Quarterly Report (10-q)

 

 

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 28, 2023

 

☐ 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: 001-38838

 

	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, Suite 150, 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

 

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 every Interactive Data File required to be submitted 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 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 April 11, 2023, there were 2,119,734 shares of common stock, par value $0.01 per share, issued and outstanding.

 

 

 

 

 

 

TSR, INC. AND SUBSIDIARIES

 

INDEX

 

				Page
				Number
Part I.	Financial Information:			1
	Item 1.	Financial Statements:		1
		Condensed Consolidated Balance Sheets – February 28, 2023 and May 31, 2022		1
		Condensed Consolidated Statements of Operations – For the three months and nine months ended February 28, 2023 and 2022		2
		Condensed Consolidated Statements of Equity – For the three months and nine months ended February 28, 2023 and 2022		3
		Condensed Consolidated Statements of Cash Flows – For the nine months ended February 28, 2023 and 2022		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		18
	Item 4.	Controls and Procedures		18
Part II.	Other Information			19
	Item 1.	Legal Proceedings		19
	Item 1A.	Risk Factors		19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		20
	Item 3.	Defaults upon Senior Securities		20
	Item 4.	Mine Safety Disclosures		20
	Item 5.	Other Information		20
	Item 6.	Exhibits		21
Signatures				22

 

i

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

February 28, 2023 and May 31, 2022

 

		February 28,				May 31,
		2023				2022
		(Unaudited)				(see Note 1)
ASSETS
Current Assets:
Cash and cash equivalents		$	7,569,557			$	6,490,158
Certificates of deposit and marketable securities			1,009,944				35,536
Accounts receivable, net of allowance for doubtful accounts of $181,000			11,578,563				13,427,562
Other receivables			38,912				39,753
Prepaid expenses			320,635				216,776
Prepaid and recoverable income taxes			17,058				31,795
Total Current Assets			20,534,669				20,241,580
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $252,319 and $195,094, respectively			87,886				138,794
Other assets			48,772				63,270
Right-of-use assets			503,638				652,020
Intangible assets, net			1,375,000				1,500,750
Goodwill			785,883				785,883
Deferred income taxes			479,000				972,000
Total Assets		$	23,814,848			$	24,354,297
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable and other payables		$	2,269,111			$	1,425,021
Accrued expenses and other current liabilities			4,048,458				5,818,903
Advances from customers			1,197,370				1,210,992
Credit facility			-				61,882
Operating lease liabilities - current			171,503				214,941
Legal settlement payable - current			-				597,566
Total Current Liabilities			7,686,442				9,329,305
Operating lease liabilities, net of current portion			366,195				492,427
Total Liabilities			8,052,637				9,821,732
Commitments and contingencies
Equity:
TSR, Inc.:
Preferred stock, $1 par value, authorized 500,000 shares; none issued			-				-
Common stock, $.01 par value, authorized 12,500,000 shares; issued 3,322,527 and 3,298,549 shares, 2,147,592 and 2,146,448 outstanding, respectively			33,226				32,986
Additional paid-in capital			7,666,711				7,473,866
Retained earnings			21,718,261				20,470,042
			29,418,198				27,976,894
Less: Treasury stock, 1,174,935 and 1,152,101 shares, at cost, respectively			13,694,472				13,514,003
Total TSR, Inc. Equity			15,723,726				14,462,891
Noncontrolling interest			38,485				69,674
Total Equity			15,762,211				14,532,565
Total Liabilities and Equity		$	23,814,848			$	24,354,297

 

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

 

1

 

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months and Nine Months Ended February 28, 2023 and 2022

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		February 28,								February 28,
		2023				2022				2023				2022
Revenue, net		$	24,257,167			$	24,383,217			$	76,487,411			$	71,112,784
Cost of sales			20,267,337				20,590,154				63,433,855				59,461,322
Selling, general and administrative expenses			3,768,902				3,829,819				11,071,679				11,628,284
			24,036,239				24,419,973				74,505,534				71,089,606
Income (loss) from operations			220,928				(36,756	)			1,981,877				23,178
Other income (expense):
Interest expense, net			(9,069	)			(19,526	)			(44,907	)			(81,510	)
Gain on PPP Loan and interest forgiveness			-				-				-				6,735,246
Unrealized loss on marketable securities, net			(4,112	)			(1,200	)			(15,592	)			(7,536	)
Income (loss) before income taxes			207,747				(57,482	)			1,921,378				6,669,378
Provision for (benefit from) income taxes			110,000				(14,000	)			629,000				(1,000	)
Consolidated net income (loss)			97,747				(43,482	)			1,292,378				6,670,378
Less: Net income attributable to noncontrolling interest			18,107				3,129				44,159				72,410
Net income (loss) attributable to TSR, Inc.		$	79,640			$	(46,611	)		$	1,248,219			$	6,597,968
Basic net income (loss) per TSR, Inc. common share		$	0.04			$	(0.02	)		$	0.58			$	3.33
Diluted net income (loss) per TSR, Inc. common share		$	0.04			$	(0.02	)		$	0.56			$	3.19
Basic weighted average number of common shares outstanding			2,134,660				2,027,494				2,140,344				1,983,146
Diluted weighted average number of common shares outstanding			2,234,600				2,027,494				2,235,173				2,066,976

 

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

 

2

 

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months and Nine Months Ended February 28, 2022

(UNAUDITED)

 

		Shares of								Additional																Non-
		common				Common				paid-in				Retained				Treasury				TSR, Inc.				controlling				Total
		stock				stock				capital				earnings				stock				equity				interest				Equity
Balance at May 31, 2021			3,114,163			$	31,142			$	5,339,200			$	13,540,822			$	(13,514,003	)		$	5,397,161			$	23,891			$	5,421,052
Net income attributable to noncontrolling interest			-				-				-				-				-				-				57,492				57,492
Distribution to noncontrolling interest			-				-				-				-				-				-				(1,750	)			(1,750	)
Non-cash stock compensation			-				-				177,249				-				-				177,249				-				177,249
Net income attributable to TSR, Inc.			-				-				-				6,401,543								6,401,543				-				6,401,543
Balance at August 31, 2021			3,114,163				31,142				5,516,449				19,942,365				(13,514,003	)			11,975,953				79,633				12,055,586
Net income attributable to noncontrolling interest			-				-				-				-				-				-				11,789				11,789
Distribution to noncontrolling interest			-				-				-				-				-				-				(25,640	)			(25,640	)
Non-cash stock compensation			-				-				177,249				-				-				177,249				-				177,249
Net income attributable to TSR, Inc.			-				-				-				243,036								243,036				-				243,036
Balance at November 30, 2021			3,114,163				31,142				5,693,698				20,185,401				(13,514,003	)			12,396,238				65,782				12,462,020
Net income attributable to noncontrolling interest			-				-				-				-				-				-				3,129				3,129
Proceeds of sales of stock through ATM			142,500				1,425				1,819,665				-				-				1,821,090				-				1,821,090
Non-cash stock compensation			-				-				141,238				-				-				141,238				-				141,238
Vested stock awards and taxes paid			41,886				419				(92,323	)			-				-				(91,904	)			-				(91,904	)
Net loss attributable to TSR, Inc.			-				-				-				(46,611	)							(46,611	)			-				(46,611	)
Balance at February 28, 2022			3,298,549			$	32,986			$	7,562,278			$	20,138,790			$	(13,514,003	)		$	14,220,051			$	68,911				14,288,962

 

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

 

3

 

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months and Nine Months Ended February 28, 2023

(UNAUDITED)

 

		Shares of								Additional																Non-
		common				Common				paid-in				Retained				Treasury				TSR, Inc.				controlling				Total
		stock				stock				capital				earnings				stock				equity				interest				equity
Balance at May 31, 2022			3,298,549			$	32,986			$	7,473,866			$	20,470,042			$	(13,514,003	)		$	14,462,891			$	69,674			$	14,532,565
Net income attributable to noncontrolling interest			-				-				-				-				-				-				12,997				12,997
Non-cash stock compensation			-				-				69,216				-				-				69,216				-				69,216
Net income attributable to TSR, Inc.			-				-				-				494,746				-				494,746				-				494,746
Balance at August 31, 2022			3,298,549				32,986				7,543,082				20,964,788				(13,514,003	)			15,026,853				82,671				15,109,524
Net income attributable to noncontrolling interest			-				-				-				-				-				-				13,055				13,055
Non-cash stock compensation			-				-				69,216				-				-				69,216				-				69,216
Purchases of treasury stock			-				-				-				-				(116,426	)			(116,426	)			-				(116,426	)
Net income attributable to TSR, Inc.			-				-				-				673,833				-				673,833				-				673,833
Balance at November 30, 2022			3,298,549				32,986				7,612,298				21,638,621				(13,630,429	)			15,653,476				95,726				15,749,202
Net income attributable to noncontrolling interest			-				-				-				-				-				-				18,107				18,107
Distribution to noncontrolling interest			-				-				-				-				-				-				(75,348	)			(75,348	)
Non-cash stock compensation			-				-				54,653				-				-				54,653				-				54,653
Purchases of treasury stock			-				-				-				-				(64,043	)			(64,043	)			-				(64,043	)
Vested stock awards			23,978				240				(240	)			-				-				-				-				-
Net income attributable to TSR, Inc.			-				-				-				79,640				-				79,640				-				79,640
Balance at February 28, 2023			3,322,527			$	33,226			$	7,666,711			$	21,718,261			$	(13,694,472	)		$	15,723,726			$	38,485			$	15,762,211

 

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

 

4

 

 

TSR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Nine Months Ended February 28, 2023 and 2022

(UNAUDITED)

 

		Nine Months Ended
		February 28,
		2023				2022
Cash flows from operating activities:
Consolidated net income		$	1,292,378			$	6,670,378
Adjustments to reconcile consolidated net income to net cash provided by (used in) operating activities:
Depreciation and amortization			182,975				170,259
Unrealized loss on marketable securities, net			15,592				7,536
Deferred income taxes			493,000				1,000
Non-cash lease recovery			(21,288	)			(47,554	)
Forgiveness of principal and accrued interest on SBA PPP Loan			-				(6,735,246	)
Non-cash stock-based compensation expense			193,085				495,736
Changes in operating assets and liabilities:
Accounts receivable			1,848,999				(2,758,279	)
Other receivables			841				(5,482	)
Prepaid expenses			(103,859	)			(43,731	)
Prepaid and recoverable income taxes			14,737				(41,723	)
Other assets			14,498				1,404
Accounts payable, other payables, accrued expenses and other current liabilities			(926,355	)			72,145
Advances from customers			(13,622	)			17,902
Legal settlement payable			(597,566	)			(276,843	)
Net cash provided by (used in) operating activities			2,393,415				(2,472,498	)
Cash flows from investing activities:
Purchases of certificates of deposit and marketable securities			(990,000	)			-
Purchases of equipment and leasehold improvements			(6,317	)			(81,011	)
Net cash used in investing activities			(996,317	)			(81,011	)
Cash flows from financing activities:
Net repayments on credit facility			(61,882	)			(32,728	)
Purchases of treasury stock			(180,469	)			-
Net proceeds of ATM stock sales			-				1,821,090
Tax withholding from vested stock awards			-				(91,904	)
Distribution to noncontrolling interest			(75,348	)			(27,390	)
Net cash (used in) provided by financing activities			(317,699	)			1,669,068
Net increase (decrease) in cash and cash equivalents			1,079,399				(884,441	)
Cash and cash equivalents at beginning of period			6,490,158				7,370,646
Cash and cash equivalents at end of period		$	7,569,557			$	6,486,205
Supplemental disclosures of cash flow data:
Income taxes paid		$	121,000			$	41,000
Interest paid		$	61,000			$	59,000

 

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

 

5

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

1.	Basis of Presentation

 

The accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries. Unless otherwise stated or the context otherwise requires, the terms “we,” “us,” “our,” “TSR,” and the “Company” refer to TSR, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of May 31, 2022, which has been derived from audited financial statements, and the unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applying to interim financial information and with the instructions to Form 10-Q of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States of America and normally included in the Company’s annual financial statements have been condensed or omitted. These condensed consolidated interim financial statements as of and for the three months and nine months ended February 28, 2023 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, 2023. 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, 2022.

 

2.	Net Income Per Common Share

 

Basic net income per common share is computed by dividing net income available to common stockholders of TSR by the weighted average number of common shares outstanding during the reporting period, excluding the effects of any potentially dilutive securities. During the quarter ended February 28, 2021, the Company granted time and performance vesting restricted stock awards under its 2020 Equity Incentive Plan (see Note 16 for further information). Diluted earnings per share gives effect to all potentially dilutive common shares outstanding during the reporting period. The common stock equivalents associated with these restricted stock awards of 99,940, 0, 94,829, and 83,830 have been included for dilutive shares outstanding for the three and nine months ended February 28, 2023 and 2022, respectively. There were no dilutive shares in the quarter ended February 28, 2022 due to a net loss for the quarter.

 

3.	Cash and Cash Equivalents

 

The Company considers short-term highly liquid investments with original 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 28, 2023 and May 31, 2022:

 

		February 28, 2023				May 31, 2022
Cash in banks		$	5,728,624			$	6,436,012
Certificates of deposit			495,000				-
Money market funds			1,345,933				54,146
		$	7,569,577			$	6,490,158

 

4.	Fair Value of Financial Instruments

 

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

 

6

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

5.	Certificates of Deposit and Marketable Securities

 

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

 

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

 

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

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

●

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

 

The following are the major categories of assets measured at fair value on a recurring basis as of February 28, 2023 and May 31, 2022 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable inputs (Level 3):

 

February 28, 2023		Level 1				Level 2				Level 3				Total
Certificates of Deposit		$	990,000			$	-			$	-			$	990,000
Equity Securities			19,944				-				-				19,944
		$	1,009,944			$	-			$	-			$	1,009,944

 

May 31, 2022		Level 1				Level 2				Level 3				Total
Equity Securities		$	35,536			$	-			$	-			$	35,536

 

Based upon the Company’s intent and ability to hold its certificates of deposit to maturity (which range up to 12 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 marketable securities at February 28, 2023 and May 31, 2022 are summarized as follows:

 

7

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

February 28, 2023		Amortized Cost				Gross Unrealized Holding Gains				Gross Unrealized Holding Losses				Recorded Value
Certificates of Deposit		$	990,000			$	-			$	-			$	990,000
Equity Securities			16,866				3,078				-				19,944
		$	1,006,866			$	3,078			$	-			$	1,109,944

 

May 31, 2022		Amortized Cost				Gross Unrealized Holding Gains				Gross Unrealized Holding Losses				Recorded Value
Equity Securities		$	16,866			$	18,670			$	-			$	35,536

 

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

 

6.	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 except for the litigation disclosed elsewhere in this report, including in Notes 9, 10 and 13 to the condensed consolidated financial statements and in the section titled “Item 1, Legal Proceedings” in Part II of this report.

 

7.

Leases

 

The Company leases the space for its offices in Hauppauge and New Jersey. The lease for the New York City office expired on August 31, 2022 and was not replaced. Under ASC 842, at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or finance lease. Operating leases are in right-of-use assets and operating lease liabilities are in our condensed consolidated balance sheets.

 

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

 

The lease agreements for Hauppauge and New Jersey expire on December 31, 2023 and May 31, 2027, respectively, and do not include any renewal options. During the fiscal year ended May 31, 2021, the Company extended its lease in Hauppauge, entered into a lease in a new location for its New Jersey office expiring May 31, 2027 and entered into an agreement to sublease the space in New York City, which expired August 31, 2022 at the end of the underlying office lease.

 

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

 

For the three months ended February 28, 2023 and 2022, the Company’s operating lease expense for these leases was $65,000 and $85,000, respectively. For the nine months ended February 28, 2023 and 2022, the Company’s operating lease expense for these leases was $214,000 and $240,000, respectively.

 

As there are no explicit rates provided in our leases, the Company’s incremental borrowing rate was used based on the information available as of the commencement date in determining the present value of the future lease payments. Future minimum lease payments under non-cancellable operating leases as of February 28, 2023 are as follows:

 

8

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

Twelve Months Ending February 28,
2024		$	203,248
2025			123,085
2026			126,162
2027			129,316
2028			32,527
Thereafter			-
Total undiscounted operating lease payments			614,338
Less imputed interest			76,640
Present value of operating lease payments		$	537,698

 

The following table sets forth the right-of-use assets and operating lease liabilities as of February 28, 2023:

 

Assets
Right-of-use assets, net		$	503,638
Liabilities
Current operating lease liabilities		$	171,503
Long-term operating lease liabilities			366,195
Total operating lease liabilities		$	537,698

 

The weighted average remaining lease term for the Company’s operating leases is 1.9 years.

 

8.	Credit Facility

 

On November 27, 2019, TSR closed on a revolving credit facility (the “Credit Facility”) pursuant to a Loan and Security Agreement with Access Capital, Inc. (the “Lender”) which provides funding to TSR and its direct and indirect subsidiaries, TSR Consulting Services, Inc., Logixtech Solutions, LLC and Eurologix, S.A.R.L., each of which, together with TSR, is a borrower under the Credit Facility. Each of the borrowers has provided a security interest to the Lender in all of their respective assets to secure amounts borrowed under the Credit Facility.

 

TSR expects to utilize the Credit Facility for working capital and general corporate purposes. The maximum amount that may 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 28, 2023 was 7.75%, indicating an interest rate of 9.50% on the line of credit. The initial term of the Credit Facility is five years, which shall automatically renew for successive five-year periods unless either TSR or the Lender gives written notice to the other of termination at least 60 days prior to the expiration date of the then-current term.

 

TSR is obliged to satisfy certain financial covenants and minimum borrowing requirements under the Credit Facility, and to pay certain fees, including prepayment fees, and provide certain financial information to the Lender. The Company was in compliance with all covenants at February 28, 2023.

 

As of February 28, 2023, the net payments exceeded borrowings outstanding against this Credit Facility resulting in a receivable from the Lender of $23,954 which is included in “Other receivables” on the condensed consolidated balance sheet. The amount the Company has borrowed fluctuates and, at times, it has utilized the maximum amount of $2,000,000 available under the facility to fund its payroll and other obligations.

 

9

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

9.	Termination of Former CEO

 

The Company terminated Christopher Hughes, the former Chief Executive Officer of the Company (“Hughes”), effective February 29, 2020. Hughes filed a complaint against the Company in the Supreme Court of the State of New York in March 2020 alleging two causes of action: (1) breach of his employment contract; and (2) breach of the duty of good faith and fair dealing. Hughes alleged that he was terminated without cause or in the alternative that he resigned for good reason and therefore, pursuant to the Amended and Restated Employment Agreement, dated August 9, 2018, between the Company and Hughes, Hughes sought severance pay in the amount of $1,000,000 and reasonable costs and attorney’s fees. The Company denied Hughes’ allegations and filed various counterclaims against Hughes. 

 

In October 2021, the Company and Hughes agreed through mediation to settle this matter. In order to avoid lengthy and costly litigation and discovery expenses, the Company has paid Hughes $705,000 to settle all claims. After adjusting for insurance reimbursement, the Company accrued a charge of $580,000 to selling, general and administrative expenses in the quarter ended August 31, 2021.

 

10.	Legal Settlement with Investor

 

On April 1, 2020, the Company entered into a binding term sheet (“Term Sheet”) with Zeff Capital, L.P. (“Zeff”) pursuant to which it agreed, among other things, to pay Zeff an amount of $900,000 over a period of three years in cash or cash and stock in settlement of expenses incurred by Zeff during its solicitations in 2018 and 2019 in connection with the annual meetings of the Company, the costs incurred in connection with the litigation initiated by and against the Company as well as negotiation, execution and enforcement of the Settlement and Release Agreement, dated as of August 30, 2019, by and between the Company, Zeff and certain other parties. In exchange for certain releases, the Term Sheet called for a cash payment of $300,000 on June 30, 2021, a second cash payment of $300,000 on June 30, 2022 and a third payment of $300,000 also on June 30, 2022, payable in cash or common stock at the Company’s option. There was no interest due on these payments. The Company accrued $818,000, the estimated present value of these payments using an effective interest rate of 5%, in the quarter ended February 29, 2020, as the events relating to the expense occurred prior to such date. The $300,000 payment due June 30, 2021 was paid during the quarter ended August 31, 2021. The two cash payments of $300,000 each were made by June 30, 2022 in full satisfaction of the settlement.

 

11.	Paycheck Protection Program Loan

 

On April 15, 2020, the Company received loan proceeds of $6,659,220 under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (“PPP”) was established under the recent congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The PPP Loan to the Company was made through JPMorgan Chase Bank, N.A., a national banking association (“PPP Lender”).

 

In March 2021, the Company submitted a PPP Loan Forgiveness application to the SBA through the PPP Lender. On July 7, 2021, the Company received notification from the PPP Lender that the SBA approved the Company’s application for forgiveness of the entire principal amount of the PPP Loan plus accrued interest. The PPP Lender has applied the forgiveness amount to satisfy the PPP Loan. The Company has no further obligations with respect to the PPP Loan. The Company recognized “Other Income” of $6,735,246 in the quarter ended August 31, 2021 related to the forgiveness of the loan principal and accrued interest. It should be noted that the SBA has a six-year period to review the forgiveness calculation.

 

10

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

12.	Intangible Assets

 

The Company amortizes its intangible assets over their estimated useful lives and will review these assets for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.

 

Intangible assets are as follows:

 

		May 31,								February 28,
		2022				Amortization				2023
Database (estimated life 5 years)		$	149,500			$	34,500			$	115,000
Non-compete agreement (estimated life 2 years)			1,250				1,250				-
Trademark (estimated life 3 years)			25,000				15,000				10,000
Customer relationships (estimated life 15 years)			1,325,000				75,000				1,250,000
Total		$	1,500,750			$	125,750			$	1,375,000

 

No instances of triggering events or impairment indicators were identified as of February 28, 2023.

 

13.	Related Party Transactions

 

On January 5, 2021, the members of the Board of Directors of the Company other than Robert Fitzgerald approved providing a waiver to QAR Industries, Inc. for its contemplated acquisition of shares owned by Fintech Consulting LLC under the Company’s then existing rights agreement (which covered a now non-existent class of Class A preferred stock) so that a distribution date would not occur under such agreement as a result of the acquisition. QAR Industries, Inc. and Fintech Consulting LLC were both principal stockholders of the Company, each owning more than 5% of the Company’s outstanding common stock prior to the consummation of the acquisition. Robert Fitzgerald is the President and majority shareholder of QAR Industries, Inc. The other directors of the Company are not affiliated with QAR Industries, Inc.

 

On February 3, 2021, the transaction was completed and QAR Industries, Inc. purchased 348,414 shares of TSR’s common stock from Fintech Consulting LLC at a price of $7.25 per share. At the same time, Bradley M. Tirpak, Chairman of TSR, purchased 27,586 shares of TSR’s common stock from Fintech Consulting LLC at a price of $7.25 per share. The foregoing transaction was the subject of litigation due to a complaint filed by Fintech Consulting LLC on December 1, 2021 in the United States District Court for the District of New Jersey under docket Fintech Consulting LLC v. TSR, Inc. et als, Docket No. 2:21-cv-20181-KSH-AME (the “New Jersey Action”). The New Jersey Action was dismissed on December 7, 2022 on jurisdictional grounds on the motion of TSR. Following that dismissal, Fintech Consulting LLC re-filed the lawsuit regarding the foregoing transaction in the Delaware Court of Chancery on January 12, 2023 under docket number Fintech Consulting LLC DBA APTASK v. TSR, Inc., et al., civil action no. 2023-0030-MTZ (the “Delaware Chancery Action”). On January 23, 2023, the Delaware Chancery Action was dismissed without prejudice. On January 22, 2023, Fintech Consulting LLC filed an action in the United States District Court for the District of Delaware under docket Fintech Consulting, LLC v. TSR, Inc., et al, Case Number: 1:23-cv-00074-MN (U.S. Dist. Ct. Dist. of Delaware) (the “Delaware Federal Action”). The Delaware Federal Action remains pending. To avoid the time and expense of litigation, the parties are in negotiations to settle this matter. As a result, the Company has accrued $75,000 in the quarter ended February 28, 2023 as an estimate of the possible settlement amount. Please refer to “Item 1, Legal Proceedings” in Part II of this report for more information on these matters.

 

The Company has provided placement services for an entity in which a Board of Director of the Company is the CEO. Revenues for such services in fiscal 2022 were approximately $59,000. Revenues for the quarter and nine months ending February 28, 2023 were $35,000 and $71,000, respectively. There were no amounts outstanding as accounts receivable from this entity as of May 31, 2022 or February 28, 2023. There was no activity with this client in the quarter and nine months ended February 28, 2022.

 

11

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

14.	Common Stock

 

Our certificate of incorporation, as amended, authorizes the issuance of up to 12,500,000 shares of common stock, $0.01 par value per share.

 

On October 8, 2021, the Company filed an automatic shelf registration statement on Form S-3 (File No. 333-260152) (the “2021 TSRI Shelf”) which contains (i) a base prospectus, which covers the offering, issuance and sale by the Company of up to $5,000,000 in the aggregate of shares of common stock from time to time in one or more offerings; and (ii) a sales agreement prospectus, which covers the offering, issuance and sale by the Company of up to $4,167,000 in the aggregate of shares of common stock that may be issued and sold from time to time under an at-the-market sales agreement (the “2021 ATM”) by and between the Company and A.G.P./Alliance Global Partners, as sales agent (the “2021 Agent”). The $4,167,000 of common stock that may be offered, issued and sold under the sales agreement prospectus is included in the $5,000,000 of shares of common stock that may be offered, issued and sold by the Company under the base prospectus. Upon termination of the sales agreement, any portion of the $4,167,000 included in the sales agreement prospectus that is not sold pursuant to the sales agreement will be available for sale in other offerings pursuant to the base prospectus and if no shares are sold under the agreement, the full $4,167,000 of securities may be sold in other offerings pursuant to the base prospectus. Under the 2021 ATM, we pay the 2021 Agent a commission rate equal to 3.0% of the gross sales price per share of all shares sold through the 2021 Agent under the sales agreement.

 

During the quarter ended February 28, 2022, we sold an aggregate of 142,500 shares of common stock pursuant to the 2021 ATM for total gross proceeds of $1,965,623 at an average selling price of $13.79 per share, resulting in net proceeds of $1,821,090 after deducting $144,533 in commissions and other transactions costs. There were no shares sold during the quarter or nine months ended February 28, 2023.

 

The 2021 TSRI Shelf is currently our only active shelf-registration statement. We may offer TSR common stock registered under the 2021 TSRI Shelf from time to time in response to market conditions or other circumstances if we believe such a plan of financing is in the best interests of our stockholders. We believe that the 2021 TSRI Shelf provides us with the flexibility to raise additional capital to finance our operations as needed. However, there is no assurance we will be successful in doing so.

 

15.	Stock-based Compensation Expense

 

On January 28, 2021, the Company granted 108,333 shares in time vesting restricted stock awards and 69,167 shares in time and performance vesting restricted stock awards to officers, directors and key employees under the TSR, Inc. 2020 Equity Incentive Plan (the “Plan”). The time vesting shares vest in tranches at the one-, two- and three-year anniversaries of the grants (“service condition”). These shares had a grant date fair value of $826,000 based on the closing price of TSR’s common stock on the day prior to the grants. The associated compensation expense is recognized on a straight-line basis over the time between grant date and the date the shares vest (the “service period”).

 

The time and performance vesting shares also vest in tranches at or after the two- and three-year anniversaries of the grants. The performance condition is defined in the grant agreements and relates to the market price of the Company’s common stock over a stated period of time (“market condition”). These shares had a grant date value of $262,000 based on the closing price of TSR common shares on the day prior to the grants discounted by an estimated forfeiture rate of 40-60%. The Company took into account the historical volatility of its common stock to assess the probability of satisfying the market condition. The associated compensation expense is recognized on a straight-line basis between the time the achievement of the performance criteria is deemed probable and the time the shares may vest. During the three months and nine months ended February 28, 2023 and 2022, $55,000, $141,000, $193,000 and $496,000, respectively, have been recorded as stock-based compensation expense and included in selling, general and administrative expenses. As of February 28, 2023, there is approximately $94,000 of unearned compensation expense that will be expensed through January 2024; 142,666 stock awards expected to vest; 82,499 awards vested to date, of which 16,635 were forfeited to pay taxes applicable to the stock awards.

 

12

 

 

TSR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

16.	Stock Repurchase Program

 

On September 12, 2022, the Board of Directors authorized a stock repurchase program of up to $500,000 of the Company’s outstanding common stock, par value $0.01 per share. The stock repurchase program commenced two business days after the filing of the related Form 8-K and is authorized for the next twelve (12) months.

 

The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program will be determined by the Board of Directors at its discretion and will depend on a number of factors, including the market price of Company’s stock, general market and economic conditions, and applicable legal and contractual requirements. The Company has no obligation or commitment to repurchase all or any portion of the shares covered by this authorization.

 

During the three months and nine months ended February 28, 2023, 8,017 and 22,834 shares of the Company’s common stock were repurchased at an aggregate cost of $64,043 and $180,469, respectively. No shares were repurchased in the three months and nine months ended February 28, 2022.

 

13

 

 

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 internally and through the previously announced pursuit of suitable acquisition candidates; the successful integration of announced and completed acquisitions and any anticipated benefits therefrom; the impact of adverse economic conditions on client spending which has 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 28, 2023 compared with three months ended February 28, 2022:

 

		(Dollar amounts in thousands) Three Months Ended
		February 28, 2023								February 28, 2022
		Amount				% of Revenue				Amount				% of Revenue
Revenue, net		$	24,257				100.0	%		$	24,383				100.0	%
Cost of sales			20,267				83.6	%			20,590				84.4	%
Gross profit			3,990				16.4	%			3,793				15.6	%
Selling, general and administrative expenses			3,769				15.5	%			3,830				15.7	%
Income (loss) from operations			221				0.9	%			(37	)			(0.1	)%
Other expense, net			(13	)			(0.0	)%			(21	)			(0.1	)%
Income (loss) before income taxes			208				0.9	%			(58	)			(0.2	)%
Provision for (benefit from) income taxes			110				0.5	%			(14	)			0.0	%
Consolidated net income (loss)			98				0.4	%			(44	)			(0.2	)%
Less: Net income attributable to noncontrolling interest			18				0.1	%			3				0.0	%
Net income (loss) attributable to TSR, Inc.		$	80				0.3	%		$	(47	)			(0.2	)%

 

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TSR, INC. AND SUBSIDIARIES

 

Revenue

 

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended February 28, 2023 decreased approximately $126,000 or 0.5% from the quarter ended February 28, 2022, primarily due to decreased activity with clients for clerical and administrative contractors. The average number of consultants on billing with customers decreased from 721 for the quarter ended February 28, 2022 to 640 for the quarter ended February 28, 2023. However, IT contractors increased from 443 to 467 IT contractors at February 28, 2023; while clerical and administrative contractors decreased from 278 to 173 at February 28, 2023. The change in the business mix toward the higher revenue IT contractors mitigated much of the decrease in revenue.

 

Cost of Sales

 

Cost of sales for the quarter ended February 28, 2023 decreased approximately $323,000 or 1.6% to $20,267,000 from $20,590,000 in the prior year period. The decrease in cost of sales resulted primarily from a decrease in consultants placed with customers, primarily clerical and administrative contractors. Cost of sales as a percentage of revenue decreased from 84.4% in the quarter ended February 28, 2022 to 83.6% in the quarter ended February 28, 2023. Revenue decreased at a lower rate than cost of sales when comparing the quarter ended February 28, 2023 to the prior year quarter, causing an increase in gross margins. The IT contractors added have a higher gross margin than the clerical and administrative staff that decreased.

 

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 decreased approximately $61,000 or 1.6% from $3,830,000 in the quarter ended February 28, 2022 to $3,769,000 in the quarter ended February 28, 2023. The decrease in these expenses primarily resulted from non-cash compensation expenses of $55,000 in the quarter ended February 28, 2023 compared with $141,000 in the quarter ended February 28, 2022 related to the Plan and from a decrease in legal fees of $55,000, offset by an accrual for a legal settlement of $75,000 in the current quarter. Selling, general and administrative expenses, as a percentage of revenue decreased from 15.7% in the quarter ended February 28, 2022 to 15.5% in the quarter ended February 28, 2023.

 

Other Expense

 

Other expense for the quarter ended February 28, 2023 resulted primarily from net interest expense of $9,000 and a mark-to-market loss of approximately $4,000 on the Company’s marketable equity securities. Other income for the quarter ended February 28, 2022 resulted primarily from net interest expense of approximately $20,000 and a mark-to-market loss of approximately $1,000 on the Company’s marketable equity securities.

 

Income Tax Provision

 

The income tax provision (benefit) included in the Company’s results of operations for the quarters ended February 28, 2023 and 2022 reflect the Company’s estimated effective tax rate for the fiscal years ending May 31, 2023 and 2022, respectively. These rates resulted in a provision of 52.9% for the quarter ended February 28, 2023 and a benefit of 24.1% for the quarter ended February 28, 2022.

 

Net Income Attributable to TSR

 

Net income attributable to TSR was approximately $80,000 in the quarter ended February 28, 2023 compared to a net loss of $47,000 in the quarter ended February 28, 2022. The increase in net income over the prior year quarter was primarily attributable to the increase in gross margin and a decrease in selling, general and administrative expenses.

 

Impact of Inflation and Changing Prices

 

For the quarters ended February 28, 2023 and 2022, inflation and changing prices did not have a material effect on the Company’s revenue or income from continuing operations.

 

15

 

 

TSR, INC. AND SUBSIDIARIES

 

Nine months ended February 28, 2023 compared with nine months ended February 28, 2022:

 

		(Dollar amounts in thousands) Nine Months Ended
		February 28, 2023								February 28, 2022
		Amount				% of Revenue				Amount				% of Revenue
Revenue, net		$	76,487				100.0	%		$	71,113				100.0	%
Cost of sales			63,434				82.9	%			59,462				83.6	%
Gross profit			13,053				17.1	%			11,651				16.4	%
Selling, general and administrative expenses			11,072				14.5	%			11,628				16.3	%
Income from operations			1,981				2.6	%			23				0.1	%
Other income (expense), net			(60	)			(0.1	)%			6,646				9.3	%
Income before income taxes			1,921				2.5	%			6,669				9.4	%
Provision for (benefit from) income taxes			629				0.8	%			(1	)			0.0	%
Consolidated net income			1,292				1.7	%			6,670				9.4	%
Less: Net income attributable to noncontrolling interest			44				0.1	%			72				0.1	%
Net income attributable to TSR, Inc.		$	1,248				1.6	%		$	6,598				9.3	%

 

Revenue

 

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the nine months ended February 28, 2023 increased approximately $5,374,000 or 7.6% from the nine months ended February 28, 2022, primarily due to growth in higher priced IT contractors offsetting decreases in clerical and administrative contractors. The average number of consultants on billing with customers decreased from 698 for the nine months ended February 28, 2022 to 671 for the nine months ended February 28, 2023. However, the average number of IT consultants increased from 424 to 467 for the nine months ended February 28, 2023, while the average number of clerical and administrative contractors decreased from 274 to 203 for the nine months ended February 28, 2023. The change in the business mix toward the higher revenue IT contractors yielded the net increase in revenue.

 

Cost of Sales

 

Cost of sales for the nine months ended February 28, 2023 increased approximately $3,972,000 or 6.7% to $63,434,000 from $59,462,000 in the prior year period. The increase in cost of sales resulted primarily from an increase in higher cost IT consultants placed with customers, primarily from organic growth. Cost of sales as a percentage of revenue decreased from 83.6% in the nine months ended February 28, 2022 to 82.9% in the nine months ended February 28, 2023. Revenue grew at a higher rate than cost of sales when comparing the nine months ended February 28, 2023 to the prior year period, causing an increase in gross margins. The IT contractors added have a higher gross margin than the clerical and administrative staff that decreased.

 

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 decreased approximately $556,000 or 4.8% from $11,628,000 in the nine months ended February 22, 2022 to $11,072,000 in the nine months ended February 28, 2023. The decrease in these expenses primarily resulted from a charge of $580,000 for the legal settlement with the former Chief Executive Officer in the prior year period. Additionally, the Company incurred non-cash compensation expenses of $193,000 in the nine months ended February 28, 2023 and $496,000 in the nine months ended February 28, 2022 related to the Plan. These reductions were offset by an increase in recruiting costs of approximately $251,000. Selling, general and administrative expenses, as a percentage of revenue, decreased from 16.3% in the nine months ended February 28, 2022 to 14.4% in the nine months ended February 28, 2023.

 

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TSR, INC. AND SUBSIDIARIES

 

Other Income (Expense)

 

Other expense for the nine months ended February 28, 2023 resulted primarily from net interest expense of $45,000 and a mark-to-market loss of approximately $15,000 on the Company’s marketable equity securities. Other income for the nine months ended February 28, 2022 resulted primarily from income of $6,735,000 from the forgiveness of principal and interest on the PPP Loan offset by net interest expense of approximately $81,000 and a mark-to-market loss of approximately $2,000 on the Company’s marketable equity securities.

 

Income Tax Provision

 

The income tax provision (benefit) included in the Company’s results of operations for the nine months ended February 28, 2023 and 2022 reflect the Company’s estimated effective tax rate for the fiscal years ending May 31, 2023 and 2022, respectively. These rates resulted in a provision of 32.7% for the nine months ended February 28, 2023 and a benefit of less than 1% for the nine months ended February 28, 2022. The effective rate for the nine months ended February 28, 2022 is low because of the non-taxable gain on the forgiveness of the PPP Loan principal and interest, combined with low taxable income.

 

Net Income Attributable to TSR

 

Net income attributable to TSR was approximately $1,248,000 in the nine months ended February 28, 2023 compared to $6,598,000 in the nine months ended February 28, 2022. The net income in the prior year period was primarily attributable to the forgiveness of principal and interest on the PPP Loan.

 

Impact of Inflation and Changing Prices

 

For the nine months ended February 28, 2023 and 2022, inflation and changing prices did not have a material effect on the Company’s revenue or income from continuing operations.

 

Liquidity and Capital Resources

 

The Company’s cash was sufficient to enable it to meet its liquidity requirements during the quarter ended February 28, 2023. The Company expects that its cash and cash equivalents and the Company’s Credit Facility pursuant to a Loan and Security Agreement with the Lender will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for the 12-month period following the issuance of these condensed consolidated financial statements. Utilizing its accounts receivable as collateral, the Company has secured this Credit Facility to increase its liquidity as necessary. As of February 28, 2023, the Company had no net borrowings outstanding against this Credit Facility. The amount the Company has borrowed fluctuates and, at times, it has utilized the maximum amount of $2,000,000 available under this facility to fund its payroll and other obligations. The Company was in compliance with all covenants under the Credit Facility as of February 28, 2023 and through the date of this filing. Additionally, in April 2020, the Company secured a PPP Loan in the amount of $6,659,000 to meet its obligations in the face of potential disruptions in its business operations and the potential inability of its customers to pay their accounts when due. As of August 31, 2020, the Company had used 100% of the PPP Loan funds to fund its payroll and for other allowable expenses under the PPP Loan. The use of these funds allowed the Company to avoid certain salary reductions, furloughs and layoffs of employees during the period. The Company applied for PPP Loan forgiveness and its application for forgiveness was accepted and approved; the PPP Loan and accrued interest were fully forgiven in July 2021.

 

At February 28, 2023, the Company had working capital (total current assets in excess of total current liabilities) of approximately $12,848,000, including cash and cash equivalents and marketable securities of $8,580,000 as compared to working capital of $10,912,000, including cash and cash equivalents and marketable securities of $6,526,000 at May 31, 2022.

 

Net cash flow of approximately $2,393,000 was provided by operations during the nine months ended February 28, 2023 as compared to $2,472,000 of net cash used in operations in the prior year period. The cash provided by operations for the nine months ended February 28, 2023 primarily resulted from consolidated net income of $1,292,000, a decrease in accounts receivable of $1,848,000 offset by a decrease in accounts payable and accrued expenses of $926,000, a decrease in legal settlement payable of $598,000 and a decrease in deferred income taxes of $493,000. The cash used in operations for the nine months ended February 28, 2022 primarily resulted from consolidated net income of $6,670,000, offset by the forgiveness of the PPP Loan principal and accrued interest of $6,735,000, an increase in accounts receivable of $2,758,000 and a decrease in legal settlement payable of $277,000.

 

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Net cash used in investing activities of approximately $996,000 for the nine months ended February 28, 2023 primarily resulted from purchases of certificates of deposit of $990,000 and purchases of fixed assets of $6,000. Net cash used in investing activities of $81,000 for the nine months ended February 28, 2022 primarily resulted from purchases of fixed assets.

 

Net cash used in financing activities during the nine months ended February 28, 2023 of $318,000 primarily resulted from purchases of treasury stock of $180,000, distributions of the minority interest of $75,000 and from net repayments under the Company’s Credit Facility of $62,000. Net cash provided by financing activities of approximately $1,669,000 during the nine months ended February 28, 2022 resulted from net proceeds from sales of the Company’s common stock in our ATM program of $1,821,000 offset by payments made for taxes related to vested stock awards of $92,000, net payments on the Company’s Credit Facility of $33,000 and distributions of the minority interest of $27,000.

 

The Company’s capital resource commitments at February 28, 2023 consisted of lease obligations on its branch and corporate facilities. The net present value of its future lease payments was approximately $538,000 as of February 28, 2023. The Company intends to finance these commitments primarily from the Company’s available cash and Credit Facility.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Critical Accounting Estimates

 

The Securities Act regulations define “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. These estimates 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, 2022 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 and are thus considered critical accounting estimates under the Securities Act. There have been no changes in the Company’s significant accounting policies as of February 28, 2023.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

As a smaller reporting company, we are not required to provide the information called for by this Item.

 

Item 4. 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 were 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 completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II. Other Information

 

Item 1. Legal Proceedings

 

Fintech Consulting LLC v. TSR, Inc., et al., case number 2:21-cv-20181(KSH)(AME) (U.S. Dist. Ct., Dist. of New Jersey); Fintech Consulting LLC DBA APTASK v. TSR, Inc., et al., civil action no. 2023-0030-MTZ (Del. Ch.); and Fintech Consulting, LLC v. TSR, Inc., et al, Case Number: 1:23-cv-00074-MN (U.S. Dist. Ct. Dist. of Delaware).

 

On December 1, 2021, Fintech Consulting LLC filed a complaint against the Company in the United States District Court for the District of New Jersey (“the New Jersey Action”). The named Defendants in the complaint are the Company, QAR Industries, Inc., a shareholder of TSR (“QAR”), Robert E. Fitzgerald, a director and shareholder of TSR and the President, director and a shareholder of QAR (“Fitzgerald”), and Bradley Tirpak, a shareholder and the chairman of the board of directors of TSR (“Tirpak”). The complaint purported to assert claims against the Defendants under state law and Section 10(b) of the Exchange Act in connection with a Share Purchase Agreement, dated January 31, 2021, by and between the Plaintiff, as the seller of shares of TSR’s common stock, and QAR and Tirpak, as the purchasers of such shares (the “SPA”). The Plaintiff sought (i) judgment declaring the transactions represented by the SPA null and void and for the return of the shares; (ii) judgment cancelling the SPA and returning the shares in exchange for return of the purchase price; (iii) judgment unwinding the transaction; (iv) compensatory damages; (v) punitive damages; (vi) pre-judgment interest; (vii) costs of lawsuit including attorneys’ fees; and (viii) such other relief as the Court may find appropriate. Fintech filed its first amended complaint on March 2, 2022 which Defendants moved to dismiss on April 19, 2022. On December 7, 2022, the court granted Defendants’ motion and dismissed the New Jersey Action on jurisdictional grounds.

 

Following the dismissal of the original lawsuit, the Plaintiff filed another complaint relating to the SPA against the Defendants on January 12, 2023 in the Court of Chancery of the State of Delaware (the “Delaware Chancery Action”), asserting claims and seeking relief substantially similar to that which was asserted and sought in the preceding lawsuit. Plaintiff filed in the Delaware Chancery Court pursuant to the forum selection clause in the SPA, whereby the parties thereto irrevocably and unconditionally consented to the exclusive general jurisdiction of the Delaware Chancery Court over any action, suit or proceeding arising out of or relating to the SPA. Also on January 12, 2023, the Plaintiff filed a motion to dismiss its own complaint for lack of subject matter jurisdiction, requesting that the court dismiss the suit so that Plaintiff could re-file in federal court, along with a motion to expedite. On January 18, 2023, the court issued a letter decision denying Plaintiff’s motion to expedite and stating that the court would address Plaintiff’s motion to dismiss in the ordinary course. On January 23, 2023, the Delaware Chancery Action was dismissed without prejudice.

 

On January 22, 2023, Fintech Consulting LLC filed a complaint against the Company in the United States District Court for the District of Delaware (the “Delaware Federal Action’). The Delaware Federal Action, in sum and substance, asserts claims and seeks relief substantially similar to that contained in both the New Jersey Action and the Delaware Chancery Action. The Delaware Federal Action remains pending.

 

The Company believes the Delaware Chancery Action described above to be without merit and intends to zealously defend its interests. However, the Company may incur significant additional legal expenses as it pursues a defense against this action. Therefore, to avoid the time and expense of litigation, the Company has commenced negotiations with Fintech to settle this matter. An amount of $75,000 has been accrued to selling, general and administrative expenses in the quarter ending February 28, 2023 as an estimate of a possible settlement payment. Further, while the Company believes the action to be without merit, no assurances can be given as to: (i) the outcome of this or other legal proceedings and (ii) the related impact of an unanticipated adverse outcome of these proceedings on the Company’s financial condition, results of operations or near-term liquidity.

 

See Note 6 to the condensed consolidated financial statements elsewhere in this report and the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2021 for more information.

 

Item 1A. Risk Factors

 

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2022, as filed with the Securities and Exchange Commission. We are not aware of any material updates to the risk factors described in our previously filed Annual Report on Form 10-K.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

The table below sets forth the information required by Item 703(b) of Regulation S-K with respect to any purchases made by or on behalf of the Company or any “affiliated purchaser,” as defined in § 240 10b-18(a)(3) of the Exchange Act, of shares of our common stock.

 

Period		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)				Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Sept. 1-30, 2022			4,388			$	8.04				4,388			$	464,702
Oct. 1-31, 2022			4,949			$	7.65				4,949			$	426,846
Nov. 1-30, 2022			5,480			$	7.89				5,480			$	383,754
Dec. 1-31, 2022			4,128			$	7.46				4,128			$	352,791
Jan. 1-31, 2023			2,858			$	8.56				2,858			$	328,309
Feb. 1-28, 2023			1,031			$	8.51				1,031			$	319,531
Total			22,834			$	7.90				22,834			$	319,531

 

(1)

On September 12, 2022, the Board of Directors authorized a stock repurchase program of up to $500,000 of the Company’s outstanding common stock, par value $0.01 per share. The stock repurchase program was announced on Form 8-K by the Company on September 13, 2022. The program commenced on September 15, 2022 and is authorized for the following 12 months until September 13, 2023. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program will be determined by the Board of Directors at its discretion and will depend on a number of factors, including the market price of the Company’s stock, general market and economic conditions and applicable legal and contractual requirements. The Company has no obligation or commitment to repurchase all or any portion of the shares authorized by the program.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

Exhibit		Document
Exhibit 31.1		Rule 13a-14(a)/15d-14(a) Certification by Thomas Salerno as principal executive officer
Exhibit 31.2		Rule 13a-14(a)/15d-14(a) Certification by John G. Sharkey as principal financial officer
Exhibit 32.1		Section 1350 Certification by Thomas Salerno as principal executive officer
Exhibit 32.2		Section 1350 Certification by John G. Sharkey as principal financial officer
Exhibit 101		Interactive Data File containing the following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2023, formatted in Inline Extensible Business Reporting Language (Inline 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.
Exhibit 104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

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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 11, 2023	/s/ Thomas Salerno
	Thomas Salerno, Chief Executive Officer, President, Treasurer and Principal Executive Officer
Date: April 11, 2023	/s/ John G. Sharkey
	John G. Sharkey, Sr. Vice President, Chief Financial Officer, Secretary, Principal Financial Officer and Principal Accounting Officer

 

 

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