Item
8. Financial Statements and Supplementary Data
See accompanying notes to consolidated financial
statements.
TSR, INC. AND SUBSIDIARIES
See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial
statements.
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2022 and 2021
| (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 existing customers, including
new customers acquired following the Geneva acquisition. In fiscal 2022, four customers each accounted for more than 10% of the Company’s
consolidated revenue, constituting a combined 67.7%. The largest of these constituted 21.5% of consolidated revenue. 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. The accounts receivable balances associated with the Company’s largest customers
were $8,668,000 for four customers at May 31, 2022 and $4,585,000 for three customers at May 31, 2021. 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, 2022 and 2021:
| |
2022 | | |
2021 | |
Cash in banks | |
$ | 6,436,012 | | |
$ | 7,317,517 | |
Money market funds | |
| 54,146 | | |
| 53,129 | |
| |
| | | |
| | |
| |
$ | 6,490,158 | | |
$ | 7,370,646 | |
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and 2021
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, 2022 and 2021 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, 2022 | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Equity Securities | |
$ | 35,536 | | |
$ | - | | |
$ | - | | |
$ | 35,536 | |
May 31, 2021 | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Equity Securities | |
$ | 45,696 | | |
$ | - | | |
$ | - | | |
$ | 45,696 | |
The Company’s equity securities are classified as trading
securities, which are carried at fair value, as determined by quoted market prices, which is a Level 1 input, as established by the fair
value hierarchy. The related unrealized gains and losses are included in earnings. The Company’s marketable securities at May 31,
2022 and 2021 are summarized as follows:
May 31, 2022 | |
Amortized Cost | | |
Gross Unrealized Holding Gains | | |
Gross Unrealized Holding Losses | | |
Recorded Value | |
Equity Securities | |
$ | 16,866 | | |
$ | 18,670 | | |
$ | - | | |
$ | 35,536 | |
May 31, 2021 | |
| | | |
| | | |
| | | |
| | |
Equity Securities | |
$ | 16,866 | | |
$ | 28,830 | | |
$ | - | | |
$ | 45,696 | |
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and 2021
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.
| (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 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 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 14 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 73,573 in the fiscal year ended May 31, 2022 have been included for diluted shares outstanding for the fiscal
year ended May 31, 2022. 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 diluted 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.
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.
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. |
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and 2021
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.
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 annual test of goodwill was performed as of September
1, 2021 and no impairment was found. There was no change in goodwill in fiscal 2022.
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 four largest customers consisted of 64.3% of the net accounts receivable balance at May 31, 2022.
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and 2021
A reconciliation of the benefit for income taxes computed
at the federal statutory rates of 21.0% for fiscal 2022 and fiscal 2021 to the reported amounts is as follows:
| |
2022 | | |
2021 | |
| |
Amount | | |
% | | |
Amount | | |
% | |
Amounts at statutory federal tax rate | |
$ | 1,470,000 | | |
| 21.0 | % | |
$ | (144,000 | ) | |
| (21.0 | )% |
PPP Loan Forgiveness | |
| (1,414,000 | ) | |
| (20.2 | ) | |
| - | | |
| (0.7 | ) |
Noncontrolling interest | |
| (15,000 | ) | |
| (0.2 | ) | |
| (5,000 | ) | |
| (0.7 | ) |
State and local taxes, net of federal income tax effect | |
| 12,000 | | |
| 0.2 | | |
| (23,000 | ) | |
| (3.4 | ) |
Federal benefit of state NOL | |
| - | | |
| - | | |
| 50,000 | | |
| 7.3 | |
Non-deductible expenses and other | |
| (54,000 | ) | |
| (0.8 | ) | |
| 13,000 | | |
| 1.9 | |
| |
$ | (1,000 | ) | |
| (0.0 | )% | |
$ | (109,000 | ) | |
| (15.9 | )% |
The components of the benefit for income taxes are as follows:
| |
Federal | | |
State | | |
Total | |
2022: Current | |
$ | - | | |
$ | 30,000 | | |
$ | 30,000 | |
Deferred | |
| (19,000 | ) | |
| (12,000 | ) | |
| (31,000 | ) |
| |
$ | (19,000 | ) | |
$ | 18,000 | | |
$ | (1,000 | ) |
| |
| | | |
| | | |
| | |
2021: Current | |
$ | - | | |
$ | 48,000 | | |
$ | 48,000 | |
Deferred | |
| (96,000 | ) | |
| (61,000 | ) | |
| (157,000 | ) |
| |
$ | (96,000 | ) | |
$ | (13,000 | ) | |
$ | (109,000 | ) |
The tax effects of temporary differences that give rise to
significant portions of the deferred income tax assets at May 31, 2022 and 2021 are as follows:
| |
2022 | | |
2021 | |
Allowance for doubtful accounts receivable | |
$ | 55,000 | | |
$ | 52,000 | |
Accrued compensation and other accrued expenses | |
| 43,000 | | |
| 26,000 | |
Net operating loss carryforwards | |
| 508,000 | | |
| 421,000 | |
Equipment and leasehold improvement depreciation and amortization | |
| (40,000 | ) | |
| (32,000 | ) |
Unrealized gain | |
| (5,000 | ) | |
| (8,000 | ) |
Legal settlement with investor | |
| 180,000 | | |
| 275,000 | |
Non-cash stock compensation | |
| 111,000 | | |
| 70,000 | |
Non-cash lease expense | |
| 17,000 | | |
| 36,000 | |
Accumulated amortization | |
| 90,000 | | |
| 95,000 | |
Other items, net | |
| 13,000 | | |
| 6,000 | |
Total deferred income tax assets | |
$ | 972,000 | | |
$ | 941,000 | |
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and 2021
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.
The Company’s federal and state income tax returns
prior to fiscal year 2019 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, 2022 and 2021, the Company’s
operating lease expense for these leases was $326,000 and $385,000, respectively.
Future minimum lease
payments under non-cancelable operating leases as of May 31, 2022 were as follows:
Twelve Months Ended May 31, | |
| |
2023 | |
$ | 256,604 | |
2024 | |
| 179,035 | |
2025 | |
| 123,840 | |
2026 | |
| 126,936 | |
2027 | |
| 130,109 | |
Thereafter | |
| - | |
| |
| | |
Total undiscounted operating lease payments | |
| 816,524 | |
Less imputed interest | |
| 109,156 | |
| |
| | |
Present value of operating lease payments | |
$ | 707,368 | |
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and 2021
The following table
sets forth the right-of-use assets and operating lease liabilities as of May 31, 2022:
Assets | |
| |
Right-of-use assets | |
$ | 652,020 | |
| |
| | |
Liabilities | |
| | |
Current operating lease liabilities | |
$ | 214,941 | |
Long-term operating lease liabilities | |
| 492,427 | |
| |
| | |
Total operating lease liabilities | |
$ | 707,368 | |
The weighted average
remaining lease term for the Company’s operating leases is 3.3 years.
On November 27, 2019, TSR closed on
a revolving credit facility (the “Credit Facility”) pursuant to a Loan and Security Agreement with Access Capital, Inc. (the
“Lender”) that initially provided up to $7,000,000 in funding to TSR and its direct and indirect subsidiaries, TSR Consulting
Services, Inc., Logixtech Solutions, LLC and Eurologix, S.A.R.L., each of which, together with TSR, is a borrower under the Credit Facility.
Each of the borrowers has provided a security interest to the Lender in all of their respective assets to secure amounts borrowed under
the Credit Facility.
TSR expects to
utilize the Credit Facility for working capital and general corporate purposes. 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, 2022 was 4.00%, indicating
an interest rate of 5.75% on the Credit Facility. The initial term of the Credit Facility is five years, which shall automatically renew
for successive five-year periods unless either TSR or the Lender gives written notice to the other of termination at least 60 days prior
to the expiration date of the then-current term.
TSR is obliged
to satisfy certain financial covenants and minimum borrowing requirements under the Credit Facility, and to pay certain fees, including
prepayment fees, and provide certain financial information to the Lender. The Company was in compliance with all applicable covenants
at May 31, 2022.
As of May 31, 2022,
the net borrowings outstanding against the Credit Facility were $62,000. The amount the Company has borrowed fluctuates and, at times,
it has utilized the maximum amount of $2,000,000 available under the facility to fund its payroll and other obligations.
(5) | Legal Settlement with Investor |
On April 1, 2020, the Company entered into a binding
term sheet (“Term Sheet”) with Zeff Capital, L.P. (“Zeff”) pursuant to which it agreed to pay Zeff an amount
of $900,000 over a period of three years in cash or cash and stock in settlement of expenses incurred by Zeff during its solicitations
in 2018 and 2019 in connection with the annual meetings of the Company, the costs incurred in connection with the litigation initiated
by and against the Company as well as negotiation, execution and enforcement of the Settlement and Release Agreement, dated as of August
30, 2019, by and between the Company, Zeff and certain other parties. 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 when due. 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 two cash payments of $300,000 each were made by June 30,2022 in full satisfaction of the settlement.
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and 2021
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 elsewhere in the report, including Notes 5,
7, 12 and 15 to the Consolidated Financial Statements.
(7) | Termination of Former CEO |
The Company terminated Christopher Hughes,
the former Chief Executive Officer of the Company (“Hughes”), effective February 29, 2020. 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 the duty of good faith and fair dealing. Hughes alleged that he was terminated without cause or in the alternative that
he resigned for good reason and therefore, pursuant to the Amended and Restated Employment Agreement, dated August 9, 2018, between the
Company and Hughes, Hughes sought severance pay in the amount of $1,000,000 and reasonable costs and attorney’s fees. The Company
denied Hughes’ allegations and filed various counterclaims against Hughes.
In October 2021, the Company and Hughes
agreed through mediation to settle this matter. In order to avoid lengthy and costly litigation and discovery expenses, the Company has
paid Hughes $705,000 to settle all claims. After adjusting for insurance reimbursement, the Company accrued a charge of $580,000 to selling,
general and administrative expenses in the quarter ended August 31, 2021 and the fiscal year ended May 31, 2022.
The COVID-19 outbreak in the United States has caused business
disruption, including through mandated and voluntary closing of various businesses. While the disruption is currently expected to be temporary,
there is considerable uncertainty around 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.
(9) | 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 congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and
is administered by the U.S. Small Business Administration (“SBA”). The PPP Loan to the Company was made through JPMorgan Chase
Bank, N.A., a national banking association.
In March 2021, the Company submitted
a PPP Loan Forgiveness application to the 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 accrued
interest. The PPP Lender will apply the forgiveness amount to satisfy the PPP Loan. The Company has no further obligations with respect
to the PPP Loan. The Company recognized “Other Income” of $6,735,246 in the quarter ended August 31, 2021 and fiscal year
ended May 31, 2022 related to the forgiveness of the loan principal and accrued interest.
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and
2021
(10) | 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, which was equal
to the amount of Geneva’s loan under the PPP that was not assumed by the Company and was substantially forgiven by the SBA, (iii)
an amount up to $300,000 originally payable 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 $36,000. Any Earnout Payments and bonus payments were to be determined based upon the achievement
of certain criteria relating to the number the Company’s contractors working full-time at the Company’s client locations on
such dates.
The initial Earnout Payments and bonus payment 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 earnout payment structure (Level 3 of the fair value hierarchy). The Earnout Payments were revalued quarterly prior to the
resolution discussed below, using a present value approach and any resulting increase or decrease was recorded into selling, general and
administrative expenses. Any changes in the amount of the actual results and forecasted scenarios could impact the fair value. Significant
judgment was employed in determining the appropriateness of the assumptions used in calculating the fair value of the Earnout Payments
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. This agreement resulted in a charge to selling, general and administrative expenses of $210,000 in the quarter ended
February 28, 2021. No further earnout or bonus amounts can be earned or will be paid subsequent to March 18, 2021.
The acquisition was accounted for as an acquisition of a
business in accordance with the acquisition method of accounting. The acquired assets and assumed liabilities were recorded at their fair
values. The Company determined the fair values with the assistance of valuations performed by an independent third-party specialist.
The Company incurred approximately $498,000 in legal fees,
business broker fees, valuation services, accounting fees and other expenses to complete the Geneva acquisition. Included in this amount
is additional bonus payments to the Sellers of $210,000 related to the March 17, 2021 agreement discussed above. All acquisition related
costs have been expensed as incurred and included in selling, general and administrative expenses for the fiscal year ended May 31, 2021.
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and
2021
The following table summarizes the components
of the purchase price at fair values at September 1, 2020:
Cash consideration paid | |
$ | 2,983,264 | |
Estimated earnout and other liabilities | |
| 358,796 | |
Total purchase price | |
$ | 3,342,060 | |
The following table summarizes the allocation
of purchase price at estimated fair values at September 1, 2020:
Cash | |
$ | 241,946 | |
Accounts receivable | |
| 778,930 | |
Prepaid expenses | |
| 5,249 | |
Intangible assets (see Note 11) | |
| 1,800,000 | |
Goodwill | |
| 785,883 | |
Accrued expenses | |
| (269,948 | ) |
Net assets | |
$ | 3,342,060 | |
The following unaudited pro forma financial information presents
the combined operating results of the Company and Geneva as if the acquisition had occurred as of the beginning of the earliest period
presented. Pro forma data is subject to various assumptions and estimates and is presented for informational purposes only. This pro forma
data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction
been completed as described herein, and the data should not be taken as indicative of future operating results.
Unaudited pro forma financial information
assuming the acquisition of Geneva as of June 1, 2020 is presented in the following table (in thousands):
| |
Fiscal Year Ended | |
| |
May 31, | |
| |
2021 | |
Revenue | |
$ | 70,258 | |
Net loss | |
$ | (756 | ) |
Earnings loss per share | |
$ | (0.39 | ) |
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.
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and
2021
Intangible assets are as follows:
| |
May 31, | | |
| | |
May 31, | |
| |
2021 | | |
Amortization | | |
2022 | |
Database (estimated life 5 years) | |
$ | 195,500 | | |
$ | 46,000 | | |
$ | 149,500 | |
Non-compete agreement (estimated life 2 years) | |
| 6,250 | | |
| 5,000 | | |
| 1,250 | |
Trademark (estimated life 3 years) | |
| 45,000 | | |
| 20,000 | | |
| 25,000 | |
Customer relationships (estimated life 15 years) | |
| 1,425,000 | | |
| 100,000 | | |
| 1,325,000 | |
Total | |
$ | 1,671,750 | | |
$ | 171,000 | | |
$ | 1,500,750 | | |
|
No instances of triggering events or
impairment indicators were identified at May 31, 2022 or 2021.
(12) | Related Party Transactions |
On January 5, 2021, the members of the Board
of Directors of the Company 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 then existing rights agreement (which covered a now non-existent class
of Class A preferred stock) so that a distribution date would not occur under such agreement as a result of the acquisition. QAR Industries,
Inc. and Fintech Consulting LLC were both principal stockholders of the Company, each owning more than 5% of the Company’s outstanding
common stock prior to the consummation of the acquisition. Robert Fitzgerald is the President and majority shareholder of QAR Industries,
Inc. The other directors of the Company are not affiliated with QAR Industries, Inc.
On February 3, 2021, the transaction was completed and QAR
Industries, Inc. purchased 348,414 shares of TSR’s 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’s common stock from Fintech Consulting LLC at a price
of $7.25 per share. The foregoing transaction is currently the subject of litigation due to a complaint filed by Fintech Consulting LLC
on December 1, 2021. For more information about the foregoing complaint and litigation, please see Note 15 to the Consolidated Financial
Statements and the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2021.
The Company has provided placement services for an entity
in which a Board of Director of the Company is the CEO. Revenues for such services in fiscal 2022 were approximately $59,000. There were
no amounts outstanding as accounts receivable from this entity as of May 31.2022.
Our certificate of
incorporation, as amended, authorizes the issuance of up to 12,500,000 shares of common stock, $0.01 par value per share.
On October 8, 2021, the Company filed
an automatic shelf registration statement on Form S-3 (File No. 333-260152) (the “2021 TSRI Shelf”) which contains (i) a
base prospectus, which covers the offering, issuance and sale by the Company of up to $5,000,000 in the aggregate of shares of common
stock from time to time in one or more offerings; and (ii) a sales agreement prospectus, which covers the offering, issuance and sale
by the Company of up to $4,167,000 in the aggregate of shares of common stock that may be issued and sold from time to time under an
at-the-market sales agreement (the “2021 ATM”) by and between the Company and A.G.P./Alliance Global Partners, as sales agent
(the “2021 Agent”). The $4,167,000 of common stock that may be offered, issued and sold under the sales agreement prospectus
is included in the $5,000,000 of shares of common stock that may be offered, issued and sold by the Company under the base prospectus.
Upon termination of the sales agreement, any portion of the $4,167,000 included in the sales agreement prospectus that is not sold pursuant
to the sales agreement will be available for sale in other offerings pursuant to the base prospectus and if no shares are sold under
the agreement, the full $4,167,000 of securities may be sold in other offerings pursuant to the base prospectus. Under the 2021 ATM,
we pay the 2021 Agent a commission rate equal to 3.0% of the gross sales price per share of all shares sold through the 2021 Agent
under the sales agreement.
(Continued)
TSR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
May 31, 2022 and
2021
During the fiscal year ended May 31,
2022, we sold an aggregate of 142,500 shares of common stock pursuant to the 2021 ATM for total gross proceeds of $1,965,623
at an average selling price of $13.79 per share, resulting in net proceeds of $1,783,798 after deducting $181,825 in commissions
and other transactions costs.
The 2021 TSRI Shelf is currently our
only active shelf-registration statement. We may offer TSR common stock registered under the 2021 TSRI Shelf from time to time in response
to market conditions or other circumstances if we believe such a plan of financing is in the best interests of our stockholders. We believe
that the 2021 TSRI Shelf provides us with the flexibility to raise additional capital to finance our operations as needed. However, there
is no assurance we will be successful in doing so.
(14) | Stock-based Compensation Expense |
On January 28, 2021, the Company granted
108,333 shares in time vesting restricted stock awards and 69,167 shares in time and performance vesting restricted 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’s 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 of $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.
The market condition for the shares that vest on the two-year anniversary was met in October 2021. During the fiscal years ended May 31,
2022 and 2021, $565,000 and $236,000, respectively, has been record as stock-based compensation expense and included in selling, general
and administrative expenses. As of May 31, 2022, there is approximately $287,000 of unearned compensation expense that will be expensed
through February 2024; 142,666 stock awards expected to vest; 56,666 awards vested to date, of which 14,780 were forfeited to pay taxes
applicable to the stock awards.
On December 1, 2021, Fintech
Consulting LLC filed a complaint against the Company in the United States District Court for the District of New Jersey. The named Defendants
in the complaint are the Company, QAR Industries, Inc., a shareholder of TSR (“QAR”), Robert E. Fitzgerald, a director
and shareholder of TSR and the President, director and a shareholder of QAR (“Fitzgerald”), and Bradley Tirpak, a shareholder
and the chairman of the board of directors of TSR (“Tirpak”). The complaint purports to assert claims against the Defendants
under state law and Section 10(b) of the Exchange Act in connection with a Share Purchase Agreement, dated January 31, 2021, by and
between the Plaintiff, as the seller of shares of TSR's common stock, and QAR and Tirpak, as the purchasers of such shares (the “SPA”).
The plaintiff seeks (i) judgment declaring the transactions represented by the SPA null and avoid and returning the shares; (ii) judgment
cancelling the SPA and returning the shares in exchange for return of the purchase price; (iii) judgement unwinding the transaction; (iv)
compensatory damages; (v) punitive damages; (vi) pre-judgment interest; (vii) costs of suit including attorneys’ fees; and (viii)
such other relief as the Court may find appropriate. See Note 12 to the Consolidated Financial Statements elsewhere in this report and
the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2021 for more information.
The Company believes the action described
above to be without merit and intends to vigorously defend its interests. However, the Company may incur significant additional legal
expenses as it pursues a vigorous defense against this action.
While the Company believes the action
to be without merit, no assurances can be given as to: (i) the outcome of this or other legal proceedings and (ii) the related impact
of an unanticipated adverse outcome of these proceedings on the Company's financial condition, results of operations or near-term liquidity.
TSR, INC. AND SUBSIDIARIES