Company Quick10K Filing
TSR
Price5.50 EPS-1
Shares2 P/E-8
MCap11 P/FCF-9
Net Debt-4 EBIT-2
TEV7 TEV/EBIT-4
TTM 2019-05-31, in MM, except price, ratios
10-Q 2020-02-29 Filed 2020-04-13
10-Q 2019-11-30 Filed 2020-01-13
10-Q 2019-08-31 Filed 2019-10-15
10-K 2019-05-31 Filed 2019-08-29
10-Q 2019-02-28 Filed 2019-04-12
10-Q 2018-11-30 Filed 2019-01-11
10-Q 2018-08-31 Filed 2018-10-12
10-K 2018-05-31 Filed 2018-08-21
10-Q 2018-02-28 Filed 2018-04-12
10-Q 2017-11-30 Filed 2018-01-09
10-Q 2017-08-31 Filed 2017-10-11
10-K 2017-05-31 Filed 2017-08-15
10-Q 2017-02-28 Filed 2017-04-14
10-Q 2016-11-30 Filed 2017-01-10
10-Q 2016-08-31 Filed 2016-10-12
10-K 2016-05-31 Filed 2016-07-28
10-Q 2016-02-29 Filed 2016-04-07
10-Q 2015-11-30 Filed 2016-01-12
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10-K 2015-05-31 Filed 2015-07-30
10-Q 2015-02-28 Filed 2015-04-09
10-Q 2014-11-30 Filed 2015-01-09
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10-Q 2014-02-28 Filed 2014-04-10
10-Q 2013-11-30 Filed 2014-01-10
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10-K 2013-05-31 Filed 2013-08-08
10-Q 2013-02-28 Filed 2013-04-08
10-Q 2012-11-30 Filed 2013-01-09
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10-K 2012-05-31 Filed 2012-08-06
10-Q 2012-02-29 Filed 2012-04-10
10-Q 2011-11-30 Filed 2012-01-10
10-Q 2011-08-31 Filed 2011-10-05
10-K 2011-05-31 Filed 2011-08-04
10-Q 2011-02-28 Filed 2011-04-01
10-Q 2010-11-30 Filed 2011-01-07
10-Q 2010-08-31 Filed 2010-10-08
10-K 2010-05-31 Filed 2010-08-09
10-Q 2010-02-28 Filed 2010-04-08
10-Q 2009-11-30 Filed 2010-01-08
8-K 2020-04-15
8-K 2020-04-01
8-K 2020-03-23
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8-K 2019-12-30
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8-K 2019-10-22
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8-K 2019-08-30
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8-K 2019-08-07
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8-K 2019-06-03
8-K 2019-05-24
8-K 2019-05-06
8-K 2019-04-25
8-K 2018-12-21
8-K 2018-12-04
8-K 2018-11-27
8-K 2018-11-16
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8-K 2018-07-27
8-K 2018-07-24
8-K 2018-07-17
8-K 2018-07-12
8-K 2018-07-09
8-K 2018-06-25

TSRI 10Q Quarterly Report

Part I.Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 4. Exhibits
EX-31.1 f10q0220ex31-1_tsrinc.htm
EX-31.2 f10q0220ex31-2_tsrinc.htm
EX-32.1 f10q0220ex32-1_tsrinc.htm
EX-32.2 f10q0220ex32-2_tsrinc.htm

TSR Earnings 2020-02-29

Balance SheetIncome StatementCash Flow
151296302012201420172020
Assets, Equity
2015117302012201420172020
Rev, G Profit, Net Income
1.40.70.0-0.6-1.3-2.02012201420172020
Ops, Inv, Fin

10-Q 1 f10q0220_tsrinc.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended February 29, 2020

 

Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                    

 

Commission File Number: 0-8656

 

TSR, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware   13-2635899
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification No.)

 

400 Oser Avenue, Hauppauge, NY 11788

 

(Address of principal executive offices)

 

631-231-0333

 

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.01 per share   TSRI   NASDAQ Capital Market
Preferred Share Purchase Rights1   --   --

 

1Registered pursuant to Section 12(b) of the Act pursuant to a Form 8-A filed by the registrant on March 15, 2019. Until the Distribution Date (as defined in the registrant’s Amended and Restated Rights Agreement dated as of September 3, 2019), the Preferred Share Purchase Rights will be transferred with and only with the shares of the registrant’s Common Stock to which the Preferred Share Purchase Rights are attached.

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer ☐ Accelerated Filer ☐
Non-Accelerated Filer ☐ Smaller Reporting Company
Emerging Growth Company ☐  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

As of March 31, 2020, there were 1,962,062 shares of common stock, par value $.01 per share, issued and outstanding.

 

 

 

 

 

 

TSR, INC. AND SUBSIDIARIES

INDEX

 

    Page
    Number
Part I. Financial Information:  
     
Item 1. Financial Statements: 1
     
  Condensed Consolidated Balance Sheets – February 29, 2020 and May 31, 2019 1
     
  Condensed Consolidated Statements of Operations – For the three months and nine months ended February 29, 2020 and February 28, 2019 2
     
  Condensed Consolidated Statements of Equity – For the three months and nine months ended February 29, 2020 and February 28, 2019 3
     
  Condensed Consolidated Statements of Cash Flows – For the nine months ended February 29, 2020 and February 28, 2019 5
     
  Notes to Condensed Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Controls and Procedures 23
     
Part II. Other Information 23
     
Item 1. Legal Proceedings 23
     
Item 1A. Risk Factors 23
     
Item 4. Exhibits 24
     
Signatures 25

 

i

 

 

Part I.Financial Information

 

Item 1. Financial Statements

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   February 29,
2020
   May 31,
2019
 
   (Unaudited)   (see Note 1) 
ASSETS          
Current Assets:          
Cash and cash equivalents  $3,473,282   $3,694,989 
Certificates of deposit and marketable securities   44,416    527,232 
Accounts receivable, net of allowance for doubtful accounts of $181,000   6,817,940    7,443,581 
Other receivables   8,877    5,321 
Prepaid expenses   254,911    118,482 
Prepaid and recoverable income taxes   -    52,385 
Total Current Assets   10,599,426    11,841,990 
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $273,444 and $268,886   13,433    6,502 
Other assets   49,653    49,653 
Right-of-use asset   431,054    - 
Deferred income taxes   1,249,000    636,000 
Total Assets  $12,342,566   $12,534,145 
           
LIABILITIES AND EQUITY          
Current Liabilities:          
Accounts and other payables  $406,333   $574,540 
Accrued expenses and other current liabilities   3,159,667    3,852,568 
Advances from customers   1,229,035    1,190,014 
Revolving line of credit   940,304    - 
Operating lease liability - current   206,380    - 
Total Current Liabilities   5,941,719    5,617,122 
Legal settlement payable   818,000    - 
Operating lease liability, net of current portion   228,192    - 
Total Liabilities   6,987,911    5,617,122 
           
Commitments and contingencies           
Equity:          
TSR, Inc.:          
Preferred stock, $1 par value, authorized 500,000 shares; none issued   -    - 
Class A Preferred Stock, Series One, authorized 30,000 and 0 shares; none issued   -    - 
Common stock, $.01 par value, authorized 12,500,000 shares; issued 3,114,163 shares, 1,962,062 outstanding   31,142    31,142 
Additional paid-in capital   5,102,868    5,102,868 
Retained earnings   13,721,620    15,268,224 
    18,855,630    20,402,234 
Less: Treasury stock, 1,152,101 shares, at cost   13,514,003    13,514,003 
Total TSR, Inc. Equity   5,341,627    6,888,231 
Noncontrolling interest   13,028    28,792 
Total Equity   5,354,655    6,917,023 
Total Liabilities and Equity  $12,342,566   $12,534,145 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 1

 

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For The Three Months and Nine Months Ended February 29, 2020 and February 28, 2019

(UNAUDITED)

 

   Three Months Ended   Nine Months Ended 
   February 29,   February 28,   February 29,   February 28, 
   2020   2019   2020   2019 
Revenue, net  $14,144,569   $14,782,706   $44,325,000   $47,765,983 
                     
Cost of sales   12,124,514    12,651,580    37,579,651    40,280,006 
Selling, general and administrative expenses   3,270,723    3,046,720    8,845,716    8,449,495 
    15,395,237    15,698,300    46,425,367    48,729,501 
Loss from operations   (1,250,668)   (915,594)   (2,100,367)   (963,518)
                     
Other income (expense):                    
Interest income and expense, net   (41,301)   5,096    (33,394)   14,671 
Loss on sale of fixed asset   -    (2,882)   -    (2,882)
Unrealized gain (loss) on marketable securities, net   (2,024)   2,920    9,184    (1,792)
                     
Loss before income taxes   (1,293,993)   (910,460)   (2,124,577)   (953,521)
Benefit from income taxes   (352,000)   (235,000)   (591,000)   (247,000)
                     
Consolidated net loss   (941,993)   (675,460)   (1,533,577)   (706,521)
Less: Net income attributable to noncontrolling interest   3,109    774    13,027    28,659 
                     
Net loss attributable to TSR, Inc.  $(945,102)  $(676,234)  $(1,546,604)  $(735,180)
Basic and diluted net loss per TSR, Inc. common share  $(0.48)  $(0.34)  $(0.79)  $(0.37)
Basic and diluted weighted average number of common shares outstanding   1,962,062    1,962,062    1,962,062    1,962,062 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 2

 

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For The Three Months and Nine Months Ended February 29, 2020 and February 28, 2019

(UNAUDITED)

 

   Shares of
common
stock
   Common
stock
   Additional
paid-in
capital
   Retained
earnings
   Treasury
stock
   TSR, Inc.
equity
   Non-
controlling
interest
   Total
equity
 
Balance at May 31, 2018   3,114,163   $31,142   $5,102,868   $16,604,219   $(13,514,003)  $8,224,226   $44,552   $8,268,778 
                                         
Net income attributable to noncontrolling interest   -    -    -    -    -    -    18,241    18,241 
                                         
Distribution to noncontrolling interest   -    -    -    -    -    -    (43,700)   (43,700)
                                         
Net income attributable to TSR, Inc.   -    -    -    37,795    -    37,795    -    37,795- 
                                         
Balance at August 31, 2018   3,114,163   $31,142   $5,102,868   $16,642,014   $(13,514,003)  $8,262,021   $19,093   $8,281,114 
                                         
Net income attributable to noncontrolling interest   -    -    -    -    -    -    9,644    9,644 
                                         
Distribution to noncontrolling interest   -    -    -    -    -    -    (4,500)   (4,500)
                                         
Net loss attributable to TSR, Inc.   -    -    -    (96,741)   -    (96,741)   -    (96,741)
                                         
Balance at November 30, 2018   3,114,163   $31,142   $5,102,868   $16,545,273   $(13,514,003)  $8,165,280   $24,237   $8,189,517 
                                         
Net income attributable to noncontrolling interest   -    -    -    -    -    -    774    774 
                                         
Distribution to noncontrolling interest   -    -    -    -    -    -    (4,500)   (4,500)
                                         
Net loss attributable to TSR, Inc.   -    -    -    (676,234)   -    (676,234)   -    (676,234)
                                         
Balance at February 28, 2019   3,114,163   $31,142   $5,102,868   $15,869,039   $(13,514,003)  $7,489,046   $20,511   $7,509,557 

 

Page 3

 

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For The Three Months and Nine Months Ended February 29, 2020 and February 28, 2019 (continued)

(UNAUDITED)

 

   Shares of
common
stock
   Common
stock
   Additional
paid-in
capital
   Retained
earnings
   Treasury
stock
   TSR, Inc.
equity
   Non-
controlling
interest
   Total
equity
 
Balance at May 31, 2019   3,114,163   $31,142   $5,102,868   $15,268,224   $(13,514,003)  $6,888,231   $28,792   $6,917,023 
                                         
Net income attributable to noncontrolling interest   -    -    -    -    -    -    3,672    3,672 
                                         
Net loss attributable to TSR, Inc.   -    -    -    (663,014)   -    (663,014)   -    (663,014)
                                        
Balance at August 31, 2019   3,114,163   $31,142   $5,102,868   $14,605,210   $(13,514,003)  $6,225,217   $32,464   $6,257,681 
                                         
Net income attributable to noncontrolling interest   -    -    -    -    -    -    6,246    6,246 
                                         
Distribution to noncontrolling interest   -    -    -    -    -    -    (11,000)   (11,000)
                                         
Net income attributable to TSR, Inc.   -    -    -    61,512    -    61,512    -    61,512 
                                         
Balance at November 30, 2019   3,114,163   $31,142   $5,102,868   $14,666,722   $(13,514,003)  $6,286,729   $27,710   $6,314,439 
                                         
Net income attributable to noncontrolling interest   -    -    -    -    -    -    3,109    3,109 
                                         
Distribution to noncontrolling interest   -    -    -    -    -    -    (17,791)   (17,791)
                                         
Net loss attributable to TSR, Inc.   -    -    -    (945,102)   -    (945,102)   -    (945,102)
                                         
Balance at February 29, 2020   3,114,163   $31,142   $5,102,868   $13,721,620   $(13,514,003)  $5,341,627   $13,028   $5,354,655 

 

Note- The Company has issued 3,114,163 of common stock and has acquired 1,152,101 treasury shares, resulting in 1,962,062 shares outstanding at February 29, 2020.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 4

 

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Nine Months Ended February 29, 2020 and February 28, 2019

(UNAUDITED)

 

   Nine Months Ended 
   February 29,   February 28, 
   2020   2019 
Cash flows from operating activities:        
Consolidated net loss  $(1,533,577)  $(706,521)
Adjustments to reconcile consolidated net loss to net cash used in operating activities:          
Depreciation and amortization   4,558    9,288 
Unrealized (gain) loss on marketable securities, net   (9,184)   1,792 
Loss on sale of fixed asset   -    2,882 
Deferred income taxes   (613,000)   (260,000)
Non-cash lease expense   3,518    - 
           
Changes in operating assets and liabilities:          
Accounts receivable   625,641    275,390 
Other receivables   (3,556)   (2,334)
Prepaid expenses   (136,429)   (67,974)
Prepaid and recoverable income taxes   52,385    (19,605)
Accounts and other payables and accrued expenses and other current liabilities   (861,108)   (415,629)
Advances from customers   39,021    16,373 
Legal settlement payable   818,000    - 
Net used in operating activities   (1,613,731)   (1,166,338)
           
Cash flows from investing activities:          
Proceeds from maturities of marketable securities   492,000    740,000 
Purchases of marketable securities   -    (739,000)
Proceeds from sale of fixed asset   -    10,000 
Purchases of equipment and leasehold improvements   (11,489)   (3,244)
Net cash provided by investing activities   480,511    7,756 
           
Cash flows from financing activities:          
Net drawings on line of credit   940,304    - 
Distribution to noncontrolling interest   (28,791)   (52,700)
           
Net cash provided by (used in) financing activities   911,513    (52,700)
           
Net decrease in cash and cash equivalents   (221,707)   (1,211,282)
Cash and cash equivalents at beginning of period   3,694,989    5,323,437 
Cash and cash equivalents at end of period  $3,473,282   $4,112,155 
           
Supplemental disclosures of cash flow data:          
Income taxes paid  $18,000   $37,000 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

Page 5

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

1.Basis of Presentation

 

The accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries (the “Company”). All significant inter-company balances and transactions have been eliminated in consolidation. The condensed balance sheet as of May 31, 2019, which has been derived from audited financial statements, and the unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applying to interim financial information and with the instructions to Form 10-Q of Regulation S-X of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States of America and normally included in the Company’s annual financial statements have been condensed or omitted. These condensed consolidated interim financial statements as of and for the three months and nine months ended February 29, 2020 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending May 31, 2020. These condensed consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2019.

 

2.Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing net loss available to common stockholders of TSR, Inc. by the weighted average number of common shares outstanding. The Company had no stock options or other common stock equivalents outstanding during any of the periods presented.

 

3.Cash and Cash Equivalents

 

The Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents were comprised of the following as of February 29, 2020 and May 31, 2019:

 

   February 29,
2020
   May 31,
2019
 
Cash in banks  $3,171,564   $3,072,218 
Money market funds   301,718    622,771 
   $3,473,282   $3,694,989 

 

4.Revenue Recognition

 

Effective June 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. This update outlined a comprehensive new revenue recognition model designed to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional quantitative and qualitative disclosures. The adoption allows companies to apply the new revenue standard to reporting periods beginning in the year the standard is first implemented, while prior periods continue to be reported in accordance with previous accounting guidance. Since the adoption of Accounting Standards Codification (“ASC”) 606 did not have a significant impact on the recognition of revenue, the Company did not have an opening retained earnings adjustment.

 

Page 6

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-08, Principal versus Agent Consideration (Topic 606). This update contains guidance on principal versus agent assessments when a third party is involved in providing goods or services to a customer. It specifies that an entity is a principal, and thus records revenue on a gross basis, if it controls a good or service before transferring the good or service to the customer. An entity is an agent, and thus records revenue on a net basis, if it arranges for a good or service to be provided by another entity. The Company adopted this ASU on June 1, 2018 as part of the adoption of ASC 606 and it did not have a significant impact.

 

In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients (Topic 606). This update provides certain clarifications to reduce potential diversity and to simplify the standard. The amendments in ASU 2016-12 clarify the following key areas: assessing collectibility; presenting sales taxes and other similar taxes collected from customers; noncash consideration; contract modifications at transition; completed contracts at transition; and disclosing the accounting change in the period of adoption. The Company adopted this ASU on June 1, 2018 as part of the adoption of ASC 606 and it did not have a significant impact.

 

Revenues are recognized as control of the promised service is transferred to customers, in an amount that reflects the consideration expected in exchange for the services. Revenues from contract assignments are recognized over time, based on hours worked by the Company’s contract professionals. The performance of the requested service over time is the single performance obligation for assignment revenues. Certain customers may receive discounts (e.g., volume discounts, rebates, prompt-pay discounts) and adjustments to the amounts billed. These discounts, rebates and adjustments are considered variable consideration. Volume discounts are the largest component of variable consideration and are estimated using the most likely amount method prescribed by ASC 606, contracts terms and estimates of revenue. Revenues are recognized net of variable consideration to the extent that it is probable that a significant reversal of revenues will not occur in subsequent periods. Payment terms vary and the time between invoicing and when payment is due is not significant. There are no financing components to the Company’s arrangements. There are no incremental costs to obtain contracts and costs to fulfill contracts are expensed as incurred. The Company’s operations are primarily located in the United States.

 

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, 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.

 

5.Certificates of Deposit and Marketable Securities

 

The Company has characterized its investments in certificates of deposit and marketable securities, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

Investments recorded in the accompanying condensed consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:

 

Level 1- These are investments where values are based on unadjusted quoted prices for identical assets in an active market the Company has the ability to access.

 

Level 2- These are investments where values are based on quoted market prices that are not active or model derived valuations in which all significant inputs are observable in active markets.

 

Level 3- These are investments where values are derived from techniques in which one or more significant inputs are unobservable.

 

Page 7

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

The following are the major categories of assets measured at fair value on a recurring basis as of February 29, 2020 and May 31, 2019 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable inputs (Level 3):

 

February 29, 2020  Level 1   Level 2   Level 3   Total 
Equity Securities  $44,416   $    -   $-   $44,416 
   $44,416   $-   $    -   $44,416 

 

May 31, 2019  Level 1   Level 2   Level 3   Total 
Certificates of Deposit  $-   $492,000   $-   $492,000 
Equity Securities   35,232    -    -    35,232 
   $35,232   $492,000   $    -   $527,232 

 

Based upon the Company’s intent and ability to hold its certificates of deposit to maturity (which maturities range up to twelve months at purchase), such securities have been classified as held-to-maturity and are carried at amortized cost, which approximates market value. The Company’s equity securities are classified as trading securities, which are carried at fair value, as determined by quoted market prices, which is a Level 1 input, as established by the fair value hierarchy. The related unrealized gains and losses are included in earnings. The Company’s certificates of deposit and marketable securities at February 29, 2020 and May 31, 2019 are summarized as follows:

 

February 29, 2020  Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
   Recorded
Value
 
Current                
Equity Securities  $16,866   $27,550   $       -   $44,416 
   $16,866   $27,550   $-   $44,416 

 

May 31, 2019  Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
   Recorded
Value
 
Current                
Certificates of Deposit  $492,000   $-   $       -   $492,000 
Equity Securities   16,866    18,366    -    35,232 
   $508,866   $18,366   $-   $527,232 

 

The Company’s investments in marketable securities consist primarily of investments in certificates of deposit and equity securities. Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market values.

 

Page 8

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

6.Fair Value of Financial Instruments

 

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. For cash and cash equivalents, accounts receivable, accounts and other payables, accrued liabilities, revolving line of credit and advances from customers, the amounts presented in the condensed consolidated financial statements approximate fair value because of the short-term maturities of these instruments.

 

7.Equity

 

Common Stock Transactions

 

On July 24, 2018, the Company became aware that Joseph F. Hughes and Winifred Hughes filed Amendments to Schedule 13D (the “Schedules 13D”) with the United States Securities and Exchange Commission (the “SEC”) on that date, in which Joseph F. Hughes and Winifred Hughes disclosed that they had collectively sold 819,491 shares of the Company’s Common Stock jointly held by them in a privately-negotiated transaction to Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC. The Schedules 13D stated that the sale closed on July 23, 2018. Joseph F. Hughes was the former Chairman and Chief Executive Officer of the Company. Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC acquired, in the aggregate, 41.8% of the Company’s issued and outstanding Common Stock from Joseph F. Hughes and Winifred Hughes in this transaction. Amendments to Schedule 13D previously filed by Joseph F. Hughes and Winifred Hughes on July 17, 2018 attached an exhibit wherein it was stated that prior to the transaction described above, Zeff Capital, L.P. owned 77,615 shares or approximately 4% of the Company’s issued and outstanding Common Stock.

 

The Company became aware on July 30, 2018 that Fintech Consulting LLC and Tajuddin Haslani filed a Schedule 13D with the SEC disclosing beneficial ownership of 376,100 shares of Common Stock, which represents approximately 19.2% of the Company’s issued and outstanding Common Stock.

 

The Company became aware on August 23, 2018 that Zeff Capital, L.P., Zeff Holding Company, LLC and Daniel Zeff filed an Amendment to Schedule 13D with the SEC disclosing the additional purchase by Zeff Capital, L.P. of an aggregate of 55,680 shares of Common Stock. As a result of these additional purchases of Common Stock, Zeff Capital, L.P., Zeff Holding Company, LLC and Daniel Zeff beneficially own a total of 437,774 shares of Common Stock, which represents approximately 22.3% of the Company’s issued and outstanding Common Stock.

 

The Company became aware on August 28, 2018 that QAR Industries, Inc. and Robert Fitzgerald filed an Amendment to Schedule 13D with the SEC disclosing the additional purchase by QAR Industries, Inc. of an aggregate of 4,070 shares of Common Stock. As a result of these additional purchases of Common Stock, QAR Industries, Inc. and Robert Fitzgerald beneficially own a total of 143,900 shares of Common Stock, which represents approximately 7.3% of the Company’s issued and outstanding Common Stock. The Company became aware on September 10, 2019 that QAR Industries, Inc. and Robert Fitzgerald filed an Amendment to Schedule 13D with the SEC disclosing beneficial ownership of an aggregate of 139,200 shares of Common Stock, which represents approximately 7.1% of the Company’s issued and outstanding Common Stock.

 

As a result of the transactions described above, Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC are the beneficial owners of an aggregate of 953,074 shares of Common Stock, which represents approximately 48.6% of the Company’s issued and outstanding Common Stock.

 

Page 9

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

Rights Plan / Preferred Stock

 

On August 29, 2018, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a “Right”) for each share of Common Stock, par value $0.01 per share (“Common Stock”), of the Company outstanding on August 29, 2018 (the “Record Date”) to the stockholders of record on that date. In connection with the distribution of the Rights, the Company entered into a Rights Agreement (the “Rights Agreement”), dated as of August 29, 2018, between the Company and Continental Stock Transfer & Trust Company, as Rights Agent. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Class A Preferred Stock, Series One, par value $0.01 per share (“Preferred Stock”), of the Company at a price of $24.78 per one one-hundredth of a share of Preferred Stock represented by a Right (the “Purchase Price”), subject to adjustment.

 

On August 30, 2019, the Company entered into a settlement and release agreement (the “Settlement Agreement”) with Zeff Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert Fitzgerald, Fintech Consulting LLC and Tajuddin Haslani (collectively, the “Investor Parties”), pursuant to which the Company agreed to, among other things, amend and restate the Rights Agreement to provide that a “Distribution Date” (as defined below) shall not occur as a result of any request by any of the Investor Parties calling for a special meeting pursuant to Article II, Section 5 of the Amended and Restated By-Laws of the Company in accordance with the terms of the Settlement Agreement. (See Note 8, “Other Matters.”)

 

Distribution Date; Exercisability; Expiration

 

Initially, the Rights will be attached to all certificates for shares of Common Stock and no separate certificates evidencing the Rights (“Rights Certificates”) will be issued. Until the Distribution Date, the Rights will be transferred with and only with shares of Common Stock. As long as the Rights are attached to the shares of Common Stock, the Company will issue one Right with each new share of Common Stock so that all such shares of Common Stock will have Rights attached.

 

The Rights will separate and begin trading separately from the Common Stock, and Rights Certificates will be issued to evidence the Rights, on the earlier to occur of (a) the Close of Business (as such term is defined in the Rights Agreement) on the tenth day following a public announcement, or the public disclosure of facts indicating, that a Person (as such term is defined in the Rights Agreement), group of affiliated or associated Persons or any other Person with whom such Person is Acting in Concert (as defined below) has acquired Beneficial Ownership (as defined below) of 5% or more of the outstanding Common Stock (an “Acquiring Person”) (or, in the event an exchange is effected in accordance with Section 27 of the Rights Agreement and the Board of Directors determines that a later date is advisable, then such later date) or (b) the Close of Business on the tenth Business Day (as such term is defined in the Rights Agreement) (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) following the commencement of a tender offer or exchange offer the consummation of which would result in the Beneficial Ownership by a Person or group of 5% or more of the outstanding Common Stock (the earlier of such dates, the “Distribution Date”). As soon as practicable after the Distribution Date, unless the Rights are recorded in book-entry or other uncertificated form, the Company will prepare and cause the Right Certificates to be sent to each record holder of Common Stock as of the Close of Business on the Distribution Date.

 

An “Acquiring Person” will not include (i) the Company, (ii) any Subsidiary (as such term is defined in the Rights Agreement) of the Company, (iii) any employee benefit plan or employee stock plan of the Company or any Subsidiary of the Company, or any trust or other entity organized, appointed, established or holding Common Stock for or pursuant to the terms of any such plan, or (iv) any Person who or which, at the time of the first public announcement of the Rights Agreement, is a Beneficial Owner of 5% or more of the Common Shares then outstanding (a “Grandfathered Stockholder”). However, if a Grandfathered Stockholder becomes, after such time, the Beneficial Owner of any additional shares of Common Stock (regardless of whether, thereafter or as a result thereof, there is an increase, decrease or no change in the percentage of shares of Common Stock then outstanding beneficially owned by such Grandfathered Stockholder) then such Grandfathered Stockholder shall be deemed to be an Acquiring Person unless, upon such acquisition of Beneficial Ownership of additional shares of Common Stock, such Person is not the Beneficial Owner of 5% or more of the Common Stock then outstanding. In addition, upon the first decrease of a Grandfathered Stockholder’s Beneficial Ownership below 5%, such Grandfathered Stockholder will cease to be a Grandfathered Stockholder. In the event that after the time of the first public announcement of the Rights Agreement, any agreement, arrangement or understanding pursuant to which any Grandfathered Stockholder is deemed to be the Beneficial Owner of Common Stock expires, terminates or no longer confers any benefit to or imposes any obligation on the Grandfathered Stockholder, any direct or indirect replacement, extension or substitution of such agreement, arrangement or understanding with respect to the same or different shares of Common Stock that confers Beneficial Ownership of Common Stock shall be considered the acquisition of Beneficial Ownership of additional shares of Common Stock by the Grandfathered Stockholder and render such Grandfathered Stockholder an Acquiring Person for purposes of the Rights Agreement unless, upon such acquisition of Beneficial Ownership of additional shares of Common Stock, such Person is not the Beneficial Owner of 5% or more of the Common Stock then outstanding.

 

Page 10

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

The Rights are not exercisable until the Distribution Date. The Rights will expire on the Close of Business on August 29, 2021 (the “Expiration Date”).

 

Redemption

 

At any time prior to the Close of Business on the earlier of (a) the tenth day following the Stock Acquisition Date or (b) the Expiration Date, the Board of Directors may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the “Redemption Price”). The “Stock Acquisition Date” is the first date on which there is a public announcement by the Company or an Acquiring Person that an Acquiring Person has become such, or such earlier date as a majority of the Board of Directors becomes aware of the existence of an Acquiring Person. The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish. Immediately upon the action of the Board of Directors ordering the redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.

 

Preferred Stock Rights

 

The Preferred Stock will not be redeemable. Each share of Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors, (a) cash dividends in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all cash dividends declared or paid on the Common Stock and (b) a preferential quarterly cash dividend (the “Preferential Dividends”) in an amount equal to $50.00 per share of Preferred Stock less the per share amount of all cash dividends declared on the Preferred Stock pursuant to clause (a) of this sentence. Each share of Preferred Stock will entitle the holder thereof to 100 votes per share, voting together with the holders of the Common Stock as a single class, except as otherwise provided in the Certificate of Designations of Class A Preferred Stock Series One filed by the Company with the Delaware Secretary of State or the Company’s Amended and Restated Certificate of Incorporation, as amended, or Amended and Restated By-laws. In the event of any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each outstanding share of Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged, multiplied by 100. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, (a) no distribution shall be made to the holders of shares of stock ranking junior to the Preferred Stock unless the holders of the Preferred Stock shall have received the greater of (i) $100 per share of Preferred Stock plus an amount equal to accrued and unpaid dividends and distributions thereon or (ii) an amount equal to 100 times the aggregate amount to be distributed per share to holders of the Common Stock, and (b) no distribution shall be made to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Preferred Stock unless simultaneously therewith distributions are made ratably on the holders of the Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Preferred Stock are entitled under clause (a)(i) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquidation, dissolution or winding up.

 

The foregoing rights are protected by customary anti-dilution provisions.

 

Page 11

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

The foregoing description of the rights of the Preferred Stock does not purport to be complete and is qualified in its entirety by reference to the Certificate of Designations of Class A Preferred Stock Series One.

 

Rights of Holders

 

Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.

 

Amended and Restated Rights Agreement

 

Pursuant to the Settlement Agreement, the Company amended and restated the Rights Agreement on September 3, 2019 to confirm that a Distribution Date (as defined in the Amended and Restated Rights Agreement) shall not occur as a result of any request by any of the Investor Parties for a special meeting of the Company’s stockholders.

 

8.Other Matters

 

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.

 

On October 16, 2018, the Company was served with a complaint filed on October 11, 2018 in the Supreme Court of the State of New York, Queens County, by Susan Paskowitz, a stockholder of the Company, against the Company; Joseph F. Hughes and Winifred M. Hughes; former directors Christopher Hughes, Raymond A. Roel, Brian J. Mangan, Regina Dowd, James J. Hill, William Kelly, and Eric Stein; as well as stockholders Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC (the “Stockholder Litigation”). The complaint purports to be a class action lawsuit asserting claims on behalf of all minority stockholders of the Company. Ms. Paskowitz alleges the following: the sale by Joseph F. Hughes and Winifred M. Hughes of an aggregate of 819,491 shares of the Company’s common stock (“controlling interest”) to Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC was in breach of Joseph F. Hughes’ and Winifred M. Hughes’ fiduciary duties and to the detriment of the Company’s minority stockholders; the members of the Board of Directors of the Company named in the complaint breached their fiduciary duties by failing to immediately adopt a rights plan that would have prevented Joseph F. Hughes and Winifred M. Hughes from selling their shares and preserved a higher premium for all stockholders; Zeff, QAR, and Fintech are “partners” and constitute a “group.” Ms. Paskowitz also asserts that Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC aided and abetted Joseph F. Hughes’ and Winifred M. Hughes’ conduct, and ultimately sought to buy out the remaining shares of the Company at an unfair price. The complaint requests declarations from the court that: (1) Joseph F. Hughes’ and Winifred M. Hughes’ sale of their controlling interest to Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC was in breach of their fiduciary duties, and that those shares may not be voted or sold back to the Company pending further court order, (2) the 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, and (3) Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC must make a number of disclosures regarding their plans for the Company, their relationships with one another, and any agreements with Joseph F. Hughes and Winifred M. Hughes. The complaint has not assigned any monetary values to alleged damages, but it seeks: (1) for Joseph F. Hughes and Winifred M. Hughes, and Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC, to disgorge any benefit they received from the sale of the Hughes’ controlling interest, (2) for the Board of Directors to pay damages equal to the reduced value of the class members’ shares as auctionable assets, and (3) reasonable attorneys’ fees and costs. Although the Company is named as a defendant, there are no claims or damage allegations against the Company, and the complaint states that it names the Company solely to effectuate equitable relief if granted.

 

On May 6, 2019, a stipulation of dismissal was filed in the Stockholder Litigation with respect to defendants Joseph F. Hughes, Winifred M. Hughes, and Regina Dowd, in which the plaintiff and these defendants agreed to the dismissal of all claims asserted by and against them, without prejudice. On July 26, 2019, the Company filed cross-claims against Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC relating to alleged breaches of fiduciary duties and for indemnification and contribution filed.

 

Page 12

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

On June 14, 2019, Ms. Paskowitz filed an amended complaint in the Stockholder Litigation in the Supreme Court of the State of New York, Queens County against the members of the Board of Directors and Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC, which asserts substantially similar allegations to those contained in the October 11, 2018 complaint. In addition to the members of the Board of Directors named in the original complaint, the amended complaint names current and former directors Ira Cohen, Joseph Pennacchio, and William Kelly as defendants. The amended complaint also asserts a derivative claim purportedly on behalf of the Company against the named members of the Board of Directors. The amended complaint seeks declaratory judgment and unspecified monetary damages. The complaint requests: (1) a declaration from the court that the 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 Directors’ alleged breaches of fiduciary duties; (3) damages and equitable relief derivatively on behalf of the Company for the Directors’ alleged failure to adopt proper corporate governance practices; and (4) damages and injunctive relief against Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC based on their knowing dissemination of false or misleading public statements concerning their status as a group. The complaint has not assigned any monetary values to alleged damages.

 

On July 15, 2019, the Company filed an answer to the amended complaint in the Stockholder Litigation and cross-claims against Zeff Capital, L.P., QAR Industries, Inc. and Fintech Consulting LLC for breaches of their fiduciary duties, aiding and abetting breaches of fiduciary duties, and indemnification and contribution based on their misappropriation of material nonpublic information and their failure to disclose complete and accurate information in SEC filings concerning their group actions to attempt a creeping takeover of the Company.

 

In addition, on December 21, 2018, the Company filed a complaint in the United States District Court, Southern District of New York, against Zeff Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert Fitzgerald, Fintech Consulting LLC, and Tajuddin Haslani for violations of the disclosure and anti-fraud requirements of the federal securities laws under Sections 13(d) and 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and the related rules and regulations promulgated by the SEC, for failing to disclose to the Company and its stockholders their formation of a group and the group’s intention to seize control of the Company. The complaint requests that the court, among other things, declare that the defendants have solicited proxies without filing timely, accurate and complete reports on Schedule 13D and Schedule 14A in violation of Sections 13(d) and 14(a) of the Exchange Act, direct the defendants to file with the SEC complete and accurate disclosures, enjoin the defendants from voting any of their shares prior to such time as complete and accurate disclosures have been filed, and enjoin the defendants from further violations of the Exchange Act with respect to the securities of the Company. The Company has filed motions for preliminary injunction and expedited discovery. The court held an initial pretrial conference on April 23, 2019 during which it ordered the parties to participate in a mediation of the claims raised in the action. The parties subsequently participated in mediation sessions through the Court-annexed Mediation Program; however, no resolution was reached as a result of the mediation.

 

On January 7, 2019, Ms. Paskowitz filed a related action against Zeff Capital, L.P., Zeff Holding Company, LLC, Daniel Zeff, QAR Industries, Inc., Robert Fitzgerald, Fintech Consulting LLC, and Tajuddin Haslani in the Southern District of New York, which asserts claims against them for breach of fiduciary duty and under federal securities laws similar to those asserted in the Company’s action. Although the Company is not a party to Ms. Paskowitz’s action, the court has determined to treat the Company’s and Ms. Paskowitz’s respective actions as related.

 

On August 7, 2019, following the Company’s initial rescheduling of the 2018 Annual Meeting for September 13, 2019 and the filing of Preliminary Proxy Statements by the Company and Zeff Capital, L.P., Zeff Capital, L.P. filed a complaint in the Delaware Court of Chancery against the Company seeking an order requiring the Company to hold its next annual meeting of stockholders on or around September 13, 2019, and obligating the Company to elect Class I and Class III directors at that annual meeting. 

 

Page 13

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

On August 30, 2019, the Company entered into the Settlement Agreement with the Investor Parties with respect to the proxy contest pertaining to the election of directors at the 2018 Annual Meeting, which was held on October 22, 2019. Pursuant to the Settlement Agreement, the parties have agreed to forever settle and resolve any and all disputes between the parties, including without limitation disputes arising out of or relating to the following litigations:

 

(i) The complaint relating to alleged breaches of fiduciary duties filed on November 1, 2018 by Fintech Consulting LLC against the Company in the Delaware Court of Chancery, which was previously dismissed voluntarily;

 

(ii) The complaint for declaratory and injunctive relief for violations of the federal securities laws filed on December 21, 2018 by the Company against the Investor Parties in the United States District Court in the Southern District of New York;

 

(iii) Cross-claims relating to alleged breaches of fiduciary duties and for indemnification and contribution filed on July 26, 2019 by the Company against the Investor Parties in New York Supreme Court, Queens County; and

 

(iv) The complaint to compel annual meeting of stockholders filed on August 7, 2019 by Zeff Capital, L.P. against the Company in the Delaware Court of Chancery.

 

No party admitted any liability by entering into the Settlement Agreement. The Settlement Agreement did not resolve the Stockholder Litigation filed by Susan Paskowitz against the Company, Joseph F. Hughes, Winifred M. Hughes and certain current and 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.

 

Page 14

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

In addition, the Settlement Agreement provides for mutual releases between the Company and each of the Investor Parties and certain of their affiliates. Each of the Investor Parties and certain of their affiliates also agreed to certain customary standstill provisions, including without limitation, with regard to certain actions in connection with the 2018 Annual Meeting, Extraordinary Transactions (as defined in the Settlement Agreement) with the Company, and the acquisition of any securities (or beneficial ownership thereof) of the Company, each of which expired on December 30, 2019.

 

The foregoing is not a complete description of the terms of the Settlement Agreement and the Share Repurchase Agreement. For a further description of the terms of the Settlement Agreement and the Share Repurchase Agreement, including copies of the Settlement Agreement and Share Repurchase Agreement, please see the Company’s Current Report on Form 8-K filed by the Company with the SEC on September 3, 2019.

 

During the quarter ending February 29, 2020, the Company negotiated a settlement with the Company’s largest shareholder to reimburse it for legal expenses of $900,000 (net present value of $818,000), subject to final documentation. (See Note 13)

 

On October 21, 2019, the Company entered into a Memorandum of Understanding (the “MOU”) with Susan Paskowitz providing for the settlement of the Stockholder Litigation filed by Ms. Paskowitz on October 11, 2018. The MOU provides for the settlement of the claims by Ms. Paskowitz that (1) the members of the Board named in the original complaint allegedly breached their fiduciary duties by failing to immediately adopt a rights plan that would have prevented the sale by Joseph F. Hughes and Winifred M. Hughes of an aggregate of 819,491 shares of the Company’s common stock to the Investor Parties; (2) the members of the Board named in the amended complaint allegedly breached their fiduciary duties and failed to adopt proper corporate governance practices; and (3) the Investor Parties acted as “partners” and constituted a “group” in their purchase of shares from Joseph F. Hughes and Winifred M. Hughes and knowingly disseminated false or misleading public statements concerning their status as a group.

 

Pursuant to the terms of the MOU, the Company will (1) implement certain corporate governance reforms described in the MOU within 30 days of a final order and judgment entered by the court, and keep these corporate governance reforms in place for 5 years from the time of the final order and judgment; and (2) acknowledge that the plaintiff, Ms. Paskowitz, and her counsel provided a substantial benefit to the Company and its stockholders through the prosecution of the Stockholder Litigation and other related actions filed by Ms. Paskowitz described above.

 

On December 16, 2019, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) with Susan Paskowitz in the Stockholder Litigation. The Stipulation retains the terms and conditions of settlement of the Stockholder Litigation contained in the MOU described in the preceding paragraph, with the addition that the Company will pay to plaintiff’s counsel an award of attorneys’ fees and reimbursement of expenses in the amount of $260,000 (collectively, the “Stockholder Litigation Settlement”). The Stockholder Litigation Settlement is intended to fully, finally, and forever compromise, settle, release, resolve, and dismiss with prejudice the Stockholder Litigation and all claims asserted therein directly against all present and former defendants and derivatively against them on behalf of the Company. The Stockholder Litigation Settlement does not contain any admission of liability, wrongdoing or responsibility by any of the parties, and provides for mutual releases by all parties. Each stockholder of the Company is a member of the plaintiff class unless such stockholder opts out of the class. The Company expects that the full amount of the $260,000 settlement payment will be covered by insurance proceeds. The Stipulation remains subject to approval by the court. The Stipulation is independent of the Settlement Agreement and Share Repurchase Agreement that the Company had entered into with the Investor Parties.

 

Although the Company believes that the Stipulation represents a fair and reasonable compromise of the matters in dispute in the Stockholder Litigation, there can be no assurance that the court will approve the Stipulation as proposed, or at all. Under the terms of the Stipulation, plaintiff Ms. Paskowitz has filed the Stipulation with the court and has requested a date for a final hearing on the approval of the Settlement and plaintiff’s application for an award of counsel fees and the reimbursement of expenses. The Stipulation is filed as an exhibit to the Company’s Current Report on Form 8-K filed by the Company with the SEC on December 17, 2019.

 

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TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

Inasmuch as the Company did not complete the Repurchase and make the Settlement Payment prior to the December 30, 2019 deadline, the members of the Board of Directors (other than the two directors who were elected as directors at the 2018 Annual Meeting) resigned from the Board effective at 5:00 p.m. Eastern Time on December 30, 2019. Immediately thereafter, the two remaining directors, Bradley M. Tirpak and H. Timothy Eriksen, appointed Robert Fitzgerald as a new director. Each of Mr. Tirpak, Mr. Eriksen and Mr. Fitzgerald qualifies as an “independent director” under the NASDAQ Stock Market Rules. These three individuals were also appointed to the Audit Committee, Nominating Committee, Compensation Committee and Special Committee. The Board appointed Mr. Tirpak as Chairman of the Board to succeed Christopher Hughes. Mr. Hughes continued to serve as the Chief Executive Officer, President and Treasurer of the Company until January 17, 2020. Additionally, the Board appointed Mr. Eriksen as Lead Independent Director, Chairman of the Audit Committee and Chairman of the Nominating Committee. The Board also appointed Mr. Fitzgerald as the Chairman of the Compensation Committee and Chairman of the Special Committee.

 

9.Recently Adopted Accounting Pronouncements

 

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 FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an optional transition method for the adoption of Topic 842. The two permitted transition methods are now the modified retrospective approach, which applies the new lease requirements at the beginning of the earliest period presented, and the optional transition method, which applies the new lease requirements through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2016-02 is effective for our fiscal year ending May 31, 2020 and the interim periods within that year. The Company adopted this standard in the first quarter of fiscal 2020 using the optional transition method. The Company also intends to elect the practical expedients that allow us to carry forward the historical lease classification. The Company has established an inventory of existing leases and implemented a new process of evaluating the classification of each lease. The financial impact of the adoption of the new standard at June 1, 2019 increased total assets and total liabilities by approximately $690,000. The financial impact of the adoption primarily relates to the capitalization of right-of-use assets and recognition of lease liabilities related to operating leases. The Company will implement changes to its processes and internal controls, as necessary, to meet the reporting and disclosure requirements of the new standard.

 

10.Leases

 

The Company leases the space for its three offices. Under ASC 842, at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or finance lease. Operating leases are in right-of-use assets and operating lease liabilities in our consolidated condensed balance sheets.

 

The Company’s leases for its three offices are classified as operating leases.

 

The lease agreements expire on December 31, 2020, February 28, 2021 and August 31, 2022, respectively, and do not include any renewal options.

 

In addition to the monthly base amounts in the lease agreements, the Company is required to pay real estate taxes and operating expenses during the lease terms.

 

For the three months and nine months ended February 29, 2020, the Company’s operating lease expense for these leases was $98,000 and $294,000, respectively.

 

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TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

Future minimum lease payments under non-cancellable operating leases as of February 29, 2020 were as follows:

(note: payments related to the lease expiring February 28, 2021 are not included below because it is a one year lease)

 

Twelve Months Ended February 28,    
2021  $229,867 
2022   160,120 
2023   80,990 
Total undiscounted operating lease payments   470,977 
Less imputed interest   36,405 
Present value of operating lease payments  $434,572 

 

The following table sets forth the right-of-use assets and operating lease liabilities as of February 29, 2020:

 

Assets    
Right-of-use assets  $431,054 
Liabilities     
Current operating lease liabilities  $206,380 
Long-term operating lease liabilities   228,192 
Total operating lease liabilities  $434,572 

 

The weighted average remaining lease term for the Company’s operating leases is 1.8 years.

 

11.Line of Credit

 

On November 27, 2019, TSR, Inc. (“TSR”) closed on a revolving credit facility (the “Credit Facility”) pursuant to a Loan and Security Agreement with Access Capital, Inc. (the “Lender”) that may provide 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 also expected to utilize the Credit Facility to complete the Repurchase and make the Settlement Payment; however, TSR did not complete the Repurchase and make the Settlement Payment prior to the December 30, 2019 deadline.

 

Inasmuch as TSR did not complete the Repurchase and make the Settlement Payment prior to the December 30, 2019 deadline, the maximum amount that may 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 February 29, 2020 was 4.75%, indicating a rate of 6.5% on the line of credit. The initial term of the Credit Facility is 5 years, which shall automatically renew for successive 5-year periods unless either TSR or the Lender gives written notice to the other of termination at least 60 days prior to the expiration date of the then-current term.

 

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TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

TSR is obliged to satisfy certain financial covenants and minimum borrowing requirements under the Credit Facility, and to pay certain fees, including prepayment fees, and provide certain financial information to the Lender. There were no financial covenants applicable for the period ended February 29, 2020.

 

As of February 29, 2020, the net borrowings outstanding against this line of credit facility were $904,304. The amount the Company has borrowed fluctuates and, at times, has utilized the maximum amount of $2,000,000 available under the facility to fund its payroll and other obligations.

 

12.Subsequent Event - 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 (the “Employment Agreement”), dated August 9, 2018 and on March 2, 2020, the Company received a letter from Mr. Hughes, providing notice of his intent to resign for “Good Reason” as defined in Section 7(c) of the Employment Agreement pursuant to which he claimed to be entitled to the “Enhanced Severance Amount” under the Employment Agreement. Hughes filed a complaint against the Company in the Supreme Court of the State of New York in March 2020 alleging two causes of action: (1) breach of his employment contract; and (2) breach of duty of good faith and fair dealing. Plaintiff alleges that he was terminated without cause or in the alternative, that he resigned for good reason and therefore, pursuant to the Amended and Restated Employment Agreement, dated August 9, 2018, between the Company and Plaintiff. Plaintiff seeks contractual severance pay in the amount of $1,000,000 and reasonable costs and attorney’s fees. The Company denies Plaintiff’s allegations in their entirety.

 

13.Subsequent Event - 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 they 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. The Term Sheet calls for a cash payment of $300,000 on June 30, 2021, a second cash payment of $300,000 on June 30, 2022 and a third payment of $300,00 also on June 30, 2022, which can be paid in cash or common stock at the Company’s option. There is no interest due on these payments. The agreement also has protections to limit the payments so that the debt covenants with the Company’s Lender are not breached. The parties intend to enter into definitive documents for the settlement. However, the binding Term Sheet shall remain in full force and effect until such time as the definitive documents are executed by the parties or until the Term Sheet is terminated by mutual consent of the parties. The Company has accrued $818,000, the estimated present value of these payments using an effective interest rate of 5%, in the quarter ended February 29, 2020.

 

14.Subsequent Event – COVID-19

 

The COVID-19 outbreak in the United States has caused business disruption through mandated and voluntary closing of a various businesses. While the disruption is currently expected to be temporary, there is considerable uncertainty around the duration of the closings. Therefore, the Company expects this matter to negatively impact its operating results in future periods. However, the related financial impact and duration cannot be reasonably estimated at this time.

 

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TSR, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements.

 

Forward-Looking Statements

 

Certain statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company’s plans, future prospects and the Company’s future cash flow requirements are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward-looking statements due to known and unknown risks and uncertainties, including but not limited to the following: the statements concerning the success of the Company’s plan for growth, both internal and through the previously announced pursuit of suitable acquisition candidates; the impact of adverse economic conditions on client spending which has a negative impact on the Company’s business, which includes, but is not limited to, the current adverse economic conditions associated with the COVID-19 global health pandemic and the associated financial crisis, stay-at-home and other orders, which may significantly reduce client spending and which may have a negative impact on the Company’s business; risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company’s contract computer programming services will continue to adversely affect the Company’s business; the concentration of the Company’s business with certain customers; uncertainty as to the Company’s ability to maintain its relations with existing customers and expand its business; the impact of changes in the industry, such as the use of vendor management companies in connection with the consultant procurement process; the increase in customers moving IT operations offshore; the Company’s ability to adapt to changing market conditions; the risks, uncertainties and expense of the legal proceedings to which the Company is a party; and other risks and uncertainties set forth in the Company’s filings with the Securities and Exchange Commission. The Company is under no obligation to publicly update or revise forward-looking statements.

 

Results of Operations

 

The following table sets forth, for the periods indicated, certain financial information derived from the Company’s condensed consolidated statements of operations. There can be no assurance that trends in operating results will continue in the future:

 

Three months ended February 29, 2020 compared with three months ended February 28, 2019

 

   (Dollar amounts in thousands)
Three Months Ended
 
   February 29, 2020   February 28, 2019 
   Amount   % of
Revenue
   Amount   % of
Revenue
 
Revenue, net  $14,145    100.0%  $14,783    100.0%
Cost of sales   12,125    85.7%   12,652    85.6%
Gross profit   2,020    14.3%   2,131    14.4%
Selling, general and administrative expenses   3,271    23.1%   3,047    20.6%
Loss from operations   (1,251)   (8.8)%   (916)   (6.2)%
Other income (expense), net   (43)   (0.3)%   6    0.0%
Loss before income taxes   (1,294)   (9.1)%   (910)   (6.2)%
Benefit from income taxes   (352)   (2.4)%   (235)   (1.6)%
Consolidated net loss    (942)   (6.7)%   (675)   (4.6)%
Less: Net income attributable to noncontrolling interest   3    0.0%   1    0.0%
                     
Net loss attributable to TSR, Inc.  $(945)   (6.7)%  $(676)   (4.6)%

  

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TSR, INC. AND SUBSIDIARIES

 

Revenue

 

Revenue consists primarily of revenue from computer programming consulting services. Overall, revenue for the quarter ended February 29, 2020 decreased $638,000 or 4.3% from the prior year quarter. Revenue for IT consultants for the current quarter decreased by 6.8%, primarily due to the reduction of the number of consultants on billing with customers and due to lower average billing rates from a shift in business mix with less placements for high end skills. Revenue for administrative (non-IT workers) increased by 11.9%, primarily due to additional opportunities for placements with a large customer due to the customer’s plan to reduce its expenses in the prior year period. The overall average number of consultants on billing with customers decreased from 397 for the quarter ended February 28, 2019 to 361 for the quarter ended February 29, 2020, while the average number of computer programming consultants decreased from 340 in the quarter ended February 28, 2019 to 300 in the quarter ended February 29, 2020. The 361 consultants on billing for the current quarter include an equivalent 61 administrative (non-IT) workers that the Company placed at the customers’ requests as compared to 57 in the prior year quarter.

 

Cost of Sales

 

Cost of sales for the quarter ended February 29, 2020 decreased $527,000 or 4.2% to $12,125,000 from $12,652,000 in the prior year period. The decrease in cost of sales resulted primarily from a decrease in consultants placed with customers and from a decrease in the average rates paid to consultants on billing. Cost of sales as a percentage of revenue increased from 85.6% in the quarter ended February 28, 2019 to 85.7% in the quarter ended February 29, 2020. The percentage decrease in cost of sales for the current quarter as compared to the prior year quarter (4.2% decrease) was lower than the percentage decrease in revenue for the current quarter as compared to the prior year quarter (4.3% decrease), causing a reduction in gross margins. Customer demands for discounts and aggressive pricing combined with a competitive market environment have continued to apply downward pressures on gross margins, causing an increase in cost of sales as a percentage of revenue.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses increased approximately $224,000 or 7.3% from approximately $3,047,000 in the quarter ended February 28, 2019 to $3,271,000 in the quarter ended February 29, 2020. The increase in these expenses primarily resulted from a settlement with an investor of $818,000 (net present value) to offset legal expenses incurred in its solicitations in connection with the annual meeting of stockholders and in connection with litigation between the investor and the Company. The amount of the settlement was offset, to an extent, by a significant decrease in amounts paid for legal and advisory services of $625,000. The legal and advisory expenses decreased in connection with the settlement, at the end of August 2019, of various lawsuits and the proxy contest relating to our annual meeting that was held on October 22, 2019 after initially being rescheduled for September 13, 2019. Selling, general and administrative expenses, as a percentage of revenue, increased from 20.6% in the quarter ended February 28, 2019 to 23.1% in the quarter ended February 29, 2020.

 

Other Income (Expense)

 

Other expense for the quarter ended February 29, 2020 resulted primarily from interest expense on the Company’s line of credit of $38,000 and a mark-to-market loss of $2,000 on the Company’s equity securities. Other income for the quarter ended February 28, 2019 resulted primarily from interest and dividend income of $5,000 and a mark-to-market gain of $3,000 on the Company’s equity securities, offset by a loss of $3,000 from the sale of a fixed asset.

 

Income Tax Benefit

 

The income tax benefit included in the Company’s results of operations for the quarters ended February 29, 2020 and February 28, 2019 reflects the Company’s estimated effective tax rate for the years ending May 31, 2020 and 2019, respectively. These rates resulted in a benefit of 27.2% for the quarter ended February 29, 2020 and a benefit of 25.8% for the quarter ended February 28, 2019.

 

Net Loss Attributable to TSR, Inc.

 

Net loss attributable to TSR, Inc. was $945,000 in the quarter ended February 29, 2020 compared to a loss of $676,000 in the quarter ended February 28, 2019. The increase in net loss was primarily attributable to an increase in selling, general and administrative expenses due to the settlement described above. The loss also increased due to a decrease in revenue and gross profit percentage.

 

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TSR, INC. AND SUBSIDIARIES

 

Nine months ended February 29, 2020 compared with nine months ended February 28, 2019

 

   (Dollar amounts in thousands)
Nine Months Ended
 
   February 29, 2020   February 28, 2019 
   Amount   % of
Revenue
   Amount   % of
Revenue
 
Revenue, net  $44,325    100.0%  $47,766    100.0%
Cost of sales   37,580    84.8%   40,280    84.3%
Gross profit   6,745    15.2%   7,486    15.7%
Selling, general and administrative expenses   8,846    20.0%   8,449    17.7%
Loss from operations   (2,101)   (4.8)%   (963)   (2.0)%
Other income (expense), net   (24)   0.0%   10    0.0%
Loss before income taxes   (2,125)   (4.8)%   (953)   (2.0)%
Benefit from income taxes   (591)   1.3%   (247)   (0.5)%
Consolidated net loss    (1,534)   (3.5)%   (706)   (1.5)%
Less: Net income attributable to noncontrolling interest   13    0.0%   29    0.0%
                     
Net loss attributable to TSR, Inc.  $(1,547)   (3.5)%  $(735)   (1.5)%

 

Revenue

 

Revenue consists primarily of revenue from computer programming consulting services. Overall, revenue for the nine months ended February 29, 2020 decreased $3,441,000 or 7.2% from the prior year period. Revenue for IT consultants for the current period decreased by 6.5%, primarily due to the reduction of the number of consultants on billing with customers and due to lower average billing rates from a shift in business mix with less placements for high end skills. Revenue for administrative (non-IT workers) decreased by 10.7%, primarily due to reduced opportunities for placements with a large customer due to the customer’s plan to reduce its expenses. The overall average number of consultants on billing with customers decreased from 398 for the nine months ended February 28, 2019 to 371 for the nine months ended February 29, 2020, while the average number of computer programming consultants decreased from 338 in the period ended February 28, 2019 to 315 in the period ended February 29, 2020. The 371 consultants on billing for the current period include an equivalent 56 administrative (non-IT) workers that the Company placed at the customers’ requests as compared to 60 in the prior year period.

 

Cost of Sales

 

Cost of sales for the nine months ended February 29, 2020 decreased $2,700,000 or 6.7% to $37,580,000 from $40,280,000 in the prior year period. The decrease in cost of sales resulted from a decrease in consultants placed with customers and from a decrease in the average rates paid to consultants on billing. Cost of sales as a percentage of revenue increased from 84.3% in the nine months ended February 28, 2019 to 84.8% in the nine months ended February 29, 2020. The percentage decrease in cost of sales for the current period as compared to the prior year period (6.7% decrease) was lower than the percentage decrease in revenue for the current period as compared to the prior year period (7.2% decrease), causing a reduction in gross margins. Customer demands for discounts and aggressive pricing combined with a competitive market environment have continued to apply downward pressures on gross margins, causing an increase in cost of sales as a percentage of revenue.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses increased approximately $397,000 or 4.7% from approximately $8,449,000 in the nine months ended February 28, 2019 to $8,846,000 in the nine months ended February 29, 2020. The increase in these expenses primarily resulted from a settlement with an investor of $818,000 (net present value) to offset legal expenses incurred in its solicitations in connection with the annual meeting of stockholders and in connection with litigation between the investor and the Company. The amount of the settlement was offset, to an extent, by a decrease in amounts paid for legal and advisory services of $252,000 to $1,399,000 in the nine months ended February 29, 2020 from $1,651,000 in the nine months ended February 28, 2019. The legal and advisory expenses decreased in connection with the settlement, at the end of August 2019, of various lawsuits and the proxy contest relating to our annual meeting that was held on October 22, 2019 after initially being rescheduled for September 13, 2019. Selling, general and administrative expenses, as a percentage of revenue, increased from 17.7% in the nine months ended February 28, 2019 to 20.0% in the nine months ended February 29, 2020. 

 

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TSR, INC. AND SUBSIDIARIES

 

Other Income (Expense)

 

Other expense for the nine months ended February 29, 2020 resulted primarily from interest expense on the Company’s line of credit of $38,000, interest and dividend income of $5,000 and a mark-to-market gain of $9,000 on the Company’s equity securities. Other income for the nine months ended February 28, 2019 resulted primarily from interest and dividend income of $15,000 offset by a mark-to-market loss of $2,000 on the Company’s equity securities and a loss of $3,000 from the sale of a fixed asset.

 

Income Tax Benefit

 

The income tax benefit included in the Company’s results of operations for the nine months ended February 29, 2020 and February 28, 2019 reflects the Company’s estimated effective tax rate for the years ending May 31, 2020 and 2019, respectively. These rates were a benefit of 27.8% for the nine months ended February 29, 2020 and a benefit of 25.9% for the nine months ended February 28, 2019.

 

Net Loss Attributable to TSR, Inc.

 

Net loss attributable to TSR, Inc. increased from a net loss of $735,000 in the nine months ended February 28, 2019 to a net loss of $1,547,000 in the nine months ended February 29, 2020. This increase in net loss was primarily attributable to a decrease in revenue and gross profit percentage and to an increase in selling, general and administrative expenses due to the settlement described above.

 

Liquidity and Capital Resources

 

The Company expects that its cash and cash equivalents and the Company’s line of credit will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for at least the next 12 months from the issuance of these financial statements. Utilizing its accounts receivable as collateral, the Company has secured a line of credit to increase its liquidity (see Note 11 to the Condensed Consolidated Financial Statements).

 

At February 29, 2020, the Company had working capital (total current assets in excess of total current liabilities) of $4,658,000 including cash and cash equivalents and certificates of deposit and marketable securities of $3,518,000 as compared to working capital of $6,225,000, including cash and cash equivalents and certificates of deposit and marketable securities of $4,222,000 at May 31, 2019.

 

For the nine months ended February 29, 2020, net cash used in operating activities was $1,614,000 compared to net cash used in operating activities of $1,166,000 for the nine months ended February 28, 2019. The cash used in operating activities in the nine months ended February 29, 2020 resulted primarily from the consolidated net loss of $1,534,000, a decrease in accounts payable and other payables and accrued expenses of $861,000 and an increase in deferred income taxes of $390,000, which were offset, to an extent, by the accrual of the legal settlement of $818,000 and a decrease in accounts receivable of $625,000. The cash used in operating activities in the nine months ended February 28, 2019 resulted primarily from the consolidated net loss of $707,000 and from a decrease in accounts and other payables and accrued expenses of $416,000.

 

Net cash provided by investing activities of $481,000 for the nine months ended February 29, 2020 primarily resulted from not reinvesting certificates of deposit that matured during the period. Net cash provided by investing activities for the nine months ended February 28, 2019 resulted primarily from the proceeds from the sale of a fixed asset of $10,000 less the purchase of fixed assets of $3,000.

 

In the nine months ended February 29, 2020, net cash provided by financing activities primarily resulted from the net drawings under the Company’s line of credit of $940,000 offset, to an extent, by the payment of distributions to the noncontrolling interest of $29,000. In the nine months ended February 28, 2019, net cash used in financing activities resulted from the payment of distributions to the noncontrolling interest of $53,000.

 

The Company’s capital resource commitments at February 29, 2020 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from available cash and the line of credit which the Company has obtained, as described above.

 

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TSR, INC. AND SUBSIDIARIES

 

Recently Adopted Accounting Pronouncements

 

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 FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an optional transition method for the adoption of Topic 842. The two permitted transition methods are now the modified retrospective approach, which applies the new lease requirements at the beginning of the earliest period presented, and the optional transition method, which applies the new lease requirements through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2016-02 is effective for our fiscal year ending May 31, 2020 and the interim periods within that year. The Company adopted this standard in the first quarter of fiscal 2020 using the optional transition method. The Company also intends to elect the practical expedients that allow us to carry forward the historical lease classification. The Company has established an inventory of existing leases and implemented a new process of evaluating the classification of each lease. The financial impact of the adoption of the new standard at June 1, 2019 increased total assets and total liabilities by approximately $690,000. The financial impact of the adoption primarily relates to the capitalization of right-of-use assets and recognition of lease liabilities related to operating leases. The Company will implement changes to its processes and internal controls, as necessary, to meet the reporting and disclosure requirements of the new standard.

 

Critical Accounting Policies

 

The Securities and Exchange Commission defines “critical accounting policies” as those that require the application of management’s most difficult subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

 

The Company’s significant accounting policies are described in Note 1 to the Company’s consolidated financial statements, contained in its May 31, 2019 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. The Company believes that those accounting policies require the application of management’s most difficult, subjective or complex judgments. Except for the adoption of ASU No. 2016-02, Leases, as of June 1, 2019, disclosed in Note 9 to the Condensed Consolidated Financial Statements, there have been no changes in the Company’s significant accounting policies as of February 29, 2020.

 

Item 3. Controls and Procedures

 

Disclosure Controls and Procedures. The Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal accounting officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934). Based on this evaluation, the principal executive officer and principal accounting officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.

 

Internal Control Over Financial Reporting. There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently reported completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

Christopher Hughes v. TSR, Inc., Docket No. 651753-2020 (NY Supr. Ct, New York County)

 

Christopher Hughes, the former Chief Executive Officer of the Company (“Plaintiff”), filed a complaint against the Company in the Supreme Court of the State of New York in March 2020 alleging two causes of action: (1) breach of his employment contract; and (2) breach of duty of good faith and fair dealing. Plaintiff alleges that he was terminated without cause or in the alternative, that he resigned for reason and therefore, pursuant to the Amended and Restated Employment Agreement, dated August 9, 2018, between the Company and Plaintiff. Plaintiff seeks contractual severance pay in the amount of $1,000,000 and reasonable costs and attorney’s fees. The Company denies Plaintiff’s allegations in their entirety.

 

Item 1A. Risk Factors

 

The Company is currently subject to ongoing litigation

 

The Company is currently subject to a litigation involving the Company’s former Chief Executive Officer, as discussed in the “Legal Proceedings” section. In connection with this litigation, the Company may enter into a settlement of claims for significant monetary damages. The Company may also be subject to a judgement for significant monetary damages. Defending against the current litigation may be time-consuming, expensive and cause diversion of management’s attention.

 

With respect to any litigation, the Company’s insurance may not reimburse it or may not be sufficient to reimburse it for the self-insured retention that the Company is required to satisfy before any insurance applies to a claim, unreimbursed legal fees or an adverse result in any litigation may adversely impact the Company’s business, operating results or financial condition.

 

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TSR, INC. AND SUBSIDIARIES

 

Our business, financial condition and results of operations may be materially adversely affected by global health epidemics, including the recent COVID-19 outbreak.

 

Outbreaks of epidemic, pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread of COVID-19 from China to other countries has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. While the COVID-19 outbreak may still be in relatively early stages, international stock markets have begun to reflect the uncertainty associated with the slow-down in the global economy and the reduced levels of international travel experienced since the beginning of January, large declines in oil prices and the significant decline in the Dow Industrial Average at the end of February and beginning of March 2020 was largely attributed to the effects of COVID-19. If COVID-19 progresses in ways that disrupts our customers’ demand for computer programing services or staffing needs or otherwise disrupts our operations, such disruption may materially negatively affect our operating results for 2020 and possible subsequent periods. Majority of our workforce and customer base is located in New Jersey and New York and typically works on-site at client locations. However, on March 20, 2020 New York Governor Cuomo signed the New York State on PAUSE executive order, which includes a new directive that all non-essential businesses statewide close in-office personnel functions effective March 22 to mitigate the impact of the COVID-19 pandemic and we determined that the Company is a non-essential business. In response to these public health directives and orders, we have implemented work-from-home policies for certain employees. The effects of the executive order, the stay at home orders and our work-from-home policies may negatively impact productivity, disrupt our business and impact our ability to service our clients and our clients need for our services, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition. Quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact us and vendors and customers business operations. Additionally, if the spread of COVID-19 limits our ability to make workers available either because they are ill or due to work from home orders, this likely would negatively affect, and may materially negatively affect, our operating results, cash flow and business.

 

On March 18, 2020, President Trump signed a bipartisan bill, the “Families First Coronavirus Response Act,” (“FFCRA”) aimed at addressing the COVID-19 pandemic. The FFCRA’s effective date has been set for April 2, 2020. The FFCRA is a comprehensive emergency measure expanding nutrition and food assistance, unemployment insurance benefits, and protections for workers exposed to risks of COVID-19. Particular provisions of the FFCRA that could materially affect our operations include the a temporary, emergency expansion to the federal Family and Medical Leave Act (FMLA) and a temporary establishment of a federal paid sick leave program in response to COVID-19. Such provisions may create obligations for the Company to provide its employees with paid sick leave beyond what the Company has historically provided. Additional expenditures related to these paid sick leave obligations may materially negatively affect our operating results for 2020 and possible subsequent periods. However, we expect that some of these potential payment obligations may be offset by separate provisions of the FFCRA creating a temporary payroll tax credit for paid sick leave and paid family leave or other federal stimulus legislation, including the America CARES Act, which was signed into law on March 27, 2020.

 

Any resulting financial impact cannot be reasonably estimated at this time. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions taken globally to contain the COVID-19 pandemic or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still assessing our business operations and system supports and the impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-019 or its consequences, including downturns in business sentiment generally or in our sector in particular.

 

Item 4. Exhibits

 

(a)Exhibit 31.1 – Certification by Thomas Salerno pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31.2 – Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.1 – Certification by Thomas Salerno pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2 – Certification by John G. Sharkey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 101 – The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements.

 

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TSR, INC. AND SUBSIDIARIES

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

 

      TSR, Inc.
      (Registrant)
       
Date: April 13, 2020   /s/ Thomas Salerno
     

Thomas Salerno,

Chief Executive Officer, President,

      Treasurer and Principal Executive Officer
       
Date: April 13, 2020   /s/ John G. Sharkey
     

John G. Sharkey,

Sr. Vice President and Principal Accounting Officer

 

 

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