievement of certain criteria relating to the number the Company’s contractors working full-time at the Company’s
clients on such dates.
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 settlement 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 settle certain interpretive differences regarding the Sellers’ entitlement to the bonus payments described above. Pursuant
to this agreement, and in full satisfaction of the Company’s obligations for deferred payments under the purchase agreement
for the Geneva acquisition, the Sellers’ representative acknowledged receipt of the first Earnout Payment in the amount
of $100,000, the parties agreed that the Company would make aggregate bonus payments to the Sellers’ representatives in
the amount of $260,000, and the Company agreed to instruct the escrow agent to release to the Sellers’ representatives the
second Earnout Payment in the amount of $200,000. All amounts relating to the Earnout Payments and bonus payments that had not
been paid as of the date of the agreement were either paid by the Company or released by the escrow agent on March 18, 2021. No
further earnout or bonus amounts can be earned or will be paid subsequent to March 18, 2021.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
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 estimated fair values. The Company determined the estimated
fair values with the assistance of valuations performed by an independent third-party specialist. There have been no changes made
to the valuation as of May 31, 2021.
The
Company has incurred approximately $498,000 in legal fees, business broker fees, valuation services, accounting fees and other
expenses to complete the Geneva acquisition, of which $220,000 of these expenses were recorded in the quarter ended February 28,
2021. This amount primarily relates to the accrual of additional bonus payments to the Sellers of $210,000 related to the March
17, 2021 agreement discussed above. All acquisition related costs have been expensed as incurred and included in selling, general
and administrative expenses.
The
following table summarizes the components of the purchase price at fair values at September 1, 2020:
Cash
consideration paid to date
|
|
$
|
2,983,264
|
|
Estimated
earnout and other liabilities
|
|
|
358,796
|
|
Total
purchase price
|
|
$
|
3,342,060
|
|
The
following table summarizes the allocation of purchase price at preliminary estimated fair values at September 1, 2020:
Cash
|
|
$
|
241,946
|
|
Accounts
receivable
|
|
|
778,930
|
|
Prepaid
expenses
|
|
|
5,249
|
|
Intangible
assets (see Note 13)
|
|
|
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, 2019 is presented in the following table (in
thousands):
|
|
Fiscal
Year Ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue
|
|
$
|
70,258
|
|
|
$
|
68,340
|
|
Net
loss
|
|
$
|
(756
|
)
|
|
$
|
(1,060
|
)
|
Earnings
loss per share
|
|
$
|
(0.39
|
)
|
|
$
|
(0.54
|
)
|
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
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:
|
|
September
1,
2020
|
|
|
Amortization
|
|
|
May
31,
2021
|
|
Database
(estimated life 5 years)
|
|
$
|
230,000
|
|
|
$
|
34,500
|
|
|
$
|
195,500
|
|
Non-compete
agreement (estimated life 2 years)
|
|
|
10,000
|
|
|
|
3,750
|
|
|
|
6,250
|
|
Trademark
(estimated life 3 years)
|
|
|
60,000
|
|
|
|
15,000
|
|
|
|
45,000
|
|
Customer
relationships (estimated life 15 years)
|
|
|
1,500,000
|
|
|
|
75,000
|
|
|
|
1,425,000
|
|
Total
|
|
$
|
1,800,000
|
|
|
$
|
128,250
|
|
|
$
|
1,671,750
|
|
No
instances of triggering events or impairment indicators were identified at May 31, 2021.
|
(14)
|
Related
Party Transactions
|
On
January 5, 2021, the members of the Board of Directors of TSR 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 Acquisition was completed and QAR Industries, Inc. purchased 348,414 shares of TSR common stock from Fintech
Consulting LLC at a price of $7.25 per share. At the same time, Bradley M. Tirpak, Chairman of TSR, purchased 27,586 shares of
TSR common stock from Fintech Consulting LLC at a price of $7.25 per share.
TSR,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May
31, 2021 and 2020
|
(15)
|
Stock-based
Compensation Expense
|
On
January 28, 2021 the Company granted 108,333 shares in time vesting stock awards and 69,167 shares in time and performance vesting
stock awards to officers, directors and key employees under the TSR, Inc. 2020 Equity Incentive Plan (the “Plan”).
The time vesting shares vest in tranches at the one, two and three-year anniversaries of the grants (“service condition”).
These shares had a grant date fair value of $826,000 based on the closing price of TSR common stock on the day prior to the grants.
The associated compensation expense is recognized on a straight-line basis over the time between grant date and the date the shares
vest (the “service period”). The time and performance vesting shares also vest in tranches at or after the two and
three-year anniversaries of the grants. The performance condition is defined in the grant agreements and relates to the market
price of the Company’s common stock over a stated period of time (“market condition”). These shares had a grant
date value $262,000 based on the closing price of TSR common shares on the day prior to the grants discounted by an estimated
forfeiture rate of 40-60%. The Company took into account the historical volatility of its common stock to assess the probability
of satisfying the market condition. The associated compensation expense is recognized on a straight-line basis between the time
the achievement of the performance criteria is deemed probable and the time the shares may vest. During the fiscal year ending
May 31, 2021, $236,000 has been record as stock-based compensation expense and included in selling, general and administrative
expenses. As of May 31, 2021, there is approximately $852,000 of unearned compensation expense that will be expensed through February
2024; 142,666 stock awards expected to vest; and zero vested awards.
TSR,
INC. AND SUBSIDIARIES