The accompanying condensed consolidated interim financial statements include the accounts of TSR, Inc. and its subsidiaries. Unless otherwise stated or the context otherwise requires, the terms “we,” “us,” “our,” and the “Company” refer to TSR, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The condensed balance sheet as of May 31, 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 ended August 31, 2022 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.

Basic net income per common share is computed by dividing net income available to common stockholders of TSR, Inc. 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 90,226 and 52,637 have been included for dilutive shares outstanding for the three months ended August 31, 2022 and 2021, respectively.

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 August 31, 2022 and May 31, 2022:

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.

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:

The following are the major categories of assets measured at fair value on a recurring basis as of August 31, 2022 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):

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 August 31, 2022 and May 31, 2022 are summarized as follows:

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.

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, 14 and 17 to the condensed consolidated financial statements and in the section titled “Item 1, Legal Proceedings” in Part II of this report.

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.

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 August 31, 2022 and 2021 the Company’s operating lease expense for these leases was $84,977 and $72,935, respectively.

As there are no explicit rates provided in our leases, the Company’s incremental borrowing rate was used based on the information at commencement date in determining the present value of the future lease payments. Future minimum lease payments under non-cancellable operating leases as of August 31, 2022 were as follows:

The following table sets forth the right-of-use assets and operating lease liabilities as of August 31, 2022:

The weighted average remaining lease term for the Company’s operating leases is 2.2 years.

On November 27, 2019, TSR closed on a revolving credit facility (the “Credit Facility”) pursuant to a Loan and Security Agreement with Access Capital, Inc. (the “Lender”) 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 August 31, 2022 was 5.50%, indicating an interest rate of 7.25% 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 August 31, 2022.

As of August 31, 2022, the net payments exceeded borrowings outstanding against this line of credit facility resulting in a receivable from the Lender of $56,965 which is included in “Other receivables” on the 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.

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.

On April 1, 2020, the Company entered into a binding term sheet (“Term Sheet”) with Zeff Capital, L.P. (“Zeff”) pursuant to which it agreed to pay Zeff an amount of $900,000 over a period of three years in cash or cash and stock in settlement of expenses incurred by Zeff during its solicitations in 2018 and 2019 in connection with the annual meetings of the Company, the costs incurred in connection with the litigation initiated by and against the Company as well as negotiation, execution and enforcement of the Settlement and Release Agreement, dated as of August 30, 2019, by and between the Company, Zeff and certain other parties . In exchange for certain releases, the Term Sheet calls for a cash payment of $300,000 on June 30, 2021, a second cash payment of $300,000 on June 30, 2022 and a third payment of $300,000 also on June 30, 2022, which can be paid in cash or common stock at the Company’s option. There is no interest due on these payments. The $300,000 payment due June 30, 2021 was paid during the quarter ended August 31, 2021. The agreement also has protections to defer such payment dates so that the debt covenants with the Company’s lender are not breached. On August 13, 2020, the Company, Zeff, Zeff Holding Company, LLC and Daniel Zeff entered into a settlement agreement to reflect these terms. Any installment payment which is deferred as permitted above will accrue interest at the prime rate plus 3.75%, and Zeff shall thereby have the option to convert such deferred amounts (plus accrued interest if any) into shares of the Company’s stock. The Company accrued $818,000, the estimated present value of these payments using an effective interest rate of 5%, in the quarter ended February 29, 2020, as the events relating to the expense occurred prior to such date. The two cash payments of $300,000 each were made by June 30, 2022 in full satisfaction of the settlement.

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

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.

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:

No instances of triggering events or impairment indicators were identified at August 31, 2022.

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

On February 3, 2021, the transaction was completed and QAR Industries, Inc. purchased 348,414 shares of TSR’s common stock from Fintech Consulting LLC at a price of $7.25 per share. At the same time, Bradley M. Tirpak, Chairman of TSR, purchased 27,586 shares of TSR’s common stock from Fintech Consulting LLC at a price of $7.25 per share. The foregoing transaction is currently the subject of litigation due to a complaint filed by Fintech Consulting LLC on December 1, 2021. For more information about the foregoing complaint and litigation, please see Note 17 to the condensed consolidated financial statements and the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2021.

The Company has provided placement services for an entity in which a Board of Director of the Company is the CEO. Revenues for such services in fiscal 2022 were approximately $59,000. There were no amounts outstanding as accounts receivable from this entity as of May 31, 2022 or August 31, 2022. There was no activity with this client in the quarters ending August 31, 2022 or 2021.

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 fiscal year ended May 31, 2022, we sold an aggregate of 142,500 shares of common stock pursuant to the 2021 ATM for total gross proceeds of $1,965,623 at an average selling price of $13.79 per share, resulting in net proceeds of $1,783,798 after deducting $181,825 in commissions and other transactions costs. There were no shares sold during the quarters ending August 31, 2022 or 2021.

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.

On January 28, 2021, the Company granted 108,333 shares in time vesting restricted stock awards and 69,167 shares in time and performance vesting restricted stock awards to officers, directors and key employees under the TSR, Inc. 2020 Equity Incentive Plan (the “Plan”). The time vesting shares vest in tranches at the one, two and three-year anniversaries of the grants (“service condition”). These shares had a grant date fair value of $826,000 based on the closing price of TSR’s common stock on the day prior to the grants. The associated compensation expense is recognized on a straight-line basis over the time between grant date and the date the shares vest (the “service period”). The time and performance vesting shares also vest in tranches at or after the two- and three-year anniversaries of the grants. The performance condition is defined in the grant agreements and relates to the market price of the Company’s common stock over a stated period of time (“market condition”). These shares had a grant date value of $262,000 based on the closing price of TSR common shares on the day prior to the grants discounted by an estimated forfeiture rate of 40-60%. The Company took into account the historical volatility of its common stock to assess the probability of satisfying the market condition. The associated compensation expense is recognized on a straight-line basis between the time the achievement of the performance criteria is deemed probable and the time the shares may vest. The market condition for the shares that vest on the two-year anniversary was met in October 2021. During the quarters ended August 31, 2022 and 2021, $69,216 and $177,249, respectively, have been recorded as stock-based compensation expense and included in selling, general and administrative expenses. As of August 31, 2022, there is approximately $217,000 of unearned compensation expense that will be expensed through February 2024; 142,666 stock awards expected to vest; 56,666 awards vested to date, of which 14,780 were forfeited to pay taxes applicable to the stock awards.

On December 1, 2021, Fintech Consulting LLC filed a complaint against the Company in the United States District Court for the District of New Jersey. The named Defendants in the complaint are the Company, QAR Industries, Inc., a shareholder of TSR (“QAR”), Robert E. Fitzgerald, a director and shareholder of TSR and the President, director and a shareholder of QAR (“Fitzgerald”), and Bradley Tirpak, a shareholder and the chairman of the board of directors of TSR (“Tirpak”). The complaint purports to assert claims against the Defendants under state law and Section 10(b) of the Exchange Act in connection with a Share Purchase Agreement, dated January 31, 2021, by and between the Plaintiff, as the seller of shares of TSR’s common stock, and QAR and Tirpak, as the purchasers of such shares (the “SPA”). The plaintiff seeks (i) judgment declaring the transactions represented by the SPA null and 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) judgement 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. See Note 14 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.

The Company believes the action described above to be without merit and intends to vigorously defend its interests. However, the Company may incur significant additional legal expenses as it pursues a vigorous defense against this action.

While the Company believes the action to be without merit, no assurances can be given as to: (i) the outcome of this or other legal proceedings and (ii) the related impact of an unanticipated adverse outcome of these proceedings on the Company’s financial condition, results of operations or near-term liquidity.

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 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.