UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended
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Commission File
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June 30, 2017
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No. 1-9309
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Versar,
Inc.
(Exact
name of registrant as specified in its charter)
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DELAWARE
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54-0852979
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(State
or other jurisdiction
of
Incorporation or organization)
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(I.R.S.
employer identification no.)
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6850 Versar Center, Springfield, Virginia
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22151
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(Address
of principal executive offices)
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(Zip
code)
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(703) 750-3000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
(Title
of Class)
NYSE American
(Name
of each exchange on which registered)
Securities
registered pursuant to Section 12(g) of Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ☐ No ☑
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files).
Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check
one):
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
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☐ (Do not check if a smaller reporting
company)
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Smaller reporting company
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☒
|
|
|
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Emerging
growth company
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☐
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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 ☑
The
aggregate market value of the voting stock held by non-affiliates
of the registrant as of December 30, 2016 was approximately
$13,563,911.
The
number of shares of Common Stock outstanding as of September 1,
2017 was
10,019,409.
Portions of the registrant’s Definitive Proxy Statement to be
filed subsequent to the date hereof with the Securities and
Exchange Commission pursuant to Regulation 14A in connection with
the Registrant’s 2017 Annual Meeting of Stockholders are
incorporated by reference into Part III of this report. Such
Definitive Proxy Statement will be filed with the Securities and
Exchange Commission, not later than 120 days after the conclusion
of the Registrant’s fiscal year ended June 30,
2017.
PART I
Item 1. Business
Unless this report indicates otherwise the terms
”Versar,” the “Company,” “we,”
“us,” and “our” refer to Versar, Inc. and
consolidated subsidiaries. Versar’s fiscal year end is based
upon a 52 or 53 week year ending on the last Friday of the fiscal
period and therefore does not close on a calendar month end. The
Company’s fiscal 2017 included 52 weeks and fiscal 2016
included 53 weeks. Therefore, for comparative purposes, the year to
date numbers presented will include an additional week of results
for fiscal 2016.
Cautionary Statement Regarding Forward-Looking
Statements
This report contains certain forward-looking statements that are
based on current expectations. Actual results may differ
materially. The forward-looking statements
include, without limitation, those regarding the continued award of
future work or task orders from government and private clients,
cost controls and reductions, the expected resolution of delays in
billing of certain projects, and the possible impact of current and
future claims against the Company based upon negligence and other
theories of liability. Forward-looking statements involve numerous
risks and uncertainties that could cause actual results to differ
materially, including, but not limited to, the possibility that the
demand for the Company's services may decline as a result of
possible changes in general and industry specific economic
conditions and the effects of competitive services and pricing; the
possibility that the Company will not be able to perform work
within budget or contractual limitations; one or more current or
future claims made against the Company may result in substantial
liabilities; the possibility that the Company will not be able to
attract and retain key professional employees; failure to recover
at-risk contract costs; changes to or failure of the Federal,
state, or local governments to fund certain programs in which the
Company participates; changes in customer procurement policies and
practices; delays in project funding; effects of U.S. government
conflict of interest policies; loss of anticipated new contract
vehicles either due to funding changes or competitive factors, and
such other risks and uncertainties set forth in this report and in
other reports and other documents filed by the Company from time to
time with the Securities and Exchange
Commission.
Business Overview
Versar, Inc. is a Delaware corporation incorporated in 1969. We are
a global project management company providing value-oriented
solutions to government and commercial clients in three business
segments: (1) Engineering and Construction Management (ECM); (2)
Environmental Services Group (ESG); and (3) Professional Services
Group (PSG). We also provide tailored and secure engineering
solutions in extreme environments and offer specialized abilities
in onsite staff support, performance based remediation, and
hazardous materials management.
Versar’s
fiscal 2017 proved to be eventful and challenging. The year began
with a string of new contract awards, including the
Architect-Engineer 2013 Environmental Services (A-E13ES)
multiple-award contract with a combined contract ceiling of $500
million, an Indefinite Delivery Indefinite Quantity (IDIQ) contract
in support of the Environmental Protection Administration (EPA)
worth up to $20 million, a $14.8 million task order for engineering
and technical support in Afghanistan, and a $15.5 million task
order to renovate a building at Hanscom Air Force Base. In December
2016, Versar announced an amendment to its loan agreement with Bank
of America and then early in January 2017, a change in its
Independent Registered Accounting Firm from Grant Thornton to Urish
Popeck. Versar continued to work with its Chief Restructuring
Officer (CRO) who served as a point of contact for Bank of America
to manage cash flow throughout the fiscal year. In April 2017, the Company sold its UK Subsidiary
PPS, Ltd. (PPS) for a cash value of $214,042.50. The Company is
entitled to additional cash payments for PPS in a total of up to
£400,000 contingent on PPS’ attainment of certain
performance thresholds through the end of calendar year 2017 agreed
upon with the buyer of PPS.
Notwithstanding new contract awards, Versar operated at a financial
loss for all four quarters in, and therefore, for all of, fiscal
2017. In response, the Company continued and expanded a wide range
of deliberate cost cutting measures initiated during fiscal 2016
which continued through the first six months of fiscal 2017, the
benefits of which will continue to be realized in future periods.
We will continue to manage our costs based on financial
performance. Versar continues to maintain a strong backlog of
$136.0 million as a result of adjusting our bidding strategies and
teaming partnerships, refining our capabilities, and making
strategic hires. As a service-based company, our revenue is
primarily derived from the provision of labor-based services,
rather than capital-intensive product offerings. Thus, our revenue
is driven by our ability to retain existing clients, attract new
clients, provide quality project and program management at
competitive rates, and identify and retain qualified
employees.
On September 22, 2017, the Company,
KW Genesis Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of Kingswood Genesis Fund I, LLC (the latter two
“Purchaser”), entered into an Agreement and Plan of
Merger (Merger Agreement). The Merger Agreement provides that,
among other things, subject to the satisfaction or waiver of
certain conditions, following completion of a tender offer for all
outstanding common stock of the Company for a cash price of $0.15
per share, and in accordance with the General Corporation Law of
the State of Delaware, as amended (the “DGCL”),
Purchaser will be merged into and with the Company (the
“Merger”). Any common stock not purchased in the tender
offer will be exchanged for a cash price of $0.15 per share in the
Merger. Following the consummation of the Merger, the Company will
continue as the surviving corporation as a wholly owned subsidiary
of Parent. The Merger will be effected under Section 251(h) of the
DGCL, which provides that following consummation of a successful
tender offer for a public corporation, and subject to certain
statutory provisions, if the acquirer holds at least the amount of
shares of each class of stock of the acquired corporation that
would otherwise be required to approve a merger of the acquired
corporation, and the stockholders that did not tender their shares
in the tender offer receive the same consideration for their stock
in the merger as was payable in the tender offer, the acquirer can
effect a merger without the vote or written consent of the
stockholders of the acquired corporation. Accordingly, if Purchaser
consummates the tender offer, the Merger Agreement contemplates
that the parties will effect the closing of the Merger without a
vote of the stockholders of the Company in accordance with Section
251(h) of the DGCL.
Business Segments
The company is aligned into three reportable segments: ECM, ESG,
and PSG, all of which are described below.
ECM
ECM’s services include engineering design,
construction, construction management and security systems
installation and support. ECM supports federal and commercial
clients worldwide. Our
global network of engineering and construction resources
facilitates the effective mobilization of highly skilled
construction teams and advanced methodologies around the
world.
The
primary markets for ECM’s services include a broad range of
infrastructure and engineering design for facilities,
transportation, resource management, and local, regional and
international development.
Our
services include:
●
Security
Systems planning and analysis services include reviewing,
developing and updating physical security plans, site surveys and
physical security risk assessments.
●
Construction Management Services providing quality assurance
services in Title II or as owner’s representatives, providing
a legally defensible record of the construction, earned value
project management to objectively measure construction progress,
engineering and schedule analysis and negotiation of change
orders.
●
Construction
Services include integrated design-build solutions for
construction, horizontal and vertical SRM projects, construction of
design-bid-build projects including all building trades, equipment
installation and furnishings as specified.
●
Fuel facility repair and modernization services include
quality-focused expertise in petroleum, oil and lubricants (POL)
Department of Defense (DOD) facilities to assist the DOD in
providing a worldwide robust and dependable refueling
capability.
ECM’s
key projects that contributed to the revenue include integration
and maintenance of access control and security systems for the
Federal Aviation Administration (FAA), construction management and
personal services including engineering, construction inspection,
operations and maintenance and administrative support to the U.S.
Army Corps of Engineers (USACE) and project and commercial
customers. The largest ECM project during fiscal 2017 was the
$109.5 million firm fixed price Design/Bid/Build runway repair task
order at Dover Air Force Base (DAFB). This project was awarded on
August 13, 2014 under Versar’s Sustainment, Restoration and
Modernization (SRM) Acquisition Task Order Contract (SATOC) IDIQ
with the Air Force Civil Engineer Center (AFCEC), held with our
joint venture partner, Johnson Controls Federal Systems. The SATOC
IDIQ primarily services USAF customers, providing a fast track,
efficient method for execution of all types of facility repairs,
renovations and construction. During the months of December 2016
through February 2017, the work on this task order stopped due to
seasonal weather related conditions. Work resumed in March 2017.
The main runway (01/19) was turned over to the USAF in September
2016 and the final phase of the project was fully turned over to
the USAF on August 16, 2017. Versar is awaiting a pending
modification with additional scope, which the Company anticipates
will be resolved by December 2017.
ESG
ESG
supports federal, state and local governments, and commercial
clients worldwide. For over 40 years, our team of engineers,
scientists, archeologists, and unexploded ordnance staff has
performed thousands of investigations, assessments, and remediation
safely and effectively. Our client-focused approach, complemented
by our regulatory expertise, provides low risk with high value in
today’s complex regulatory climate.
Our
services include:
●
Compliance services
include hazardous waste and hazardous materials management from
permitting support to compliance with applicable federal laws,
emergency response training, hazardous waste facility
decommissioning, energy planning, energy audit and assessment,
commission and metering, Energy Savings Performance Contract (ESPC)
support and Executive Order 13514/sustainability services. We are a
greenhouse gas verification body in California, one of the few
companies certified to review greenhouse gas emissions data in that
state.
●
Cultural Resources
services provides clients with reliable solutions from recognized
experts, quality products that are comprehensive yet focused on
client objectives, and large-business resources with small-business
responsiveness and flexibility. ESG’s staff has set the
industry standard for management, methodologies, and products. Our
expertise and experience in the design and management of innovative
programs that are responsive to client needs and satisfy regulatory
requirements.
●
Natural Resources
services include protected species assessments and management,
wetland delineations and Section 404 permitting, ecosystem and
habitat restoration, and water quality monitoring, ecological
modeling, and environmental planning. Our team has extensive
expertise in developing innovative means for mitigation, managing
the complex regulatory environment, and providing our clients with
the knowledge and experience needed to meet or exceed goals and
objectives.
●
Remediation
services provides on-going federal remediation and restoration
projects, including four USAF Performance Based Remediation (PBR)
projects operating at more than ten different locations in nine
states. Our success is based in part on the understanding that the
goal of remedial action projects is to eliminate our clients’
long-term liability and reduce the life cycle costs of
environmental restoration.
●
Unexploded Ordnance
(UXO)/Military Munitions Response Program (MMRP) provides range
sustainment services at two of the world’s largest ranges.
Our highly experience staff provide range sustainment services,
range permitting, monitoring, and deconstruction, surface,
subsurface, and underwater investigations and removals, geophysical
surveys, and anomaly avoidance and construction
support.
ESG’s
key projects that contributed to revenue in fiscal 2017 are the
PBRs in New England, Great Lakes, Tinker and Front Range, Range
Sustainment Services at Nellis Air Force Base (AFB), hydrodynamic
flow modeling and sedimentation study at Naval Submarine Base Kings
Bay, shoreline stabilization projects at Possum and Cedar Point for
the Navy, an Environmental Impact Statement (EIS) for housing
privatization for the USAF, fence to fence programs at Cannon,
Holloman, Barksdale, Columbus AFBs and Joint Base
McGuire-Dix-Lakehurst, large cultural resources efforts at Avon
Park, Tyndall AFB, and Joint Base McGuire-Dix-Lakehurst, and
numerous remedial actions for the EPA.
PSG
PSG provides onsite environmental, engineering, construction
management, and logistics services to the USAF, U.S. Army, U.S.
Army Reserve, National Guard Bureau, FAA, Bureau of Land Management
(BLM), and Department of Justice (DOJ) through the Drug Enforcement
Agency (DEA). Versar provides on-site services that enhance a
customer’s mission through the use of subject matter experts
who are fully dedicated to accomplish mission objectives. These
services are particularly attractive as the federal agencies and
DOD continue to be impacted by budgetary pressures. This segment
focuses on providing onsite support to government clients to
augment their capabilities and capacities.
Our
services include:
●
Facilities
and operational support by delivering comprehensive facility
maintenance, life cycle management plan minimizing operating costs,
space utilization, operational planning/forecasting, and automated
planning technical support services ensuring operational readiness
of reserve forces to the U.S. Army Reserve.
●
Versar
assists the U.S. Army Reserve with assessing, improving, obtaining,
maintaining, and sustaining environmental compliance, as well as
conservation requirements, performing hazardous waste management,
spill prevention and clean-up, biological assessments, wetland
sustainment, and environmental training.
●
Environmental
quality program services, including facility and utilities
integration, National Environmental Policy Act considerations,
water program management, wildlife program management,
archaeological and historical preservation to DOD Joint Base
communities.
●
Microbiological
and chemical support to the U.S. Army’s designated Major
Range and Test Facility Base for Chemical and Biological Testing
and Training.
●
Biological,
archaeological, and Geographic Information Systems (GIS) support to
plan restoration projects for wildlife habitat improvements and
also field verification of GIS-generated disturbances and related
mapping data.
●
Engineering
expertise and program oversight for civil engineering activities
related to various facilities services performed at the Air
National Guard Readiness Center and National Guard
Bureau.
●
Provides
the DOJ’s DEA engineering and facilities planning support for
the implementation and completion of SRM projects.
Revenue Earned by Geographic Location
Our consolidated gross revenue for fiscal 2017 was $111.8 million,
of which approximately $109.8 million was funded with U.S. currency
and approximately $2.0 million was derived from our former
subsidiary PPS, and funded in Pounds Sterling. Approximately 16% of
our fiscal 2017 revenue was generated in international
locations.
Our consolidated gross revenue for fiscal 2016 was $167.9 million,
of which approximately $165.7 million was funded with U.S. currency
and approximately $2.2 million was derived from PPS, and funded in
Pounds Sterling. Approximately 11% of our fiscal 2016 revenue was
generated in international locations.
Our Strategy
In
addressing fiscal 2017’s challenges, Versar has remained
committed to our customers, shareholders, employees and partners.
Going forward, Versar will continue to provide technical expertise
to our primarily federal customers. We will focus on international
construction management in austere environments, security
solutions, ongoing investments in military base efficiencies and
renovation, compliance and environmental remediation. The following
elements are driving our strategy:
1.
Manage
our business to the bottom line. We are committed to conservatively
managing our resources to achieve positive net income, ensure
shareholder value, and transform processes and
procedures.
2.
Profitably
execute current backlog. Our front-line project managers and
employees will continue to control costs and streamline processes
to profitably execute our current backlog. In addition, our support
staff will redouble efforts to support our front-line employees
efficiently and effectively serve our customers. We are committed
to innovatively transforming our business processes to be as
efficient and cost-effective as possible.
3.
Grow
our pipeline. We are aggressively mining existing IDIQ contract
vehicles to increase win rate. While we reduced support staff in
our Business Development function, we remain committed to growing
our pipeline and backlog by carefully managing our proposal efforts
from identification through award to maximize our business
development investments.
4.
Retain
and attract the best people. Our employees are critical to the
execution of our strategy and we are committed to attracting and
retaining the employees required to achieve all the elements of our
strategy.
Competition
Government contracting is a highly competitive industry, one in
which price is often the deciding factor. In such an environment,
Versar must differentiate our capabilities and offerings to ensure
that our customers understand the value of our offerings. Versar
carefully targets business development and sales efforts and
develops strategic partnerships to enhance our competitive
advantage.
The acquisition of Versar Security Systems (VSS) in fiscal 2016
expanded our customer base to include the FAA and the Federal
Emergency Management Agency (FEMA), among others, and increased our
service offerings into higher margin classified construction.
During fiscal 2017, we positioned the Company to expand these new
capabilities to existing customers and existing capabilities to new
customers.
Backlog
We report “funded” backlog, which represents orders for
goods and services for which we have received firm contractual
commitments. Based on its history, Versar believes that
approximately 90% of funded backlog will be performed in the
succeeding twelve- to eighteen-month period following the execution
of the relevant contract. However, there can be no assurance that
we will ultimately realize our full backlog. Additionally, other
companies with similar types of contracts may not calculate backlog
in the same manner we do, as their calculations may be based on
different subjective factors or because they use a different
methodology. Therefore, information presented by us regarding
funded backlog may not necessarily be comparable to similar
presentations by others.
As of June 30, 2017, funded backlog was approximately $136.0
million, which was consistent with the funded backlog at the end of
the fiscal 2016.
Employees
At June 30, 2017, we had 412 employees, of which 76% are engineers,
scientists, and other professionals. 39% of our professional
employees have a bachelor’s degree, 26% have a master’s
degree, and 3% have a doctorate degree as their highest level of
education earned.
Item 1A. Risk Factors
Risks
Related to the Acquisition of the Company by
Kingswood
The
announcement and pendency of the acquisition of the Company by
Kingswood may have a material adverse effect on our
business.
Uncertainty about the effect of the
acquisition on our employees, suppliers, customers and other
parties may have a material adverse effect on our business.
Although we intend to take steps designed to reduce any adverse
effects, these uncertainties could impair our ability to retain and
motivate key personnel and could cause customers, suppliers and
others that deal with us to defer entering into contracts, or
making other decisions, concerning doing business with us or seek
to change existing business relationships with us. The pursuit of
the acquisition may place a significant burden on our management
and internal resources. In addition, we have diverted, and will
continue to divert, significant management resources towards the
completion of the acquisition. The diversion of management’s
attention away from day-to-day business concerns could adversely
affect our financial results. In addition, the Merger Agreement
restricts us from taking certain actions without the consent of
Kingswood. These uncertainties and restrictions could disrupt or
adversely affect our business and prevent us from pursuing
otherwise attractive business opportunities that may arise prior to
the completion of the acquisition or termination of the Merger
Agreement.
There may be
unexpected delays in the completion of the acquisition, or the
acquisition may not be completed at all.
Certain events may delay the
completion of the acquisition or result in a termination of the
Merger Agreement. Some of these events are outside the control of
either party. In particular, completion of the Offer requires the
tender of a stated minimum percentage of the Company’s common
stock. We may incur significant additional costs in connection with
any delay in completing the acquisition or the termination of the
Merger Agreement, in addition to significant transaction costs,
including legal, financial advisory, accounting and other costs we
have already incurred.
We can neither assure you that the
conditions to the completion of the acquisition will be satisfied
or waived or that any adverse change, effect, event, circumstance,
occurrence or state of facts that could give rise to the
termination of the Merger Agreement will not occur, and we cannot
provide any assurances as to whether or when the acquisition will
be completed.
Failure to
complete the acquisition in a timely manner or at all could
negatively affect our stock price and future business and financial
results.
Delays in completing the
acquisition or the failure to complete the acquisition at all could
negatively affect our future business and financial results, and,
in that event, the market price of our common stock may decline
significantly. If the acquisition is not completed for any reason,
we will be subject to several risks, including the diversion of
management focus and resources from operational matters and other
strategic opportunities while working to implement the acquisition,
any of which could materially adversely affect our business,
financial condition, results of operations and the value of our
stock price. A failed transaction may result in negative publicity
and a negative impression of us in the investment community.
Further, any disruptions to our business resulting from the
announcement and pendency of the acquisition, including any adverse
changes in our relationships with our customers, suppliers and
employees, could continue or accelerate in the event of a failed
transaction. In addition, if we do not complete the acquisition, we
may be required to pay a termination fee under certain
circumstances set forth in the Merger
Agreement.
In addition, we have incurred, and will continue
to incur, significant costs, expenses and fees for professional
services and other transition costs in connection with the
acquisition. We will be required to pay such costs relating to the
transaction whether or not the acquisition is
consummated.
If a sufficient number of shares are not tendered pursuant to the
Offer, the merger may not be completed and our business could be
impaired.
If the
shares Kingswood acquires pursuant to the Offer together with any
shares Kingswood otherwise owns in Versar equal at least a majority
of Versar’s issued and outstanding shares, the proposed
merger can be effected without a shareholder vote under Delaware
law. Therefore Kingswood will set a minimum tender condition to the
consummation of the Offer and may terminate the Offer if the
minimum tender condition is not met. If less than the required
number of shares are tendered, then neither the Offer nor the
merger may be completed, which could also cause significant
uncertainty for Versar and its business could be severely and
adversely affected.
Risks Related to
our Business
Our line of credit contains, and our future debt agreements may
contain, covenants that may constrain our ability to engage in
activities that may be in our long-term best interest, including
financing future operations or capital needs or engaging in other
business activities, and that require us to maintain specific
financial ratios or levels.
Our
line of credit constrains, among other things, our ability
to:
●
incur additional
debt;
●
pay dividends or
distributions on our capital stock;
●
purchase, redeem or
retire capital stock;
●
make acquisitions
or other investments;
●
create liens on our
assets;
●
enter into certain
transactions with affiliates;
●
merge or
consolidate with another company;
●
obtain or maintain
the appropriate bonding necessary to perform our work;
or
●
transfer or sell
assets outside the ordinary course of business.
In
addition, our line of credit requires that we comply with certain
consolidated Earnings Before Interest, Tax, Depreciation and
Amortization (EBITDA) financial ratios and levels. These covenants
may adversely impact our ability to finance our future operations
or use the capital required to pursue available business
opportunities.
During fiscal 2016 and 2017, Versar was in default under certain
financial covenants under our loan agreement. If in the future we
again default under any future credit agreement, or if we are
unable to obtain a new facility or refinance our existing
indebtedness, it would have a material adverse impact on our
financial position and operations.
On
December 9, 2016, Versar, together with certain of its domestic
subsidiaries acting as guarantors, entered into an amendment to its
loan agreement with Bank of America, N.A., as lender. Under the
amendment, the lender waived all existing events of default, and
reduced the revolving facility to $13.0 million from $25.0 million.
The amendment further amended the loan agreement to remove the
consolidated Total Leverage Ratio
covenant, consolidated Senior Leverage Ratio covenant, consolidated
Fixed Charge Coverage Ratio covenant, and the consolidated
Asset Coverage Ratio covenant. Additionally, it added a covenant
requiring Versar to maintain certain minimum quarterly consolidated
EBITDA amounts and a requirement that we pursue one or more
transactions to repay or replace Bank of America. Lastly, the
amendment required Versar to repay or replace the existing facility
by September 30, 2018. Subsequent to the amendment, Versar
experienced additional covenant defaults. We have entered into an agreement for the
acquisition of the Company pursuant to a tender offer and merger.
If consummated, the proposed acquisition would result in the
replacement of the loan agreement. If the transaction is not
consummated, the Company must seek an alternative transaction to
replace or refinance the loan agreement. Failure to refinance or
replace the loan agreement would have a material adverse effect on
us and our financial condition.
We
are taking affirmative steps to modify operational plans and
internal organization to ensure that we can continue to operate
with our existing cash resources. The actual amount of funds that
we will need will be determined by many factors, some of which are
beyond our control, and we may need funds sooner than currently
anticipated.
The accompanying Financial Statements have been prepared assuming
Versar will continue as a going concern. If we are unable to
identify alternative sources of funding and raise additional
capital as needed to fund operations, due to our negative cash flow
from operations and accumulated deficit, there would be substantial
doubt about our ability to continue as a going concern. The
Financial Statements do not include any adjustments that might
result from the outcome of this uncertainty.
We are dependent on government contracts for the majority of our
revenue, and a reduction or delay in spending by government
agencies could adversely affect our business and operating
results.
Contracts with agencies of the U.S. government and various state
and local governments represented approximately 97% of our revenue
in fiscal 2017, with the remaining 3% of our revenue coming from
commercial sources. Therefore, the success of our business is
materially dependent on contracts with governmental agencies.
Companies engaged in government contracting are subject to certain
unique business risks not shared by those serving the general
commercial sector. Among these risks are:
●
a
competitive procurement process with no firm schedule or guarantee
of contracts being awarded;
●
pricing
pressure that may require cost reductions in order to realize
revenue under contracts;
●
award
of work to competitors due primarily to policy
reasons;
●
dependence
on congressional and state appropriations and administrative
allotment of funds;
●
policies
and regulations that can be readily changed by governing
bodies;
●
competing
political priorities and changes in the political climate regarding
funding and operations of the services;
●
shifts
in buying practices and policy changes regarding the use of
contractors;
●
changes
in and delays or cancellations of government programs or
requirements;
●
government
contracts that are usually awarded for relatively short periods of
time and are subject to renewal options in favor of the government;
and
●
many
contracts with U.S. government agencies require annual funding and
may be terminated in the agency’s sole
discretion.
The U.S. government’s contracting laws and regulations
provide that the U.S. government can do business only with
responsible contractors. Accordingly, U.S. government agencies have
the authority under certain circumstances to suspend or debar a
contractor from bidding on government contracts.
A reduction or shift in spending priorities by U.S. government
agencies could limit or eliminate the continued funding of our
existing government contracts or awards of new contracts or new
task orders under existing contracts. Any such reductions or shifts
in spending, if significant, could have a material adverse effect
on our business.
Inability of the legislative and executive branches of the federal
government to agree on a budget for key agencies or to enact
appropriations in a timely manner has in the past delayed, and may
in the future delay, the award of contracts. These delays, if
significant, could have a material adverse effect on our
business.
Our government contracts are subject to audit and potential
reduction of costs and fees.
Contracts with the U.S. government and many other state and local
governmental agencies are subject to auditing by governmental
agencies, which could result in the disallowance of certain costs
and expenses. These audits can result in the disallowance of
significant costs and expenses if the auditing agency determines,
in its discretion, that certain costs and expenses were
unwarranted, allowable, or were excessive. Disallowance of costs
and expenses, if pervasive or significant, could have a material
adverse effect on our business.
As a government contractor, we are subject to a number of
procurement laws and regulations, violation of which could result
in sanctions, contract termination, forfeiture of profit, harm to
our reputation or loss of our status as an eligible government
contractor.
We must comply with all federal, state and local laws and
regulations regarding the formation, administration and performance
of government contracts. These laws and regulations govern how we
transact business with our government clients and, in some
instances, impose additional costs and related obligations on our
business operations. Even though we take significant precautions to
identify, prevent and deter fraud, misconduct and non-compliance,
we face the risk that our personnel or outside partners may engage
in misconduct, fraud or improper activities. Government contract
violations could result in the imposition of civil and criminal
penalties or sanctions, contract termination, forfeiture of profit
and/or suspension of payment, any of which could make us lose our
status as an eligible government contractor and could cause our
reputation to suffer serious harm. Loss of our status as an
eligible government contractor would have a material adverse effect
on our business.
Actual or perceived conflicts of interest may prevent us from being
able to bid on or perform contracts.
U.S. government agencies have conflict of interest policies that
may prevent us from bidding on or performing on certain contracts.
When dealing with U.S. government agencies that have such policies,
we must decide, at times with incomplete information, whether to
participate in a particular business opportunity when doing so
could preclude us from participating in a related procurement at a
future date. We have, on occasion, declined to bid on certain
projects because of actual or perceived conflicts of interest. We
will continue to encounter such conflicts of interest in the
future, which could cause us to be unable to secure key contracts
with U.S. government agencies.
Robust enforcement of environmental regulations is important to our
financial success.
Our business is materially dependent on the continued enforcement
by federal, state and local governments of various environmental
regulations. From time to time, depending on changing enforcement
priorities, local, state and federal agencies modify environmental
clean-up standards to promote economic growth and to discourage
industrial businesses from relocating. Any relaxation in
environmental and compliance standards could impact our ability to
secure additional contracting work with such agencies or with other
federal agencies that operate or manage contaminated
property.
Many of our U.S. government customers procure goods and services
through IDIQ, government wide acquisition contract (GWAC) or
General Services Administration (GSA) Schedule contracts under
which we must compete for post-award orders.
Budgetary pressures and reforms in the procurement process have
caused many U.S. government customers to purchase goods and
services through IDIQ, GSA Schedule contracts and other multiple
award and/or GWAC contract vehicles. These contract vehicles
increase competition and pricing pressures, requiring us to make
sustained efforts following the initial contract award to obtain
ongoing awards and realize revenue. There can be no assurance that
we will increase revenue or otherwise sell successfully under these
contract vehicles. Any failure by Versar to compete effectively in
this procurement environment could harm our business, financial
condition, operating results and cash flows, as well as our ability
to meet our financial obligations.
If we fail to recover at-risk contract costs, we may have reduced
fees or losses.
We are at risk for any costs incurred before a contract is
executed, modified or renewed. A customer may choose not to pay us
for these costs. While such costs are typically associated with
specific anticipated contracts and funding modifications, we cannot
be certain that our customers will execute these contracts or
contract renewals, or that they will pay us for all our related
at-risk costs. If any such unrecovered at-risk costs are
significant, we may experience a decline in contract margins or
experience losses on certain contracts or in certain periods,
resulting in reduced profitability. We face increased pressure on
profit margins and may need to lower margins to price projects at a
more competitive rate to win awards.
We could face potential liability for failure to properly design or
implement remediation efforts.
Part of our business involves the design and implementation of
remediation at environmental clean-up sites. If we fail to properly
design, build, or implement a remediation system, or if a customer
claims that we did, we could face expensive litigation or
regulatory enforcement efforts and potential settlement costs. If
we fail to successfully defend against such a lawsuit, it could
have a material adverse effect on our business.
Environmental laws and regulations and our use of hazardous
materials may subject us to significant liabilities.
Our operations are subject to U.S. federal, state and local
environmental laws and regulations, as well as environmental laws
and regulations in the various countries in which we operate. We
are also subject to environmental laws and regulations relating to
the discharge, storage, treatment, handling, disposal and
remediation of regulated substances and waste products, such as
radioactive, biochemical or other hazardous materials and
explosives. We may incur substantial costs in the future because of
modifications to current laws and regulations, new laws and
regulations, new guidance or new interpretation of existing laws or
regulations, violations of environmental laws or required operating
permits, or discovery of previously unknown contamination.
Incurring such additional costs could have a material adverse
effect on our business.
Our failure to properly manage projects may result in additional
costs or claims.
Our engagements regularly involve complex and lengthy projects. The
quality of our performance on such projects depends in large part
upon our ability to manage the relationship with our clients, and
to effectively manage the projects and deploy appropriate resources
in a timely manner. If we miscalculate the resources or time
required to complete those projects with capped or fixed fees, our
operating results could be adversely affected. Further, any defects
or errors, or failures to meet our client’s expectations,
could result in claims for damages against us.
Our services expose us to significant risks of liability and it may
be difficult to obtain or maintain adequate insurance
coverage.
Our services involve significant risks of professional and other
liabilities that may exceed the fees we derive from performance.
Our business activities could expose us to potential liability
under various laws and regulations and under federal and state
workplace health and safety regulations. In addition, we sometimes
may assume liability by contract under indemnification agreements.
Given the varied nature of our many agreements, we are not able to
predict the magnitude of any such liabilities.
We obtain insurance from third party carriers to cover our
potential risks and liabilities. However, it is possible that we
may not be able to obtain adequate insurance to meet our needs, may
have to pay an excessive amount for the insurance coverage we
require, or may not be able to acquire any insurance for certain
types of business risks.
We are exposed to risks associated with operating
internationally.
A certain portion of our business is conducted internationally.
Consequently, we are subject to a variety of risks that are
specific to international operations, including the
following:
●
export
regulations that could erode profit margins or restrict
exports;
●
compliance
with the U.S. Foreign Corrupt Practices Act;
●
compliance
with the anti-corruption laws of other jurisdictions in which we
operate;
●
the
burden and cost of compliance with foreign laws, treaties and
technical standards and changes in those regulations;
●
potential
restrictions on transfers of funds;
●
foreign
currency fluctuations;
●
import
and export duties and value added taxes;
●
transportation
delays and interruptions;
●
uncertainties
arising from foreign local business practices and cultural
considerations; and
●
potential
military conflicts, civil strife and political risks.
While we have and will continue to adopt and implement aggressive
measures to reduce the potential impact of losses resulting from
the risks of our foreign business, we cannot ensure that such
measures will be adequate.
Political destabilization or insurgency in the regions in which we
operate may have a material adverse effect on our
business.
Certain regions in which we operate are highly politically
unstable. Insurgent activities in the areas in which we operate may
cause further destabilization in these regions. There can be no
assurance that the regions in which we operate will continue to be
stable enough to allow us to operate profitably or at all. We must
significantly increase compensation to our personnel as an
incentive to deploy them to many of these regions. To date, we have
been able to recover such costs under our contracts, but we may not
be able to do so in the future. To the extent that we are unable to
transfer such increased costs to our customers, our operating
margins would be adversely impacted, which could adversely affect
our operating performance. In addition, increased insurgent
activities or destabilization, including civil unrest or a civil
war in countries in which we operate, may lead to a determination
by the U.S. government to halt our operations in a particular
location, country or region and to perform the services that we
provide using military personnel.
If our partners fail to perform their contractual obligations on a
project, we could be exposed to legal liability, loss of reputation
or reduced profits.
From time to time, we enter into joint venture and other
contractual arrangements with partners to jointly bid on and
execute certain projects. The success of such joint projects
depends in part on the satisfactory performance of the contractual
obligations by our partners. If any of our partners fail to satisfy
their contractual obligations, we may be required to make
additional investments and provide additional services to complete
projects, increasing our cost on such projects. If we are unable to
adequately address a partner’s performance issues, then our
client could terminate the joint project, exposing us to legal
liability, loss of reputation or reduced profits.
We operate in highly competitive industries.
The markets for many of our services are highly competitive. There
are numerous professional architectural, engineering, construction
management, and environmental consulting firms, and other
organizations that offer many of the same services we do. We
compete with many companies that have greater resources than us and
we cannot provide assurance that such competitors will not
substantially increase the resources they devote to those
businesses that compete directly with our services. Competitive
factors considered by clients include reputation, performance,
price, geographic location and availability of technically skilled
personnel. In addition, we face competition from the use by our
clients of in-house environmental, engineering and other
staff.
An economic downturn may have a material adverse
effect on our business.
In an economic recession, or under other adverse macroeconomic
conditions that may arise from natural or man-made events,
customers and vendors may be less likely to meet contractual terms
and payment or delivery obligations. In particular, if the U.S.
government changes its operational priorities in countries in which
we operate, reduces the DOD Operations and Maintenance budget, or
reduces funding for Department of State initiatives in which we
participate, our business, financial condition and results of
operations could be severely affected.
Our quarterly and annual revenue, expenses and operating results
may fluctuate significantly, which could have a negative effect on
the price of our common stock.
Our quarterly and annual revenues, expenses and operating results
have and may continue to fluctuate significantly because of a
number of factors, including:
●
the
seasonality of the spending cycle of our public sector clients,
notably the U.S. government, and the spending patterns of our
private sector clients;
●
the
hiring and utilization rates of employees in the United States and
internationally;
●
the
number and significance of client engagements commenced and
completed during the period;
●
the
delays incurred in connection with an engagement because of weather
or other factors;
●
the
ability to work within foreign countries’ regulations, tax
requirements and obligations;
●
the
business, financial, and security risks related to working in
foreign countries;
●
the
ability of clients to terminate engagements without
penalties;
●
the
size and scope of engagements;
●
the
delay in federal, state and local government
procurements;
●
the
ability to perform contracts within budget or contractual
limitations;
●
the
timing of expenses incurred for corporate initiatives;
●
any
threatened or pending litigation or other regulatory enforcement
matters;
●
periodic
reductions in the prices of services offered by our
competitors;
●
the
likelihood of winning the re-bids of our existing large government
contracts;
●
the
general economic and political conditions;
●
the
loss of a major contract or the shutdown of a major
program;
●
the
volatility of currencies in foreign countries; and
●
our
ability to integrate any acquisition or the ability of an acquired
business to continue to perform as expected.
Variations in any of these factors could cause significant
fluctuations in our operating results from quarter to quarter and
could result in net losses and have a material adverse effect on
our stock price.
We are highly dependent on key personnel and our business could
suffer if we cannot continue to attract, train and retain skilled
employees.
Our business is managed by a number of key management and operating
professional personnel. The loss of key personnel could have a
material adverse effect on our business.
Availability of highly trained and skilled professional,
administrative and technical personnel is critical to our future
growth and profitability. Even in the current economic climate,
competition in our industry for scientists, engineers, technicians,
management and professional personnel is intense and competitors
aggressively recruit key employees. Competition for experienced
personnel, particularly in highly specialized areas, has
occasionally made it more difficult for us to timely meet all our
staffing needs. We cannot be certain that we will be able to
continue to attract and retain required staff. Any failure to do so
could have a material adverse effect on our business, financial
condition, operating results and our ability to meet our financial
obligations. Failure to recruit and retain a sufficient number of
such employees could adversely affect our ability to maintain or
grow our business. Some of our contracts require us to staff a
program with personnel that the customer considers key to
successful performance. If we cannot provide such personnel or
acceptable substitutes, the customer may terminate the contract,
and we may be unable to recover our costs.
In order to succeed, we will have to keep up with a variety of
rapidly changing technologies. Various factors could affect our
ability to keep pace with these changes.
Our success will largely depend on our ability to keep pace with
changing technologies that can occur rapidly in our core business
segments. We may incur significant expenses updating our
technologies, which could in turn have a material adverse effect on
our margins and results of operations. Even if we keep up with the
latest developments and available technology, newer services or
technologies could negatively affect our business.
Our employees may engage in misconduct or other improper
activities, which could harm our business.
Like all companies, we face the risk of employee fraud or other
misconduct. Employee misconduct could include intentional failures
to comply with U.S. government procurement regulations,
unauthorized activities, attempts to obtain reimbursement for
improper expenses, or submission of falsified time records.
Employee misconduct could also involve improper use of our
customers’ sensitive or classified information, which could
result in regulatory sanctions against us. Negative press reports
regarding employee misconduct could harm our reputation with the
U.S. government agencies for which we work. If our reputation with
these agencies is negatively affected, or if we are suspended or
debarred from contracting with government agencies for any reason,
our future revenues and growth prospects would be adversely
affected. Despite an active compliance program, it is not always
possible to deter employee misconduct, and the precautions we take
to prevent and detect this activity may not be effective in
controlling unknown or unmanaged risks or losses, which could harm
our business, financial condition, operating results and our
ability to meet our financial obligations.
Internal system or service failures could disrupt our business and
impair our ability to effectively provide our services and products
to our customers, which could damage our reputation and adversely
affect our revenue, profitability and operating
results.
Our information technology systems are subject to systems failures,
including network, software or hardware failures, whether caused by
us, third-party service providers, cyber intruders or hackers,
computer viruses, attacks on our computers systems, phishing
attacks, natural disasters, power shortages or terrorist attacks.
Any such failures or cyber-threats could cause loss of data and
interruptions or delays in our business processes, cause us to
incur remediation costs, subject us to claims and damage our
reputation. Failure or disruption of our communications or
utilities could cause us to interrupt or suspend our operations or
otherwise adversely affect our business. Any system or service
disruptions, if not anticipated and appropriately mitigated, could
have a material adverse effect on our business including, among
other things, an adverse effect on our ability to bill our
customers for work performed on our contracts, collect the amounts
that have been billed and produce accurate financial statements in
a timely manner. Our property and business interruption insurance
may be inadequate to compensate us for all losses that may occur as
a result of any system or operational failure or disruption and, as
a result, our results of operations could be materially and
adversely affected. Versar
has invested in and implemented systems that will allow it to
achieve and remain in compliance with the regulations governing its
business; however, there can be no assurance that such systems will
be effective at achieving and maintaining compliance or that we
will not incur additional costs in order to make such systems
effective.
We have submitted claims to clients for work we performed beyond
the initial scope of some of our contracts. If these clients do not
approve these claims, our results of operations could be adversely
impacted.
We typically have pending claims submitted under some of our
contracts for payment of work performed beyond the initial
contractual requirements for which we have already recorded
revenue. In general, we cannot guarantee that such claims will be
approved in whole, in part, or at all. If these claims are not
approved, our revenue may be reduced in future
periods.
An impairment charge of intangible assets could have a material
adverse impact on our financial condition and results of
operations.
Because we have grown in part through acquisitions, intangible
assets-net represent a substantial portion of our assets.
Intangible assets, net, were $6.1 million as of June 30, 2017.
Under accounting principles generally accepted in the United
States, we are required to test intangible assets carried in our
Consolidated Balance Sheets for possible impairment on an annual
basis based upon a fair value approach and whenever events occur
that indicate impairment could exist. These events or circumstances
could include a significant change in the business climate,
including a significant sustained decline in a reporting unit's
market value, legal factors, operating performance indicators,
competition, sale or disposition of a significant portion of our
business, a significant sustained decline in our market
capitalization and other factors.
Maintaining adequate bonding capacity is necessary for us to
successfully bid on and win certain fixed-price contracts. Failing
to maintain adequate bonding capacity could have a material adverse
impact on our ability to pursue new construction services
contracts.
In line with industry practice, we are often required to provide
bid, performance and/or payment bonds to clients under certain
fixed-price contracts. These bonds indemnify the
customer should we fail to perform our obligations under the
relevant contract. If a bond is required for a
particular project and we are unable to obtain such a bond, we
cannot pursue that project. We have bonding capacity
but, as is typically the case, the issuance of a bond is at the
surety’s sole discretion. Moreover, due to events
that affect the insurance and bonding markets generally, bonding
may be more difficult to obtain in the future or may only be
available at significantly higher costs. There can be no
assurance that our bonding capacity will continue to be available
to us on reasonable terms. Our inability to obtain
adequate bonding and, as a result, to bid on new fixed-price
contracts could have a material adverse effect on our business,
financial condition, results of operations and cash
flows.
Our operating margins may decline under our fixed-price contracts
if we fail to estimate accurately the time and resources necessary
to satisfy our obligations.
Some of our contracts are fixed-price contracts, under which we
bear the risk of any cost overruns. Our profits are adversely
affected if our costs under these contracts exceed the assumptions
that we used in bidding for the contract. Often, we are required to
fix the price for a contract before we finalize the project
specifications, increasing the risk that we may misprice these
contracts. The complexity of many of our engagements makes
accurately estimating our time and resources more difficult. In the
event we fail to estimate our time and resources accurately, our
expenses will increase and our profitability, if any, under such
contracts will decrease.
Item 2. Properties
Our corporate executive office is located in Springfield, Virginia,
which is a suburb of Washington, D.C. Versar currently leases
22,260 square feet from Springfield Realty Investors, LLC. The rent
is subject to a two percent escalation per year through December
31, 2024.
As of June 30, 2017, we had under lease an aggregate of
approximately 147,000 square
feet of office and manufacturing space in the following locations
(parenthetical reference of business segments using space): Dulles
(ECM and G&A), Springfield (all segments), Hampton, VA (ESG);
Chandler, AZ (ESG); Westminster, CO (all segments); Atlanta, GA
(ESG and PSG); Aiea, HI (ECM); Boise, ID (ESG); Columbia (ESG), and
Germantown, MD (ECM and ESG); Charleston, SC (ESG); San Antonio and
El Paso, TX (ESG); Clark Special Economic Zone, the Republic of
Philippines (ECM and G&A); and Abu Dhabi (ECM and ESG), United
Arab Emirates. The lease terms primarily range from two to seven
years.
Item 3. Legal Proceedings
Versar and its subsidiaries are parties from time to time to
various legal actions arising in the normal course of business. We
believe that any ultimate unfavorable resolution of any current
ongoing legal actions will not have a material adverse effect on
its consolidated financial condition and results of
operations.
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is traded on the NYSE American under the symbol
VSR. At June 30, 2017, there were 988 stockholders of record,
excluding stockholders whose shares were held in nominee name. The
quarterly high and low sales prices as reported on the NYSE
American during fiscal 2017 and 2016 are presented
below.
|
Fiscal Year 2017
|
High
|
Low
|
|
4th Quarter
|
1.71
|
1.21
|
|
3rd Quarter
|
2.14
|
0.90
|
|
2nd Quarter
|
1.56
|
1.19
|
|
1st Quarter
|
1.87
|
1.15
|
|
|
|
|
|
Fiscal Year 2016
|
High
|
Low
|
|
4th Quarter
|
3.25
|
1.01
|
|
3rd Quarter
|
3.07
|
1.93
|
|
2nd Quarter
|
3.55
|
2.67
|
|
1st Quarter
|
4.38
|
2.86
|
No cash dividends have been paid by Versar since it began public
trading its stock in 1986. The Board of Directors intends to retain
any future earnings for use in our business and does not anticipate
paying cash dividends in the foreseeable future. Under the terms of
our revolving line of credit, approval would be required from our
lender for the payment of any dividends.
We have established equity compensation plans to attract, motivate
and reward performance of employees and directors. Currently, there
is one stock incentive plan, which was previously approved by the
stockholders: the 2010 Stock Incentive Plan. We do not maintain any
equity compensation plans not approved by our stockholders.
Through June 30, 2017,
562,994 restricted stock units
have been granted under this plan.
Equity Compensation Plan Information
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
remaining available for
|
|
|
|
Number of Securities
|
|
|
|
future issuance under
|
|
|
|
to be issued upon
|
|
Weighted-average
|
|
equity compensation
|
|
|
|
exercise of
|
|
exercise price of
|
|
plans, excluding
|
|
|
|
outstanding options,
|
|
outstanding options,
|
|
securities reflected in
|
|
|
|
warrants and rights
|
|
warrants and rights
|
|
column (a)
|
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
-
|
|
-
|
|
539,935
|
The graph below matches Versar, Inc.'s cumulative 5-Year total
shareholder return on common stock with the cumulative total
returns of (i) the S&P 500 index and (ii) a customized peer
group of five companies comprised of AECOM Technology Corp.,
Arcadis, NV, Ecology & Environment Inc., TRC Companies Inc. and
URS Corp. The graph tracks the performance of a $100 investment in
our common stock, in each of the peer groups, and the index (with
the reinvestment of all dividends) from 6/30/2012 to
6/30/2017.
The stock price performance included in this graph is not
necessarily indicative of future stock price
performance.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis of our financial condition
and results of operations is provided to enhance the understanding
of, and should be read together with, our consolidated financial
statements and the notes to those statements that appear elsewhere
in this Annual Report on Form 10-K. This discussion contains
forward-looking statements that involve risks and uncertainties.
Unless otherwise specifically noted, all years refer to our fiscal
years which ended on June 30, 2017, and July 1, 2016.
Financial Trends
Our business performance is affected by the overall level of U.S.
government spending and the alignment of our offerings and
capabilities with the budget priorities of the U.S. government.
Adverse changes in fiscal and economic conditions, such as the
manner in which spending reductions are implemented, including
sequestration, future government shutdowns, and issues related to
the nation’s debt ceiling, could have a material adverse
effect on our business.
In this challenging economic environment, our focus is on those
opportunities where the U.S. government continues funding and which
clearly align with Versar’s capabilities. These opportunities
include construction management services, security systems
integration, shoreline stabilization, sustainable range management
and UXO, and PBR. We also continue to focus on those areas that we
believe offer attractive returns to our clients, such as
construction-type services both in the U.S. and internationally,
improvements in energy efficiency, and assisting with facility
upgrades. Overall, our pipeline remains robust, but longer
timelines for contract awards and project start dates have slowed
the transition from pipeline to backlog and then to revenue
generating projects.
We believe that Versar has the expertise to identify and respond to
the challenges raised by the issues we face and that we are
positioned going forward to address these challenges. Our three
business segments are segregated based on the nature of the work,
business processes, customer bases and the business environment in
which each of the segments operates.
The DAFB project contributed $15.2 million of revenue for fiscal
2017, as compared to $50.2 million for fiscal 2016, a decrease of
$35.0 million. During fiscal 2015 and 2016, the DAFB project
completed the concept, planning and the major execution phases of
construction. During fiscal 2017, we continued performing the
remaining execution phases according to our project plans resulting
in the expected reduction in revenues for the current year. The
runway was fully turned over to the Air Force on August 16, 2017
and Versar is awaiting a pending modification with additional scope
with completion expected by November 2017. Versar is the prime
contractor on the DAFB project, with a significant portion of the
work performed by sub-contractors, resulting in smaller positive
gross margin on the project than our other self-performing
projects. During January 2017, the DAFB customer issued the Company
a Notice of Forbearance stating we had not met our contractual
obligation to complete the DAFB project by December 31, 2016. We
submitted several change order requests to the DAFB customer during
fiscal 2016 and 2017, a number of which are still pending
resolution. The requested change orders impacted our timeline for
completion of the project, and were outside the original scope of
services to be performed, and as a result, did impact the
project’s profitability. We expect the DAFB project to be
profitable pending successful outcomes of the Request for Equitable
Adjustment (REA) negotiations and anticipate the acceptance of
additional change orders and resolution of the construction related
issues by the DAFB customer that will resolve the current Notice of
Forbearance and allow the Company to complete the construction
project by December 2017.
There are risk factors or uncertainties that could significantly
impact our future financial performance. A sample of these risks is
listed below. For a complete discussion of these risk factors and
uncertainties, refer to Item 1A. Risk Factors, herein.
●
We
operate in highly competitive industries;
●
A
reduction or delay in pending awards by government agencies could
adversely affect us;
●
Our
inability to win or renew government contracts could adversely
affect us;
●
We
are exposed to risks associated with operating
internationally;
●
Our
failure to properly manage projects may result in additional costs
or claims;
●
Our
failure to maintain compliance with our banking loan
covenants;
●
An
economic downturn may adversely affect our business;
●
In
order to succeed, we must stay current with a variety of rapidly
changing technologies;
●
We
are highly dependent on key personnel; and
●
The
government may adopt new contract laws or regulations, increasing
the cost and difficulty of performance.
Factors Affecting Fiscal 2017 Performance
During fiscal 2017, Versar recognized a number of project losses
and charges to our Income Statement and Balance Sheet as
follows:
Loss Contingency Accruals in the ECM Segment
During fiscal 2017, an infrastructure repair project with USACE
required the installation of two General Electric (GE) transformers
purchased as part of our contract for services. After installation,
the transformers malfunctioned and required replacement. GE
determined that the failure of both transformers was caused by a
manufacturer's defect and GE would repair both transformers at no
cost to Versar or the customer, but the emergency power services
required to deliver power to the customer during the malfunctioning
period was outside the scope of their warranty. On May 9, 2017, the
customer issued a Notice to Proceed for the repair of the
transformers and further directed Versar to complete several
studies before allowing the reinstallation of the repaired
transformers. Versar believes this is a Statement of Work
sequencing change and has submitted a notice of change and pending
REA to the customer. The customer has denied the REA and directed
Versar to file a claim under the Disputes clause of the contract.
GE was prepared to deliver the repaired transformers in mid-June
but because of this customer direction, the actual reinstallation
of the transformers cannot take place until the end of October 2017
or once Versar has completed the studies, anticipated to be
completed at the end of September 2017. In the meantime, Versar
must continue to provide the emergency power services and store the
repaired transformers from mid-June through the end of October, at
an estimated cost of $0.3 million. To date, no decision on the REA
has been made.
During the fourth quarter of fiscal 2017, Versar encountered
differing site conditions than what the client originally indicated
for the following three projects (i) INOVA Loudoun Hospital, (ii)
INOVA Heart & Vascular, and (iii) Sabey access controls. Due to
the differing site conditions, installation for these sites will
not be achieved within the contractual value. Versar is in contract
negotiations with the clients in the aggregate amount of $0.1
million. To date no decision on the contract negotiations has been
made. Versar continues to install the equipment to provide a
complete solution to the customers. All three projects are
estimated to be completed in December 2017.
Loss Contingency Accruals in the PSG Segment
In September 2016, Versar entered into a contract with the U.S.
Army Reserve 88th Regional Support Command (RSC) to provide staff
augmentation services. Management expects this contract to operate
at a loss. During September 2016, we recorded a loss of $0.6
million related to this contract for the base period of nine
months. The base contract performance period for this contract was
awarded in September 2016 and ended April 15, 2017. In April 2017,
the RSC executed the first option period for an additional 12
months. We expect this contract to continue to operate at a loss
and have recorded a charge of $1.3 million during the fourth
quarter of fiscal 2017.
Other Nonrecurring Expenses
On
December 9, 2016, Versar, together with certain of its domestic
subsidiaries acting as guarantors, entered into an amendment to the
loan agreement with Bank of America N. A., as lender. Under the
amendment, the lender waived all existing events of default, and
reduced the revolving facility to $13.0 million from $25.0 million.
The interest rate on borrowings under the revolving facility and
the term facility were also amended. Under the initial loan
agreement, interest accrued at the LIBOR Daily Floating Rate plus
1.87%. Under the amendment, interest now accrues at the LIBOR Daily
Floating Rate plus 5.00%. During fiscal 2017, we paid $1.2 million
in forbearance fees, and expenses related to the lender’s
advisor and the CRO required by the amendment.
Additionally,
during the fourth quarter of fiscal 2017, Versar recorded a $1.2
million charge to write-down the related historical cumulative
translation adjustment for PPS, as a result of the sale of PPS in
April 2017. This amount is recorded as Other Expense in the
Consolidated Financial Statements.
In
August 2017, we received a decision from an impartial referee that
was retained to address the purchase price adjustment for the
fiscal 2014 acquisition of Geo-Marine, Inc. (GMI) between Versar
and ARA. Per the agreement, Versar was to calculate the net working
capital adjustment and then make a payment to, or receive a payment
from, ARA for the adjusted amount. The decision of the referee
requires a payment by Versar to ARA in the amount of $1.4 million.
We recorded a loss contingency accrual of $1.2 million in fiscal
2016. As a result of this decision, we recorded an additional $0.5
million of costs in fiscal 2017, including legal expenses related
to the settlement process. The contracts acquired related to this
acquisition are reported within the ECM and ESG segments on a 58.6%
and 41.4% allocation with the segments receiving their proportional
share of the loss contingency accrual.
Versar
failed to meet its fourth quarter fiscal 2017 banking loan covenant
and has recorded $0.1 million in anticipated fees to the lender
related to the anticipated forbearance agreement. (Note 21 –
Subsequent Events).
On
July 28, 2017, Versar and two J.M. Waller & Associates (JMWA)
note holders entered into a full and final settlement of issues
related to the payment of the notes in the litigation arising from
Versar’s payments under the relevant notes. This litigation
did not involve the third JMWA note holder, who was not a party to
the action. We have recorded $0.1 million related to the note
holders’ attorney’s fees and $0.2 million related to
quarterly interest payments from October 2016 through September
2017. (Note 21 – Subsequent Events).
Factors Affecting Fiscal 2016 Performance
Loss Contingency Accruals in the ESG Segment
In June 2016, a class action lawsuit was filed against Versar by
former employees alleging violations of several provisions of
California’s labor law relating to paid lunch time and breaks
for the years 2012 through 2015. We reviewed the supporting files
and documentation regarding this notice and engaged outside counsel
with experience with these matters to assist us in the defense of
this matter. We performed an initial financial review of the number
of employees, days worked, and hours per day worked by employees on
this project over the course of the years noted in the lawsuit. As
a result of this analysis, we recorded a loss contingency accrual
of $0.5 million related to this event for fiscal 2016. On October
11, 2016, the mediation resulted in a Confidential Memorandum Of
Understanding (MOU) for settlement of this claim. The estimated
contingency accrual of $0.5 million remained consistent with this
MOU and was paid in August, 2017.
In May 2016, during a routine audit by the GSA concerning
authorized GSA schedule rates compared to the invoicing of a
federal customer, the GSA discovered that Versar had been charging
its customer several billing rates that were not supported by the
contractual listed billing rates for fiscal 2015 and 2016. We
performed a preliminary financial analysis of the number of
employees working, labor categories billed to the customer, the
contractual billing rates that should have been billed, days
worked, and hours per day worked on this project over the course of
the years noted in the audit finding. As the audit had not been
resolved at the end of fiscal 2016, this preliminary analysis was
the basis for the our probable loss and provided the basis for the
accrual during fiscal 2016 of $0.3 million. Subsequently, the
outstanding audit issues were resolved and Versar made a payment of
$0.3 million to the GSA in November 2016.
During April 2016, a project under one of our PBR Task Orders
involving a ground water extraction well system at a site in
Ohio failing to meet minimum
performance requirements required rehabilitation/replacement. This
work was completed under Versar’s 2009 USAF Worldwide
Environmental Restoration and Construction (WERC) contract with
AFCEC. This extraction well system failure was not included in our
original budget for the performance of this work. In
accordance with the performance basis of our contract with the
customer, we must repair and or replace all equipment located on
the site that fails to meet performance requirements. We performed
a review of the materials and labor required to rehabilitate or
replace the extraction well system and used this review as the
basis of the estimate for the accrual. We recorded a loss
contingency accrual of $0.3 million in fiscal 2016 to rehabilitate
or replace the extraction well system. The corrective action
occurred during fiscal 2017 and will continue into fiscal
2018.
Lease Loss Accruals
In March 2016, Versar abandoned its field office facilities in
Charleston, SC and Lynchburg, VA, both within the ESG segment.
Although we remain obligated under the terms of these leases for
the rent and other costs associated with these leases, we decided
to cease using these spaces effective April 1, 2016, and do not
plan to occupy them in the future. Therefore, we recorded a charge
to selling, general and administrative expenses of approximately
$0.4 million in fiscal 2016 to recognize the costs of exiting these
spaces. This liability was equal to the total amount of rent and
other direct costs for the period of time that the space is
expected to remain unoccupied. In addition, this liability included
the present value of the amount by which the rent paid by Versar to
the landlord exceeds any rent paid to us by a tenant under a
sublease over the remainder of the lease terms, which expire in
April 2019 for Charleston, SC, and June 2020 for Lynchburg, VA.
Versar also recognized $0.1 million of costs in fiscal 2016 for the
associated leasehold improvements related to the Lynchburg, VA
office.
In June 2016, Versar abandoned an office in San Antonio, TX, which
is within the ECM segment. We have continued to use a smaller
office in San Antonio. Although we remain obligated under the terms
of this lease for the rent and other costs associated with this
lease, we made the decision to cease using this space on July 1,
2016, and have no foreseeable plans to occupy it in the future.
Therefore, we recorded a charge to selling, general and
administrative expenses of approximately $0.2 million in fiscal
2016 to recognize the costs of exiting this space. This liability
is equal to the total amount of rent and other direct costs for the
period of time that the space is expected to remain unoccupied. In
addition, this liability includes the present value of the amount
by which the rent paid by Versar to the landlord exceeds any rent
paid to us by a tenant under a sublease over the remainder of the
lease term, which expires in February 2019. Versar also recognized
$0.2 million of costs in fiscal 2016 for the associated leasehold
improvements related to the San Antonio, TX office.
Other Nonrecurring Expenses
During the third and fourth quarters of fiscal 2016, following
discussion with its lender, Versar determined that it was not in
compliance with the covenants regarding its Consolidated Total
Leverage Ratio, Consolidated Senior Leverage Ratio and Asset
Coverage Ratio under its loan agreement. Each failure to comply
with these covenants constituted a default under the loan
agreement. On May 12, 2016, Versar, certain of its subsidiaries,
and the lender entered into a forbearance agreement pursuant to
which the lender agreed to forbear from exercising any and all
rights or remedies available to it under the loan agreement and
applicable law related to these defaults for a period ending on the
earliest to occur of: (a) a breach by Versar of any obligation or
covenant under the forbearance agreement, (b) any other default or
event of default under the loan agreement or (c) June 1, 2016 (the
Forbearance Period), which was subsequently extended through
additional forbearance agreements. The lender engaged an advisor to
review Versar’s financial condition on the lender’s
behalf. Versar accrued $0.1 million at July 1, 2016 related to the
costs of services provided by the lenders’
advisor.
During fiscal 2016, Versar and the lender entered into additional
forbearance agreements, which allowed us to borrow funds pursuant
to the loan agreement, consistent with current operating needs as
set forth in a 13-week cash flow forecast subject to certain caps
on revolving borrowings initially sit at $15.5 million and
subsequently reduced to $13.0 million through December 9, 2016. In
addition, from and after June 30, 2016 outstanding amounts under
the credit facility bore interest at the default interest rate set
forth in the credit facility equal to the LIBOR Daily Floating Rate
(as defined in the credit facility) plus 3.95%. In connection with
these forbearance agreements, we recorded a charge to selling,
general and administrative expenses of approximately $0.2 million
for fiscal 2016 related to the remaining deferred expenses
associated with the loan agreement.
Versar
entered into negotiations with ARA regarding the fiscal 2014
acquisition of GMI, and the related price agreement dated September
2, 2013 between Versar and ARA. Per the price agreement, after the
closing date of the acquisition, Versar was to calculate the net
working capital adjustment and then make a payment to, or receive a
payment from, ARA for the adjusted amount. We recorded a loss
contingency accrual of $1.2 million in fiscal 2016 that represented
management’s best estimate at the time of the ultimate cost
to resolve this matter. During fiscal 2017, as a result of a
subsequent settlement, we recorded an additional $0.5 million of
costs, including legal expenses. The contracts acquired related to
this acquisition are reported within the ECM and ESG segments on a
58.6% and 41.4% allocation with the segments receiving their
proportional share of the loss contingency accrual.
During
the fourth quarter of fiscal 2016, Versar recorded a $9.5 million
charge to record a full valuation allowance against its deferred
tax assets. ASC 740-10-30-4 requires deferred taxes to be
determined separately for each taxpaying component in each tax
jurisdiction. Furthermore, the deferred tax assets must be reduced
by a valuation allowance if, based on the weight of available
positive and negative evidence, it is “more likely than
not” that some portion or all of the deferred tax assets will
not be realized. We have determined to reduce the deferred tax
asset to the amount that is more likely than not to be
realized.
Additionally,
during the fourth quarter of fiscal 2016, Versar recorded a $1.9
million charge to write-down certain PPS assets, primarily
inventory, to their estimated net realizable value as of July 1,
2016. This amount is recorded as Other Expense (Income) in the
financial statements.
Goodwill and Intangible Expense Impairments
During fiscal 2016, continued delays in contract awards and
contract funding and the direct impact on Versar’s results of
operations, coupled with the continued decrease in our stock price,
were deemed to be triggering events that led to a test for goodwill
impairment. As a result of our analysis, we recorded an impairment
charge of $20.3 million. The carrying value of goodwill after
impairment at July 1, 2016 was zero.
Further, based on the results of the impairment testing, we
concluded that the value of definite-lived assets with a carrying
value of 3.8 million was not recoverable. We recorded a charge of
$3.8 million in fiscal 2016 for the full impairment of
definite-lived intangible assets acquired from JMWA, GMI, Charron
and PPS and as a result of these charges, the carrying amount of
intangible assets has been reduced to zero.
Consolidated Results of Operations
The table below sets forth our consolidated results of continuing
operations for the fiscal years ended June 30, 2017 and July 1,
2016.
|
|
For the
Fiscal Year Ended
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(dollars
in thousands)
|
|
|
GROSS
REVENUE
|
$111,821
|
$167,917
|
|
Purchased
services and materials, at cost
|
60,860
|
107,199
|
|
Direct
costs of services and overhead
|
45,061
|
57,544
|
|
GROSS
PROFIT
|
$5,900
|
$3,174
|
|
Gross
Profit percentage
|
5%
|
2%
|
|
|
|
|
|
Selling
general and administrative expenses
|
12,873
|
13,031
|
|
Other
operating expense
|
1,243
|
1,937
|
|
Goodwill
Impairment
|
-
|
20,331
|
|
Intangible
impairment
|
-
|
3,812
|
|
OPERATING
(LOSS)
|
(8,216)
|
(35,937)
|
|
OTHER
(INCOME) EXPENSE
|
|
|
|
Interest
income
|
(14)
|
(19)
|
|
Interest
expense
|
1,446
|
702
|
|
(LOSS)
BEFORE INCOME TAXES
|
$(9,648)
|
$(36,620)
|
|
|
|
|
Fiscal Year 2017 Compared to Fiscal Year 2016
Gross revenue for fiscal 2017 was $111.8 million, a decrease of 33%
compared to $167.9 million during fiscal 2016. The decrease in
revenue resulted from declines in revenue of (i) $35.0 million
related to the DAFB project, which was substantially completed in
fiscal 2017 and will be fully completed during fiscal 2018, (ii)
$1.4 million for VSS, acquired during fiscal 2016, (iii) $4.0
million from our Laughlin AFB project, (iv) $3.0 million related to
PPS which was sold in April 2017, (v) $2.4 million related to
decreased levels of Title II work in Iraq and Afghanistan within
ECM, (vi) $4.1 million related to PBR projects within ESG,
(vii) $6 million from decline in EPA during the
change of Administration and lack of funding available at the
government year-end,
and (viii)
when the prime small business did not renew
Versar's subcontract, $1.1 million from
PSG’s Joint Base Lewis McChord (JBLM)
project. Additionally, PSG continued to experience a
shift of contract solicitations to businesses that qualify for
small business and often set-aside programs.
Purchased services and materials for fiscal 2017 were $60.9
million, a decrease of 43% compared to $107.2 million during fiscal
2016. The purchased services and materials decrease was comprised
of; (i) $32.6 million for the DAFB project, (ii) $4.3 million
decrease at VSS, (iii) $3.1 million for the Cedar Point Shoreline
project, (iv) $4.5 million from decline in EPA projects, (v) RSC
project loss reserves of $0.6 million related to this contract for
the base period of nine months and $1.3 million for the RSC project
related to the exercise of an additional option year, twelve month,
performance period, (vi) $0.3 million for
an infrastructure repair project with USACE, and (vii) $0.1
million related to three projects. (see “Factors Affecting
Fiscal 2017 Performance--Loss Contingency Accruals” above for
more information).
Direct
costs of services and overhead for fiscal 2017 were $45.0 million,
a decrease of 22% compared to $57.5 million during fiscal 2016. The
decrease is related to a cost savings plan we initiated during
fiscal 2017 as well the full year impact of the costs savings
reductions we made in fiscal 2016.
Gross profit from operations for fiscal 2017 was $5.9 million, an
increase of 86% compared to gross profit of $3.2 million for fiscal
2016. Gross profit increase was comprised of $1.4 million from VSS,
which was offset by reduced gross profit of $2.1 million from the
DAFB project which is scheduled for completion during fiscal 2018,
$0.4 million for project loss contingency accruals, and an
additional charge for $0.5 million for the ARA net working capital
settlement (see “Factors Affecting Fiscal 2017
Performance” above for more information). Costs savings
actions made to improve overhead structure during fiscal 2017 and
fiscal 2016 contributed to the increased gross profit for fiscal
2017. During fiscal 2016, we recorded several losses including a
total of $1.3 million of loss contingency accruals in connection
with (i) a class action lawsuit from a group of former employees at
Ft. Irwin, (ii) a probable loss related to the audit finding by GSA
within the ESG segment, and (iii) the loss accrual for the removal
and installation of the new well pump for the PBR task orders. A
charge for $1.2 million for the ARA net working capital adjustments
also contributed to the decline in the gross profit (see
“Factors Affecting Fiscal 2016 Performance” above for
more information).
Selling, general and administrative expenses for fiscal 2017 were
$12.9 million, or 12% of gross revenue, compared to $13.0 million,
or 8% of gross revenue, during fiscal 2016. While overall selling,
general and administrative expenses were down only slightly from
fiscal 2016, there were a number of line item increases in fiscal
2017 including approximately $1.0 million for the costs associated
with the CRO services, $0.7 million in additional banking fees
related to forbearance agreements and an amendment to the loan
agreement, $1.1 million in additional legal expenses related to one
time issues, $0.2 million for retention bonuses to key employees,
and $0.2 million in severance costs for the former Chief Financial
Officer. The Company also recorded $0.1 million related to the JMWA
note holders’ attorney’s fees and $0.2 million related
to quarterly interest payments from October 2016 through September
2017. (see “Factors Affecting Fiscal 2017
Performance—Other Nonrecurring Expenses” above for more
information).These additional costs were more than offset by the
costs savings actions made by the Company during fiscal 2017 and
fiscal 2016. During fiscal 2016 we recorded approximately $1.25
million of acquisition and integration costs associated with the
acquisition of VSS, approximately $0.6 million to record the costs
of exiting lease spaces, as well as approximately $0.2 million in
fees associated with borrowings from Bank of America.
During fiscal 2016, we recorded a Goodwill and Intangible
impairments charge of $24.1 million due to a decline in operations
and the estimated fair value in the ECM, ESG, and PSG reporting
units, attributable to goodwill and intangibles acquired in certain
acquisitions. (For additional information on these goodwill and
intangible impairments, see Note 7 to our Consolidated Financial
Statements included herein).
Other
operating expense for fiscal 2017 was $1.2 million representing the
charge to write-down the related historical cumulative translation
adjustment for PPS, as a result of the sale in April 2017. During
fiscal 2016, Versar recorded a $1.9 million charge for the loss on
sale of PPS. PPS had been classified as held for sale, and as such,
the carrying amount of the long-lived assets has been reduced to
the estimated fair market value as of July 1,
2016.
Loss before income taxes, for fiscal 2017, was $9.6 million
compared to a loss before income taxes of $36.6 million during
fiscal 2016. The improvement in operating loss was the result of
the items discussed above.
Results of Operations by Business Segment
The tables below set forth the operating results for our three
business segments for the fiscal years ended June 30, 2017 and July
1, 2016.
ECM
|
|
For the
Fiscal Year Ended
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
GROSS
REVENUE
|
$61,294
|
$110,533
|
|
Purchased
services and materials, at cost
|
43,715
|
86,927
|
|
Direct
costs of services and overhead
|
13,158
|
20,498
|
|
GROSS
PROFIT
|
$4,421
|
$3,108
|
|
Gross
profit percentage
|
7%
|
3%
|
Fiscal 2017 Compared to Fiscal 2016
Gross
revenue for fiscal 2017 was $61.3 million, a decrease of 45%
compared to $110.5 million during fiscal 2016. The decrease in
revenue were a result of $35.0 million less revenue from the DAFB
project, reduced revenue from PPS of $3.0 million, completion in
2016 of a repair project at Laughlin AFB of $4.0 million, and $2.4
million less revenue from our Title II work in Iraq and
Afghanistan, which continued to wind down during fiscal 2017.
Additionally, Versar saw lower revenue of $1.4 million from
VSS.
In April 2017, Versar sold its PPS subsidiary for a cash value of
$214,042.50. We are entitled to additional cash payments for PPS in
a total of up to £400,000 contingent on PPS’ attainment
of certain performance thresholds during the balance of calendar
year 2017, as agreed upon with the buyer of PPS.
Gross profit for fiscal 2017 was $4.4 million, an increase of 42%
compared to gross profit of $3.1 million for fiscal 2016. Our gross
profit percentage increased to 7% from 3% for fiscal 2017. VSS
contributed $1.4 million to gross profit offset by the decline of
our higher margin Title II work and a $2.2 million project loss on
our DAFB project resulting from costs we incurred that we expect
will be recovered via negotiations for REAs and $0.4 million for
project loss contingency accruals (see “Factors Affecting
Fiscal 2017 Performance--Loss Contingency Accruals” above for
more information). An additional charge was recorded of $0.3
million for the ARA net working capital adjustments (see
“Factors Affecting Fiscal 2017 Performance—Other
Nonrecurring Expenses” above for more information). As prime
contractor on the DAFB project, a significant portion of the work
is performed by sub-contractors, resulting in lower gross profit
for Versar. This was offset by costs savings actions made to
improve overhead structure during fiscal 2017 and fiscal 2016. As
we continue to sub-contract a greater percentage of our services to
expand our ability to offer a broader set of capabilities to
market, we continue to see pressure on our gross profits. During
fiscal 2016, we recorded a charge for $0.7 million for the ARA net
working capital adjustments (see Non Recurring Expenses
above).
ESG
|
|
For the
Fiscal Year Ended
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
GROSS
REVENUE
|
$33,320
|
$38,688
|
|
Purchased
services and materials, at cost
|
14,057
|
17,628
|
|
Direct
costs of services and overhead
|
17,133
|
20,170
|
|
GROSS
PROFIT
|
$2,130
|
$890
|
|
Gross
profit percentage
|
6%
|
2%
|
Fiscal 2017 Compared to Fiscal 2016
Gross
revenue for fiscal 2017 was $33.3 million, a decrease of 14%
compared to $38.7 million during fiscal 2016. The decrease in
revenue was due to the lack of funding available at the government
year-end coupled with delays within the EPA during the change of
Administration, both of which resulted in the delay of over $6
million in anticipated revenue. This was partially offset by
the increase in revenue of $1.0 million for cultural resources work
for the USAF.
Gross profit for fiscal 2017 was $2.1 million, an increase of 139%
compared to $0.9 million during fiscal 2016. Our gross profit
percentage increased to 6% from 2% for fiscal 2017. This increase
was due to the continued insourcing of work previously performed by
subcontractors and increased efficiencies within the ESG
organization. This was further supported by costs savings actions
made to improve overhead structure during fiscal 2017 and 2016. An
additional charge of $0.2 million was recorded for the ARA net
working capital adjustments (see “Factors Affecting Fiscal
2017 Performance—Other Nonrecurring Expenses” above for
more information). During fiscal 2016, we recorded several onetime
charges which impacted the results of operations such as a total of
$1.3 million of project loss contingency accruals in connection
with (i) Ft. Irwin class action lawsuit brought by a number of
former employees, (ii) a probable loss from the audit finding by
GSA, and (iii) the loss accrual for the removal and installation of
the new well pump for the PBR task orders, as described above.
Additionally, several projects experienced decreased gross profit
related to no cost work extensions due to demobilization expenses
and higher overtime requirements to finish projects within the
required period of performance. Further a charge for $0.5 million
for the ARA net working capital adjustments (see Non Recurring
Expenses above).
PSG
|
|
For the
Fiscal Year Ended
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
GROSS
REVENUE
|
$17,207
|
$18,696
|
|
Purchased
services and materials, at cost
|
3,088
|
2,644
|
|
Direct
costs of services and overhead
|
14,770
|
16,876
|
|
GROSS
PROFIT (LOSS)
|
$(651)
|
$(824)
|
|
Gross
profit (loss) percentage
|
-4%
|
-4%
|
Fiscal 2017 Compared to Fiscal 2016
Gross revenue for fiscal 2017 was $17.2 million, a decrease of 8 %
compared to $18.7 million during fiscal 2016. The decrease in
revenue was due to a decline of $1.1 million from the JBML
project
when the prime small business did not renew
Versar's subcontract. We
continue to see a decline in our contract positions largely due to
the continued shift to more contract solicitations being targeted
to small business and similar such set aside programs.
Consequently, we continue to seek new ways to deepen our
relationships with firms qualified for these programs to increase
our ability to capture more of this work and maintain current
projects.
Gross
loss for fiscal 2017 was $0.7 million, compared to gross loss of
$0.8 million during fiscal 2016. In fiscal 2017 we recognized project loss reserves of $0.6
million related to the RSC contract for the base period of nine
months and a $1.3 million project loss reserve for the RSC project
related to the exercise of an additional option year, twelve month
performance period. This was offset in part by costs savings
actions made to improve our Company overhead structure during
fiscal 2017 and 2016.
Gross Revenue by Client Base
Our business segments provide services to various industries,
serving government and commercial clients. A summary of gross
revenue from continuing operations generated from our client base
is as follows:
|
|
Years Ended
|
|||
|
|
June
30, 2017
|
July 1,
2016
|
||
|
|
(in
thousands)
|
|||
|
Government
|
|
|
|
|
|
DoD
|
$82,491
|
74%
|
$116,062
|
69%
|
|
State
and Local
|
4,827
|
4%
|
6,899
|
4%
|
|
EPA
|
3,321
|
3%
|
4,583
|
3%
|
|
Other
|
17,588
|
16%
|
38,415
|
23%
|
|
Commercial
|
3,594
|
3%
|
1,958
|
1%
|
|
Gross Revenue
|
$111,821
|
100%
|
$167,917
|
100%
|
Liquidity and Capital Resources
Our working capital as of June 30, 2017 was approximately negative
$11.5 million, compared to negative working capital at July 1, 2016
of $2.2 million. A significant factor contributing to this change
in working capital is the $15.9 million decrease in the ending
accounts receivable balance offset by the $7.8 million improvement
in the outstanding line of credit balance with Bank of America, as
compared to fiscal 2016. Our current ratio at June 30, 2017 was
0.76 compared to 0.96 from the prior fiscal year.
On July 1, 2014, we acquired JMWA. The acquisition price of $13.0
million was paid in cash and with seller notes in the principal
amount of $6.0 million. On June 30, 2017, the outstanding aggregate
principal balance of the notes was $3.5 million. On September 30,
2015, the Company successfully completed the acquisition of VSS.
Versar paid a cash purchase price of $10.5 million and agreed to
pay contingent consideration of up to a maximum of $9.5 million
based on the occurrence of certain events within the earn-out
period of three years from September 30, 2015. As of June 30, 2017,
management believes the amount of the contingent consideration that
will be earned within the earn-out period is $2.7 million,
including probability weighing of future cash flows. All payment
related to the VSS contingent consideration over the next 1.3 years
will also be funded through existing working capital (See Note 3
– Acquisitions).
On September 30, 2015, Versar, together with certain of its
domestic subsidiaries acting as guarantors, entered into a loan
agreement with Bank of America, N.A. as the lender and letter of
credit issuer for a revolving credit facility in the amount of
$25.0 million and a term facility in the amount of $5.0 million.
The proceeds of the term facility and borrowings under the
revolving credit facility were used to repay amounts outstanding
under the Third Amended and Restated Loan and Security Agreement
with United Bank and to pay a portion of the purchase price for the
acquisition of VSS.
The maturity date of the revolving credit facility is currently
September 30, 2018 and the maturity date of the term facility
is September 30, 2017. The principal amount of the term facility
amortizes in quarterly installments equal to $0.8 million with no
penalty for prepayment. Interest initially accrued on the revolving
credit facility and the term facility at a rate per year equal to
the LIBOR Daily Floating Rate (as defined in the loan agreement)
plus 1.95% and was payable in arrears on December 31, 2015 and
on the last day of each quarter thereafter. Obligations under the
loan agreement are guaranteed unconditionally and on a joint and
several basis by the guarantors and secured by substantially all of
the assets of Versar and the guarantors. The loan agreement
contains customary affirmative and negative covenants and during
fiscal 2016 contained financial covenants related to the
maintenance of a Consolidated Total Leverage Ratio (which requires
that the Company maintain a Consolidated Total Leverage Ratio, as
defined, of not greater than 3.25:1.0), Consolidated Senior
Leverage Ratio (which requires the Company to maintain a
Consolidated Senior Leverage Ratio, as defined, of not greater than
2.75:1.0), Consolidated Fixed Charge Coverage Ratio(which requires
the Company maintain an Fixed Charge Coverage Ration greater than
1.25:1.0 and Consolidated Asset Coverage Ratio (which requires the
Company maintain an Asset Coverage Ratio, as defined, of greater
than 1.25:1.0).
During the third and fourth quarters of fiscal 2016, following
discussion with the lender, Versar determined that it was not in
compliance with the Consolidated Total Leverage Ratio, Consolidated
Senior Leverage Ratio, and Asset Coverage Ratio covenants for the
fiscal quarters ended January 1, 2016, April 1, 2016, and July 1,
2016. Each failure to comply with these covenants constituted a
default under the loan agreement. During fiscal 2016 and the first
half of fiscal 2017, Versar, certain of its subsidiaries and the
lender entered into certain forbearance agreements pursuant to
which the lender agreed to forbear from exercising any and all
rights or remedies available to it under the loan agreement and
applicable law related to these defaults for a period the last of
which extended through December 9, 2016, and to allow Versar
to borrow funds pursuant to the terms of the loan agreement,
consistent with current operating needs as set forth in a 13-week
cash flow forecast and subject to certain caps on revolving
borrowings initially of $15.5 million and reducing to $13.0
million. In addition, from and after June 30, 2016, outstanding
amounts under the credit facility bore interest at the default
interest rate equal to the LIBOR Daily Floating Rate (as defined in
the loan agreement) plus 3.95%. Versar was required to provide a
13-week cash flow forecast updated on a weekly basis to the lender,
and the lender waived any provisions prohibiting the financing of
insurance premiums for policies covering the period of July 1, 2016
to June 30, 2017 in the ordinary course of business and in amounts
consistent with past practices. The lender engaged an advisor to
review Versar’s financial condition on the lender’s
behalf, and also required us to pursue a transaction to
refinance or replace the loan agreement.
On
December 9, 2016 Versar, together with certain of its domestic
subsidiaries acting as guarantors, entered into a First Amendment
and Waiver to the loan agreement.
Under
the amendment, the lender waived all existing events of default,
and reduced the revolving facility to $13.0 million from $25.0
million. The interest rate on borrowings under the revolving
facility and the term facility accrue at the LIBOR Daily Floating
Rate plus 5.00% from LIBOR plus 1.87%. The amendment added a
covenant requiring Versar to maintain certain minimum quarterly
consolidated EBITDA amounts. The amendment also eliminated the loan
agreement covenants requiring maintenance of a required
consolidated total leverage ratio, consolidated fixed charge
coverage ratio, consolidated senior leverage ratio and asset
coverage ratio.
In
addition to the foregoing, and subject to certain conditions
regarding the use of cash collateral and other cash received to
satisfy outstanding obligations under the loan agreement, the
amendment suspended all amortization payments under the term
facility such that the entire amount of the term facility shall be
due and payable on September 30, 2017. The original maturity date
of the term facility under the loan agreement was March 31, 2017.
As consideration for the amendment and the waiver of the existing
events of default, Versar agreed to pay an amendment fee of .5% of
the aggregate principal amount of the term facility outstanding as
of November 30, 2016 plus the commitments under the revolving
facility in effect as of the same date (totaling $73,333.54), which
fee was due and payable on the earlier of a subsequent event of
default or August 30, 2017. The fee was paid August 7, 2017.
Versar paid $0.3 million in amendment fees in December
2016.
In
connection with this amendment, among other things, Versar agreed
to continue to engage with a strategic financial advisor to assist
with the structuring and consummation of a transaction the purpose
of which would be the replacement or repayment in full of the
obligations under the loan agreement, agreed to a timeline for the
consummation of such a transaction, and agreed to the issuance of
certain warrants to the lender, which would become exercisable on
the earlier of a subsequent event of default or August 30,
2017. Subsequent to the end of fiscal 2017, the lender provided
Versar with notice of certain events of default under the loan
agreement as a result of our failure to meet the timeline for
consummating the transaction noted above and under a financial
covenant. As a result of these events of default, the amendment fee
discussed above became payable to the lender. The Lender, by letter
dated August 1, 2017 terminated the automatic advance feature
under the loan agreement, effective August 8, 2017, and on
August 9, 2017, Versar issued warrants (the
“Warrants”) to purchase 9.9% of the outstanding common
stock to the lender.
Our capital requirements for fiscal 2017 were approximately $0.1
million, used primarily for annual hardware and software purchases
to maintain our existing information technology systems. We
anticipate that our discretionary capital requirements for fiscal
2018 will be approximately $0.5 million. Versar has made
certain cost cutting measures during fiscal 2016 so that we could
continue to operate within existing cash resources. We believe that our cash balance of $1.0 million
at the end of fiscal 2017, along with anticipated cash flows from
ongoing operations and the funds available from our line of credit
facility, will be sufficient to meet our working capital and
liquidity needs during fiscal 2018.
Going forward, we will continue to aggressively manage cash flows
and costs as needed based on performance.
Additionally, the surety broker informed Versar that bonding
for new work may be limited due to our accumulated deficit and
requested that for all new bonds issued: i) a portion of the
required bonds for future work be placed in a collateral account,
and ii) establish a funds control account for each new project.
A funds control account
essentially eliminates the payment risk for the surety. The surety
establishes a separate bank account in our name, oversees all of
the payment disbursements from Versar, and delivers checks from
each payment for us to distribute to vendors working on the
project. The surety essentially becomes our accounts payable back
office. We continue to work with our surety broker and
bonding companies to find ways to issue bonds.
Contractual Obligations
At June 30, 2017, we had total contractual obligations of
approximately $16.5 million, including short-term obligations of
approximately $8.1 million. The short-term obligations will become
due over the next twelve months. Our contractual obligations are
primarily related to lease commitments. Additionally, we have
principal and interest obligations related to the notes payable
from our acquisition of JMWA. The table below specifies the total
contractual payment obligations as of June 30, 2017.
|
|
|
Within
|
|
|
|
|
Contractual
Obligations
|
TOTAL
|
1
Year
|
2 - 3
Years
|
4 - 5
Years
|
After 5
Years
|
|
Lease
Obligations
|
$11,123
|
$2,790
|
$3,844
|
$2,464
|
$2,025
|
|
Notes
Payable to sellers
|
3,498
|
3,498
|
-
|
-
|
-
|
|
Note
Payable to Bank of America
|
957
|
957
|
-
|
-
|
-
|
|
Deferred
Compensation obligations
|
678
|
678
|
-
|
-
|
-
|
|
Estimated
interest obligations
|
195
|
195
|
-
|
-
|
-
|
|
Total
contractual obligations
|
$16,451
|
$8,118
|
$3,844
|
$2,464
|
$2,025
|
On
October 3, 2016 Versar did not make the quarterly principal
payments to three individuals who were the former owners of JMWA.
However, we continued to make monthly interest payments through the
end of calendar year 2016 at an increased interest rate (seven
percent per annum, rather than five percent per annum). On November
21, 2016, two of the former JMWA shareholders filed an action
against us in Fairfax County District Court, VA for failure to make
such payments and to enforce their rights to such payments.
Consequently, in the second quarter of fiscal 2017, we moved the
long-term portion of the debt to short term notes payable for a
total of $3.5 million. Starting in January 2017, we stopped making
the interest-only payments to two of the former owners and
continued to make the monthly interest only payment at seven
percent per annum to one noteholder. On July 28, 2017, Versar and
the two JMWA note holders who brought this action entered into a
full and final settlement of issues related to the payment of the
notes. This litigation did not involve the third JMWA note holder,
who was not a party to the action. Versar will pay the settling
note holders’ attorney’s fees of $80,000 and the
parties will continue to discuss resolution of any additional legal
fees and costs. Additionally, we will pay during fiscal 2018,
$194,766.89 representing quarterly interest payments from October
2016 to July 2017. This resolution will become effective on October
20, 2017.
On January 1, 2017 Versar did not make $0.1 million in periodic
payment to three individuals who participate in a Deferred
Compensation Agreement plan established in 1988. Versar continues
to negotiate with the individuals to reschedule the payments during
a future period.
Critical Accounting Policies and Related Estimates That Could Have
a Material Effect on Our Consolidated Financial
Statements
Critical Accounting Policies and Estimates
Below
is a discussion of the accounting policies and related estimates
that we believe are the most critical to understanding our
consolidated financial position and results of operations which
require management judgments and estimates, or involve
uncertainties. Information regarding our other accounting policies
is included in the notes to our consolidated financial statements
included elsewhere in this annual report on Form 10-K.
Revenue recognition:
On cost-plus fee contracts, revenue is
recognized to the extent of costs incurred plus a proportionate
amount of fee earned, and on time-and-material contracts, revenue
is recognized to the extent of billable rates times hours delivered
plus material and other reimbursable costs incurred. We record
income from fixed-price contracts, extending over more than one
accounting period, using the percentage-of-completion method.
During the performance of such contracts, estimated final contract
prices and costs are periodically reviewed and revisions are made
as required. Fixed price contracts can be significantly impacted by
changes in contract performance, contract delays, liquidated
damages and penalty provisions, and contract change orders, which
may affect the revenue recognition on a project. Revisions to such
estimates are made when they become known. Detailed quarterly
project reviews are conducted with project managers to review all
project progress accruals and revenue recognition. It is possible
that there will be future and currently unforeseeable adjustments
to our estimated contract revenues, costs and margins for fixed
price contracts, particularly in the later stages of these
contracts. Such adjustments are common in the construction industry
given the nature of the contracts. These adjustments could either
positively or negatively impact our estimates due to the
circumstances surrounding the negotiations of change orders, the
impact of schedule slippage, subcontractor claims and contract
disputes which are normally resolved at the end of the
contract.
Allowance for doubtful
accounts: Disputes arise in the
normal course of our business on projects where we are contesting
with customers for collection of funds because of events such as
delays, changes in contract specifications and questions of cost
allowability and collectability. Such disputes, whether claims or
unapproved change orders in process of negotiation, are recorded at
the lesser of their estimated net realizable value or actual costs
incurred and only when realization is probable and can be reliably
estimated. Management reviews outstanding receivables on a
quarterly basis and assesses the need for reserves, taking into
consideration past collection history and other events that bear on
the collectability of such receivables. All receivables over 60
days old are reviewed as part of this process.
Share-based
compensation: Share-based
compensation is measured at the grant date, based on the fair value
of the award. All of the Company's equity awards granted to
employees in fiscal 2017 and 2016 were restricted stock unit
awards. Share-based compensation cost for restricted stock unit
awards is based on the fair market value of the Company’s
stock on the date of grant. Stock-based compensation cost for stock
options is calculated on the date of grant using the fair value of
stock options, as calculated using the Black-Scholes pricing
model.
Net deferred tax asset:
The Company established a full
valuation allowance against its U.S net deferred tax assets during
the year and maintained the full valuation allowance for our
Philippine branch. Therefore, the net balance of deferred taxes as
of June 30, 2017 is zero.
Long-lived assets:
We review long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying value of an asset might not be recoverable. An
impairment loss is recognized if the carrying value exceeds the
fair value. We review the cash flows of the operating units to
ensure the carrying values do not exceed the cash flows that they
support. Any write-downs are treated as permanent reductions. We
believe the carrying value of our long-lived assets as of June 30,
2017 are fully recoverable.
Intangible assets:
The net carrying value of our
intangible assets at June 30, 2017 and July 1, 2016 was $6.1
million and $7.2 million, respectively. The intangible assets
include customer related assets, marketing related assets, and
technology-based assets. These intangible assets are amortized over
a 1.75 - 15 year useful life. We review our intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying value of the asset might not be recoverable. An
impairment loss is recognized if the carrying value exceeds the
fair value. Any impairments of the asset are treated as permanent
reductions.
Impact of Inflation
We
protect ourselves from the effects of inflation. The majority of
contracts we perform are for a period of a year or less and are
firm fixed price contracts. Multi-year contracts provide for
projected increases in labor and other costs.
Business Segments
We
have the following three business segments: ECM, ESG, and PSG.
Additional details regarding these segments are contained in Note 2
- Business Segments, of the Notes to the Consolidated Financial
Statements included elsewhere in this annual report on Form
10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
We
have not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believe that
our exposure to interest rate risk and other relevant market risk
is not material.
Item 8. Financial Statements and Supplementary Data Report of
Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting
Firm
Board
of Directors and Stockholders Versar, Inc.
We
have audited the accompanying consolidated balance sheets of
Versar, Inc. (a Delaware corporation) and its subsidiaries (the
“Company”) as of June 30, 2017 and July 1, 2016, and
the related consolidated statements of operations, comprehensive
(loss), changes in stockholders’ equity (deficit), and cash
flows for each of the two years in the period ended June 30, 2017.
Our audits also included the financial statement schedule listed in
the Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedules based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of
the Company’s internal control over financial reporting. Our
audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Versar, Inc. and its subsidiaries as of June 30, 2017
and July 1, 2016, and the results of its operations and its cash
flows for each of the two years in the period ended June 30, 2017,
in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
described in Note 2 to the consolidated financial statements, the
Company generated a net loss of $9.6 million for the fiscal year
ended June 30, 2017, expects losses to continue in the future and
had an accumulated deficit of $37.0 million at that date. These
conditions raise substantial doubt about its ability to continue as
a going concern. Management’s plans in regard to these
matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/
Urish Popeck & Co., LLC
Pittsburgh,
PA
September 25,
2017
|
VERSAR, INC. AND SUBSIDIARIES
|
||
|
Consolidated
Balance Sheets
|
||
|
(In
thousands, except share amounts)
|
||
|
|
As
of
|
|
|
|
June
30,2017
|
July
1,2016
|
|
ASSETS
|
|
|
|
Current
assets
|
|
|
|
Cash
and cash equivalents
|
$1,039
|
$1,549
|
|
Accounts
receivable, net
|
31,753
|
47,675
|
|
Inventory,
net
|
-
|
221
|
|
Prepaid
expenses and other current assets
|
1,645
|
1,007
|
|
Income
tax receivable
|
1,352
|
1,513
|
|
Total
current assets
|
35,789
|
51,965
|
|
Property
and equipment, net
|
839
|
1,328
|
|
Deferred
income taxes, non-current
|
-
|
-
|
|
Goodwill
|
-
|
-
|
|
Intangible
assets, net
|
6,072
|
7,248
|
|
Other
assets
|
1,647
|
775
|
|
Total
assets
|
$44,347
|
$61,316
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$15,601
|
$18,156
|
|
Billings
in excess of revenue
|
9,378
|
7,156
|
|
Accrued
salaries and vacation
|
2,272
|
2,478
|
|
Bank
line of credit
|
7,083
|
14,854
|
|
Notes
payable, current
|
4,407
|
3,831
|
|
Other
current liabilities
|
8,563
|
7,724
|
|
Total
current liabilities
|
47,304
|
54,199
|
|
|
|
|
|
Notes
payable, non-current
|
-
|
2,494
|
|
Other
long-term liabilities
|
2,824
|
3,555
|
|
Total
liabilities
|
50,128
|
60,248
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
Stockholders'
equity (deficit)
|
|
|
|
Common stock $.01
par value; 30,000,000 shares authorized;10,266,027 shares issued
and 9,923,710 shares outstanding as of June 30, 2017; 10,217,227 shares issued and 9,982,778 shares
outstanding as of July 1, 2016.
|
103
|
102
|
|
Capital
in excess of par value
|
32,857
|
31,128
|
|
Accumulated
deficit
|
(37,021)
|
(27,448)
|
|
Treasury
stock, at cost
|
(1,494)
|
(1,480)
|
|
Accumulated
other comprehensive loss; foreign currency translation
|
(226)
|
(1,234)
|
|
Total
stockholders' equity (deficit)
|
(5,781)
|
1,068
|
|
Total
liabilities and stockholders' equity
|
$44,347
|
$61,316
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
VERSAR, INC. AND SUBSIDIARIES
|
||
|
Consolidated
Statements of Operations
|
||
|
(In
thousands, except per share amounts)
|
||
|
|
For the
Fiscal Year Ended
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
|
|
|
GROSS
REVENUE
|
$111,821
|
$167,917
|
|
Purchased
services and materials, at cost
|
60,860
|
107,199
|
|
Direct
costs of services and overhead
|
45,061
|
57,544
|
|
GROSS
PROFIT
|
5,900
|
3,174
|
|
|
|
|
|
Selling,
general and administrative expenses
|
12,873
|
13,031
|
|
Other
operating expense
|
1,243
|
1,937
|
|
Goodwill
impairment
|
-
|
20,331
|
|
Intangible
impairment
|
-
|
3,812
|
|
LOSS
FROM OPERATIONS
|
(8,216)
|
(35,937)
|
|
|
|
|
|
OTHER
(INCOME) EXPENSE
|
|
|
|
Interest
income
|
(14)
|
(19)
|
|
Interest
expense
|
1,446
|
702
|
|
LOSS
BEFORE INCOME TAXES
|
(9,648)
|
(36,620)
|
|
|
|
|
|
Income
tax (benefit) expense
|
(75)
|
1,267
|
|
|
|
|
|
NET
LOSS
|
$(9,573)
|
$(37,887)
|
|
|
|
|
|
NET
LOSS PER SHARE-BASIC and DILUTED
|
$(0.96)
|
$(3.84)
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC AND DILUTED
|
10,002
|
9,857
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
|
VERSAR, INC. AND SUBSIDIARIES
|
||
|
Consolidated
Statements of Comprehensive (Loss)
|
||
|
(In
thousands)
|
||
|
|
|
|
|
|
For the
Fiscal Year Ended
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
COMPREHENSIVE
(LOSS)
|
|
|
|
Net
(loss)
|
$(9,573)
|
$(37,887)
|
|
Reclassification
of cumulative translation adjustments due to disposal of
PPS
|
1,041
|
--
|
|
Foreign
currency translation adjustments
|
(33)
|
(726)
|
|
TOTAL
COMPREHENSIVE (LOSS)
|
$(8,565)
|
$(38,613)
|
The accompanying notes are an integral part of these consolidated
financial statements.
VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(Deficit)
Fiscal
Years Ended June 30, 2017 and July 1, 2016 (in
thousands)
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
Capital
|
Earnings
/
|
|
|
Other
|
Total
|
|
|
Common
Stock
|
in
Excess of
|
(Accumulated)
|
Treasury
|
Comprehensive
|
Stockholders'
|
||
|
|
Shares
|
Amount
|
Par
Value
|
Deficit)
|
Shares
|
Amount
|
Loss
|
Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 26, 2015
|
10,129
|
$101
|
$30,798
|
$10,439
|
(324)
|
(1,460)
|
$(508)
|
$39,370
|
|
Restricted stock
units
|
88
|
1
|
330
|
-
|
-
|
-
|
-
|
331
|
|
Treasury
stock
|
-
|
-
|
-
|
-
|
(7)
|
(20)
|
-
|
(20)
|
|
Net
loss
|
-
|
-
|
-
|
(37,887)
|
-
|
-
|
-
|
(37,887)
|
|
Foreign Currency
Translation Adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
(726)
|
(726)
|
|
Balance
at July 1, 2016
|
10,217
|
$102
|
$31,128
|
$(27,448)
|
(331)
|
$(1,480)
|
$(1,234)
|
$1,068
|
|
Restricted stock
units
|
49
|
1
|
185
|
-
|
-
|
-
|
-
|
186
|
|
Treasury
stock
|
-
|
-
|
-
|
-
|
(33)
|
(14)
|
-
|
(14)
|
|
Warrants
|
-
|
-
|
1,544
|
-
|
-
|
-
|
-
|
1,544
|
|
Net
loss
|
-
|
-
|
-
|
(9,573)
|
-
|
-
|
-
|
(9,573)
|
|
Foreign Currency
Translation Adjustment and reclassifications from other
comprehensive loss to net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
1,008
|
1,008
|
|
Balance
at June 30, 2017
|
10,266
|
$103
|
$32,857
|
$(37,021)
|
(364)
|
$(1,494)
|
$(226)
|
$(5,781)
|
The accompanying notes are an integral part of these consolidated
financial statements.
|
VERSAR, INC. AND SUBSIDIARIES
|
||
|
Consolidated
Statements of Cash Flows
|
||
|
(In
thousands)
|
||
|
|
For the
Fiscal Year Ended
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
Cash
flows from operating activities:
|
|
|
|
Net
income (loss)
|
$(9,573)
|
$(37,887)
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) from continuing operations to net
cash provided by operating activities:
|
|
|
|
Depreciation
and amortization
|
1,860
|
5,756
|
|
(Gain)
loss on sale of property and equipment
|
-
|
(79)
|
|
Change
in contingent notes
|
(371)
|
-
|
|
Provision
for (recovery of) doubtful accounts receivable
|
(845)
|
1,001
|
|
Provision
for non-cash interest expense
|
611
|
-
|
|
Provision
(benefit) for income taxes expense
|
-
|
1,779
|
|
Share
based compensation
|
185
|
329
|
|
Goodwill
impairment
|
-
|
20,331
|
|
Intangible
impairment
|
-
|
3,812
|
|
Loss
on disposal of PPS
|
1,243
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Decrease
(increase) in accounts receivable
|
15,555
|
15,192
|
|
Decrease
(increase) in prepaid and other assets
|
(741)
|
1,148
|
|
(Increase)
decrease in inventories
|
-
|
(96)
|
|
(Decrease)
increase in accounts payable
|
(2,323)
|
(19,635)
|
|
Decrease
in accrued salaries and vacation
|
(208)
|
(1,055)
|
|
Decrease
in income tax payable
|
161
|
829
|
|
(Decrease)
Increase in billings in excess of revenue
|
(2,222)
|
-
|
|
Decrease
(increase) in other assets and liabilities
|
4,621
|
6,503
|
|
Net
cash (used in) provided by operating activities
|
7,953
|
(2,072)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(184)
|
(686)
|
|
Payment
for VSS acquisition, net of cash acquired
|
-
|
(11,080)
|
|
Proceeds
from sale of office equipment
|
-
|
270
|
|
Proceeds
from sale of PPS
|
214
|
-
|
|
Net
cash used in investing activities
|
30
|
(11,496)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Borrowings
on line of credit
|
66,913
|
73,464
|
|
Repayments
on line of credit
|
(73,799)
|
(58,611)
|
|
Repayment
of Loan for JMWA Purchase
|
(1,543)
|
(1,266)
|
|
Loan
for VSS Purchase
|
-
|
5,000
|
|
Repayment
of Loan for VSS Purchase
|
-
|
(2,500)
|
|
Repayments
of notes payable
|
-
|
(3,058)
|
|
Purchase
of treasury stock
|
(15)
|
(20)
|
|
Net
cash provided by (used in) financing activities
|
(8,444)
|
13,009
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
(49)
|
(1)
|
|
Net
decrease in cash and cash equivalents
|
(510)
|
(560)
|
|
Cash
and cash equivalents at the beginning of the period
|
1,549
|
2,109
|
|
Cash
and cash equivalents at the end of the period
|
$1,039
|
$1,549
|
|
Supplemental
disclosure of cash and non-cash activities:
|
|
|
|
Contingent
consideration payable related to VSS acquisition
|
$2,728
|
$3,154
|
|
Cash
paid for interest
|
$683
|
$133
|
|
Cash
paid for income taxes
|
$28
|
$254
|
The accompanying notes are an integral part of these consolidated
financial statements.
VERSAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and business operations:
The accompanying consolidated
financial statements include the accounts of Versar, Inc. a
Delaware corporation organized in 1969, and its wholly-owned
subsidiaries (“Versar” or the “Company”).
Versar, Inc., Versar is a global project management firm that
provides value oriented solutions to government and commercial
clients. It also provides tailored and secure engineering solutions
in extreme environments and offers specialized abilities in staff
augmentation, performance based remediation, and hazardous material
management. All intercompany balances and transactions have been
eliminated in consolidation. Refer to Note 3 - Business Segments
for additional information. The Company’s fiscal year end is
based upon 52 or 53 weeks per year ending on the last Friday of the
fiscal period and therefore does not close on a calendar month end.
Fiscal 2017 included 52 weeks and fiscal 2016 included 53 weeks.
The extra week occurred in the period ended December 30, 2016.
Therefore, for comparative purposes, the fiscal year numbers
presented will include an additional week of results for fiscal
2016.
Accounting estimates: The
financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”), which require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those
estimates.
Contract accounting and revenue recognition: Contracts in process are stated at the lower of
actual cost incurred plus accrued profits or incurred costs reduced
by progress billings. Versar records income from major fixed-price
contracts, extending over more than one accounting period, using
the percentage-of-completion method. During performance of such
contracts, estimated final contract prices and costs are
periodically reviewed and revisions are made as required. The
effects of these revisions are included in the periods in which the
revisions are made. On cost-plus-fee type contracts, revenue is
recognized to the extent of costs incurred plus a proportionate
amount of fee earned, and on time-and material contracts, revenue
is recognized to the extent of billable rates times hours delivered
plus material and other reimbursable costs incurred. Losses on
contracts are recognized when they become
known.
Direct costs of services and overhead: These expenses represent the cost to Versar of
direct and overhead staff, including recoverable overhead costs and
unallowable costs that are directly attributable to contracts
performed by the Company.
Pre-contract costs: Costs
incurred by Versar prior to the execution of a contract, including
bid and proposal costs, are expensed when incurred regardless of
whether the bid is successful.
Depreciation and amortization: Property and equipment are carried at cost net of
accumulated depreciation and amortization. Depreciation and
amortization are computed on a straight-line basis over the
estimated useful lives of the assets. Repairs and maintenance that
do not add significant value or significantly lengthen an
asset’s useful life are charged to current
operations.
Allowance for doubtful accounts receivable: Disputes arise in the normal course of our
business on projects where we are contesting with customers for
collection of funds because of events such as delays, changes in
contract specifications and questions of cost allowability and
collectability. Such disputes, whether claims or unapproved change
orders in process of negotiation, are recorded at the lesser of
their estimated net realizable value or actual costs incurred and only when
realization is probable and can be reliably estimated. Management
reviews outstanding receivables on a quarterly basis and assesses
the need for reserves, taking into consideration past collection
history and other events that bear on the collectability of such
receivables. All receivables over 60 days old are reviewed as part
of this process.
Share-based compensation:
Share-based compensation expense is measured at the grant date,
based on the fair value of the award. Versar’s recent equity
awards have been restricted stock unit awards. Share-based
compensation cost for restricted stock unit awards is based on the
fair market value of the stock on the date of grant. Share-based
compensation expense for stock options is calculated on the date of
grant using the Black-Scholes pricing model to determine the fair
value of stock options. Compensation expense is then recognized
ratably over the requisite service period of the
grants.
Net income (loss) per share: Basic net income (loss) per common share is
computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted net income per
common share also includes common equivalent shares outstanding
during the period, if dilutive. Versar’s common equivalent
shares consist of shares to be issued under outstanding stock
options and shares to be issued upon vesting of unvested restricted
stock units.
The following is a reconciliation of weighted average outstanding
shares for purposes of calculating basic net (loss) income per
share compared to diluted net (loss) income per share:
|
|
For the Fiscal Year Ended
|
|
||
|
|
June 30, 2017
|
|
July 1, 2016
|
|
|
|
(in thousands)
|
|||
|
Weighted average common shares outstanding-basic
|
10,002
|
|
9,857
|
|
|
Effect of assumed exercise of options and vesting of restricted
stock unit awards, using the treasury stock method
|
-
|
|
-
|
|
|
Weighted average common shares outstanding-diluted
|
10,002
|
|
9,857
|
|
Cash and cash equivalents: All
investments with an original maturity of three months or less when
purchased are considered to be cash equivalents. Cash and cash
equivalents are maintained at financial institutions and, at times,
balances may exceed federally insured limits. Versar has never
experienced any losses related to these
balances.
Inventory: Versar’s
inventory is valued at the lower of cost or market and is accounted
for on a first-in first-out basis.
Long-lived assets: Versar is
required to review long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset might
not be recoverable. An impairment loss is recognized if the
carrying value exceeds the fair value. Any write-downs are treated
as permanent reductions. We believe the long-lived assets as of
June 30, 2017 are fully recoverable.
Income taxes: Versar recognizes
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts
and the tax bases of certain assets and liabilities. A valuation
allowance is established, as necessary, to reduce deferred income
tax assets to the amount expected to be realized in future
periods.
Goodwill: The carrying value of
goodwill at June 30, 2017 and July 1, 2016 was
zero.
Other intangible assets: The
net carrying value of intangible assets at June 30, 2017 and July
1, 2016 was $6.1 million and $7.2 million, respectively. The
intangible assets accumulated from acquisitions include customer
related assets, marketing related assets, technology-based assets,
contractual related assets, and non-competition related assets.
These intangible assets are amortized over a 1.75 - 15 year useful
life. Versar is required to review its amortized intangible assets
for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset might not be recoverable. An
impairment loss is recognized if the carrying value exceeds the
fair value. Any impairment of the assets would be treated as
permanent reductions. Based on the results of the impairment
testing during the fourth quarter of fiscal 2017, we concluded that
the value of intangible assets with a carrying amount of $6.1
million was recoverable.
Treasury stock: Versar accounts
for treasury stock using the cost method. There were 379,000 and
330,742 shares of treasury stock at historical cost of
approximately $1.5 million at June 30, 2017 and July 1, 2016,
respectively.
Foreign Currency Translation
and Transactions: The financial
position and results of operations of Versar’s foreign
affiliates are translated using the local currency as the
functional currency. Assets and liabilities of the affiliates are
translated at the exchange rate in effect at year-end. Statement of
Operations accounts are translated at the average rate of exchange
prevailing during the year. Translation adjustments arising from
the use of differing exchange rates from period to period are
included in Other Comprehensive Income (Loss) within the
Consolidated Statements of Comprehensive Income (Loss). Gains and
losses resulting from foreign currency transactions are included in
operations and are not material for the fiscal years presented. At
June 30, 2017 and July 1, 2016, Versar held cash in foreign banks
of approximately $0.2 million and $0.5 million, respectively. At
June 30, 2017 and July 1, 2016, we had net assets held in the
United Kingdom of approximately zero and $1.3 million. On April 4,
2017, Versar sold its PPS subsidiary and recorded a $1.2 million
charge to write-down the related historical cumulative translation
adjustment. This amount is recorded as Other Expense in the
Consolidated Financial Statements.
Fair value of Financial
Instruments: The fair values of
the Versar’s cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximate their
carrying values because of the short-term nature of those
instruments. The carrying value of our debt approximates its fair
value based upon the quoted market price offered us for debt of the
same maturity and quality.
Commitments and
Contingencies: Liabilities for
loss contingencies arising from claims, assessments, litigation,
fines, and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the
assessment and/or remediation can be reasonably
estimated.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
(Topic 842) (“ASU
2016-02”), which requires
the recognition of lease rights and obligations as assets and
liabilities on the balance sheet. Previously, lessees were not
required to recognize on the balance sheet assets and liabilities
arising from operating leases. The ASU also requires disclosure of
key information about leasing arrangements. ASU 2016-02 is
effective on January 1, 2019, using the modified retrospective
method of adoption, with early adoption permitted. We have not yet
determined the effect of the adoption of ASU 2016-02 on our
consolidated financial statements nor have we selected a transition
date.
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers
(Topic 606). ASU 2014-09 provides a single comprehensive
revenue recognition framework and supersedes almost all existing
revenue recognition guidance. Included in the new principles-based
revenue recognition model are changes to the basis for deciding on
the timing for revenue recognition. In addition, the standard
expands and improves revenue disclosures. In August 2015, the FASB
issued ASU 2015-14, Revenue
from Contracts with Customers (Topic 606): Deferral of Effective
Date, to amend ASU 2014-09 to defer the effective date of
the new revenue recognition standard. As a result, ASU 2014-09 is
effective for Versar for fiscal 2018 and can be adopted either
retrospectively to each prior reporting period presented or as a
cumulative effect adjustment as of the date of
adoption.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net) to amend ASU 2014-09, clarifying the
implementation guidance on principal versus agent considerations in
the new revenue recognition standard. Specifically, ASU 2016-08
clarifies how an entity should identify the unit of accounting
(i.e., the specified good or service) for the principal versus
agent evaluation and how it should apply the control principle to
certain types of arrangements. The guidance is effective for fiscal
years beginning after December 15, 2017. Early adoption is
permitted. Versar is evaluating the impact all the foregoing
Topic 606 amendments will have on its consolidated financial
statements.
In
April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing
to amend ASU 2014-09, reducing the complexity when
applying the guidance for identifying performance obligations and
improving the operability and understandability of the license
implementation guidance. The guidance is effective for fiscal
years, beginning after December 15, 2017. Early adoption is
permitted. Versar is evaluating the impact all the foregoing
Topic 606 amendments will have on its consolidated financial
statements.
In May
2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients.
The improvements address completed contracts and contract
modifications at transition, noncash consideration, the
presentation of sales taxes and other taxes collected from
customers, and assessment of collectability when determining
whether a transaction represents a valid contract. Specifically,
ASU 2016-12 clarifies how an entity should evaluate the
collectability threshold and when an entity can recognize nonrefundable consideration
received as revenue if an arrangement does not meet the
standard’s contract criteria. The pronouncement is effective
for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017. Versar is evaluating the impact
all the foregoing Topic 606 amendments will have on its
consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments. ASU
2016-15 is intended to reduce diversity in practice in how certain
cash receipts and cash payments are presented and classified in the
Consolidated Statement of Cash Flows by providing guidance on eight
specific cash flow issues. ASU 2016-15 is effective retrospectively
on January 1, 2018, with early adoption permitted. Versar is
evaluating the impact the effect of the ASU on its results of
operations, financial condition or cash flows nor and has not
selected a transition date.
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash. ASU 2016-18 is intended to reduce diversity in
practice in the classification and presentation of changes in
restricted cash on the Consolidated Statement of Cash Flows. The
ASU requires that the Consolidated Statement of Cash Flows explain
the change in total cash and equivalents and amounts generally
described as restricted cash or restricted cash equivalents when
reconciling the beginning of- period and end-of-period total
amounts. The ASU also requires a reconciliation between the total
of cash and equivalents and restricted cash presented on the
Consolidated Statement of Cash Flows and the cash and equivalents
balance presented on the Consolidated Balance Sheet. ASU 2016-18 is
effective retrospectively on January 1, 2018, with early adoption
permitted. We have not yet selected a transition date. Versar does not expect the
adoption of ASU 2016-18 to have a material effect on its results of
operations financial condition or cash flows.
NOTE 2 – GOING CONCERN
The
accompanying financial statements and notes have been prepared
assuming that Versar will continue as a going concern. For the
fiscal year ended June 30, 2017, we generated a net loss of $9.6
million and had an accumulated deficit of $37.0 million with
limited sources of operating cash flows, and further losses are
anticipated in fiscal 2018. Further, we were in default under our
loan agreement as of June 30, 2017. On December 9, 2016, Versar,
together with certain of its domestic subsidiaries acting as
guarantors, entered into an amendment to the loan agreement dated
September 30, 2015 with the lender (see Note 13 – Debt).
Versar’s ability to continue as a going concern is dependent
upon our ability to generate profitable operations and/or raise
additional capital through equity or debt financing to meet our
liabilities when they come due.
Versar
intends to continue funding its business operations and its working
capital needs by way of private placement financing, obtaining
additional term loans or borrowings from other financial
institutions, until such time profitable operations can be
achieved. As much as we believe that this plan provides an
opportunity for us to continue as a going concern, there are no
written agreements in place for such funding or issuance of
securities and there can be no assurance that sufficient funding
will be available in the future. These and other factors raise
substantial doubt about our ability to continue as a going
concern.
These financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts,
or amounts and classification of liabilities that might result from
the outcome of this uncertainty.
NOTE 3 - BUSINESS SEGMENTS
The ECM business segment provides engineering design, construction,
construction management and security systems installation and
support services. ESG provides full service environmental
consulting including compliance, cultural resources, natural
resources, remediation and UXO/MMRP services. PSG provides onsite
environmental, engineering, construction and logistics
services.
Summary financial information from continuing operations for the
business segments is as follows:
|
|
For the
Fiscal Year Ended
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
GROSS
REVENUE
|
|
|
|
ECM
|
$61,294
|
$110,533
|
|
ESG
|
33,320
|
38,688
|
|
PSG
|
17,207
|
18,696
|
|
|
$111,821
|
$167,917
|
|
|
|
|
|
GROSS
PROFIT (LOSS) (a)
|
|
|
|
ECM
|
$4,421
|
$3,108
|
|
ESG
|
2,130
|
890
|
|
PSG
|
(651)
|
(824)
|
|
|
$5,900
|
$3,174
|
|
|
|
|
|
Selling,
general and administrative expenses
|
12,873
|
13,031
|
|
Other
operating expense (income)
|
1,243
|
1,937
|
|
Goodwill
impairment
|
-
|
20,331
|
|
Intangible
impairment
|
-
|
3,812
|
|
OPERATING
(LOSS)
|
$(8,216)
|
$(35,937)
|
|
|
|
|
(a)
- Gross profit is defined as gross revenue less purchased services
and materials, at cost, less direct costs of services and overhead
allocated on a proportional basis.
|
|
As
of
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
ASSETS
|
(in
thousands)
|
|
|
|
|
|
|
ECM
|
$12,949
|
$21,842
|
|
ESG
|
16,862
|
21,492
|
|
PSG
|
14,536
|
17,982
|
|
Total
Assets
|
$44,347
|
$61,316
|
NOTE 4 - ACQUISITIONS AND DIVESTITURES
On
September 30, 2015, Versar completed the acquisition of a
specialized federal security integration business from Johnson
Controls, Inc., which is now known as VSS. This group is
headquartered in Germantown, Maryland and generated approximately
$34.0 million in trailing twelve month revenues prior to the
acquisition date from key long term customers such as FAA and FEMA.
The Company has incurred approximately $1.3 million of acquisition
and integration costs through July 1, 2016, recorded in selling,
general, and administrative expenses. The results of operations of
VSS have been included in consolidated results from the date of
acquisition. VSS has contributed approximately $16.1 million in
revenue and $11.5 million in expenses during fiscal 2017 and
contributed approximately $17.5 million in revenue and $14.7
million in expenses during fiscal 2016.
VSS
expanded Versar’s service offerings to include higher margin
classified construction, enabling Versar to generate more work from
existing clients and positions us to more effectively compete for
new opportunities. At closing, we paid a cash purchase price of
$10.5 million. In addition, we agreed to pay contingent
consideration of up to a maximum of $9.5 million (undiscounted)
based on certain events within the earn out period of three years
from September 30, 2015. Based on the facts and circumstances as of
June 30, 2017, management believes that the amount of the
contingent consideration that will be earned within the earn out
period is $2.7 million, including probability weighing of future
cash flows. This anticipated contingent consideration is recognized
as consideration and as a liability, of which $1.6 million is
presented within other current liabilities and $1.1 million is
presented within other long-term liabilities on the condensed
consolidated balance sheet as of June 30, 2017. The potential
undiscounted amount of all future payments that Versar could be
required to make under the contingent consideration agreement
ranges from $0 to a maximum payout of $9.5 million, with the amount
recorded being the most probable.
The
final purchase price allocation in the table below reflects
Versar’s estimate of the fair value of the assets acquired
and liabilities assumed as of the September 30, 2015 acquisition
date. Goodwill was allocated to the ECM segment. Goodwill
represents the value in excess of fair market value that we paid to
acquire VSS. The allocation of intangibles has been completed by an
independent third party.
|
|
Amount
|
|
Description
|
(in
thousands)
|
|
Accounts
receivable
|
$6,979
|
|
Prepaid
and other
|
15
|
|
Property
and equipment
|
29
|
|
Goodwill
|
4,266
|
|
Intangibles
|
8,129
|
|
Assets
Acquired
|
19,418
|
|
|
|
|
Account
payable
|
1,675
|
|
Other
liabilities
|
3,509
|
|
Liabilities
Assumed
|
5,184
|
|
|
|
|
Acquisition
Purchase Price
|
$14,234
|
|
|
|
The table below summarizes the unaudited pro forma statements of
operations for the fiscal year ended June 30, 2017 and July 1,
2016, assuming that the VSS acquisition had been completed as of
the first day of each of the two fiscal years, respectively. These
pro forma statements do not include any adjustments that may have
resulted from synergies derived from the acquisition or for
amortization of intangibles other than during the period the
acquired entity was part of Versar.
|
VERSAR, INC. AND SUBSIDIARIES
|
||||||
|
Pro
forma Consolidated Statements of Operations
|
||||||
|
(In
thousands, except per share amounts)
|
||||||
|
|
For the
Fiscal Year EndedJune 30, 2017(in thousands)
|
For the
Fiscal Year EndedJuly 1, 2016(in thousands)
|
||||
|
|
Versar
|
VSS
|
Pro
Forma Combined
|
Versar
|
VSS
|
Pro
Forma Combined
|
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$111,821
|
-
|
111,821
|
$167,917
|
6,497
|
174,414
|
|
Purchased
services and materials, at cost
|
60,860
|
-
|
60,861
|
107,199
|
3,816
|
111,015
|
|
Direct
costs of services and overhead
|
45,061
|
-
|
45,060
|
57,544
|
1,043
|
58,587
|
|
GROSS
PROFIT
|
5,900
|
-
|
5,900
|
3,174
|
1,638
|
4,812
|
|
Selling,
general and administrative expenses
|
12,873
|
-
|
12,874
|
13,031
|
450
|
13,481
|
|
Other
operating expense (income)
|
1,243
|
-
|
1,243
|
1,937
|
-
|
1,937
|
|
Goodwill
impairment
|
-
|
-
|
-
|
20,331
|
-
|
20,331
|
|
Intangible
impairment
|
-
|
-
|
-
|
3,812
|
-
|
3,812
|
|
OPERATING
(LOSS) INCOME
|
(8,216)
|
-
|
(8,215)
|
(35,937)
|
1,188
|
(34,749)
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
|
|
|
|
Interest
income
|
(14)
|
-
|
(14)
|
(19)
|
-
|
(19)
|
|
Interest
expense
|
1,446
|
-
|
1,446
|
702
|
-
|
702
|
|
(LOSS)
INCOME BEFORE INCOME TAXES, FROM OPERATIONS
|
(9,648)
|
-
|
(9,647)
|
(36,620)
|
1,188
|
(35,432)
|
|
Income
tax (benefit) expense
|
(75)
|
-
|
(75)
|
1,267
|
457
|
1,724
|
|
NET
(LOSS) INCOME FROM OPERATIONS
|
(9,573)
|
-
|
(9,572)
|
(37,887)
|
731
|
(37,156)
|
|
NET
(LOSS) INCOME
|
$(9,573)
|
-
|
(9,572)
|
$(37,887)
|
731
|
(37,156)
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) PER SHARE-BASIC and DILUTED
|
$(0.96)
|
-
|
(0.96)
|
$(3.84)
|
-
|
(3.84)
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC AND DILUTED
|
10,002
|
-
|
10,002
|
9,857
|
-
|
9,857
|
|
|
|
|
|
|
|
|
In April 2017, the Company sold the
PPS business, which was a component of the ECM segment, for
$214,043 in cash. There were no significant amounts due to or from
the buyer as of June 30, 2017. We are
entitled to additional cash payments for PPS up to £400,000
contingent on PPS’ attainment of certain performance
thresholds agreed upon with the buyer of PPS. In connection
with the disposal of the PPS business, all of the Company’s
equity interest in the wholly-owned foreign subsidiary was
transferred to the buyer and, following the disposal, the Company
retained no investment or interest in the subsidiary. Accordingly,
the net assets of the subsidiary were deconsolidated and the
associated cumulative currency translation adjustments were
reclassified from accumulated other comprehensive loss and included
as a reduction to the loss on the sale of the
business.
The following table summarizes the
calculation of the loss as well as net assets sold associated with
the disposal of PPS:
|
|
Total
|
|
Sale
price
|
$214,043
|
|
Less:
|
|
|
Net
working capital (1)
|
1,830,942
|
|
Fixed
assets
|
72,084
|
|
Intangible
assets
|
7,728
|
|
Other
long-term liabilities
|
(11,108)
|
|
Net
assets sold
|
1,899,646
|
|
Cumulative
translation losses included in long-lived asset group
|
1,041,154
|
|
Direct
and incremental transaction costs
|
276,000
|
|
Cumulative
loss on disposal of PPS
|
$(3,002,757)
|
|
|
|
(1)
Net working capital primarily includes accounts receivable and
inventory offset by accounts payable.
The loss on the disposal of PPS is
included in the other operating expense in the accompanying
consolidated statements of operations.
NOTE 5 – FAIR VALUE
MEASUREMENT
Versar applies ASC 820 – Fair Value Measurements and
Disclosures in determining the
fair value to be disclosed for financial and nonfinancial assets
and liabilities.
ASC 820 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the measurement
date. It establishes a fair value hierarchy and a framework which
requires categorizing assets and liabilities into one of three
levels based on the assumptions (inputs) used in valuing the asset
or liability. Level 1 provides the most reliable measure of fair
value, while Level 3 generally requires significant management
judgment.
Level 1 inputs are unadjusted,
quoted market prices in active markets for identical assets or
liabilities.
Level 2 inputs are observable
inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets or liabilities in active markets or
quoted prices for identical assets or liabilities in inactive
markets.
Level 3 inputs include
unobservable inputs that are supported by little, infrequent, or no
market activity and reflect management’s own assumptions
about inputs used in pricing the asset or
liability.
As a result of the acquisition of JMWA, Versar is required to
report at fair value the assets and liabilities it acquired as a
result of the acquisition. The significant valuation technique
utilized in the fair value measurement of the assets and
liabilities acquired was primarily an income approach used to
determine fair value of the acquired intangible assets.
Additionally, a market approach and an asset-based approach were
used as secondary methodologies. This valuation technique is
considered to be Level 3 fair value estimate, and required the
estimate of appropriate royalty and discount rates and forecasted
future revenues generated by each identifiable intangible
asset.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
The carrying value of goodwill at June 30, 2017 and July 1, 2016
was zero.
Versar records goodwill in connection with the acquisition of
businesses when the purchase price exceeds the fair values of the
assets acquired and liabilities assumed. Generally, the most
significant intangible assets from the businesses that we acquire
are the assembled workforces, which includes the human capital of
the management, administrative, marketing and business development,
engineering and technical employees of the acquired businesses.
Since intangible assets for assembled workforces are part of
goodwill in accordance with the accounting standards for business
combinations, the substantial majority of the intangible assets for
recent business acquisitions are recognized as
goodwill.
The first step of the goodwill impairment analysis identifies
potential impairment and the second step measures the amount of
impairment loss to be recognized, if any. Step 2 is only performed
if Step 1 indicates potential impairment. Potential impairment is
identified by comparing the fair value of the reporting unit with
its carrying amount, including goodwill. The carrying amount of a
reporting unit equals assets (including goodwill) less liabilities
assigned to that reporting unit. The fair value of a reporting unit
is the price that would be received if the reporting unit was sold.
Value is based on the assumptions of market participants. Market
participants may be strategic acquirers, financial buyers, or both.
The assumptions of market participants do not include assumed
synergies which are unique to the parent company. Management, with
the assistance of an external valuation firm has estimated the fair
value of each reporting unit using the Guideline Public Company
(GPC) method under the market approach. Each of the GPC’s is
assumed to be a market participant. The valuation analysis
methodology adjusted the value of the reporting units by including
a premium for control, or MPAP. The MPAP reflects the capitalized
benefit of reducing Versar’s operating costs. These costs are
associated with a company’s public reporting requirements.
The adjustment assumes an acquirer could take a company private and
eliminate these costs.
During fiscal 2016, continued delays in contract awards and
contract funding and the direct impact on our results of
operations, coupled with the continued decrease in stock price,
were deemed to be triggering events that led to a test for goodwill
impairment. As a result of our analysis, we recorded an impairment
charge of $20.3 million. The carrying value of goodwill after
impairment at July 1, 2016 was zero and the carrying amount of
goodwill assets in ECM and PSG segments have been reduced to
zero.
Intangible Assets
In connection with the acquisitions of VSS, JMWA, GMI, Charron,
PPS, and Advent, Versar identified certain intangible assets. These
intangible assets were customer-related, marketing-related and
technology-related. A summary of the intangible asset balances as
of June 30, 2017 and July 1, 2016, as well as their respective
amortization periods, is as follows (in thousands):
|
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Impairment
Expense
|
Net
Carrying Amount
|
Amortization
Period
|
|
As
of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$12,409
|
$(2,856)
|
$(3,618)
|
$5,935
|
5-15
yrs
|
|
Marketing-related
|
1,084
|
(980)
|
(104)
|
-
|
5-7
yrs
|
|
Technology-related
|
841
|
(751)
|
(90)
|
-
|
7
yrs
|
|
Contractual-related
|
1,199
|
(1,199)
|
-
|
-
|
1.75
yrs
|
|
Non-competition-related
|
211
|
(74)
|
-
|
137
|
5
yrs
|
|
Total
|
$15,744
|
(5,860)
|
(3,812)
|
$6,072
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Impairment
Expense
|
Net
Carrying Amount
|
Amortization
Period
|
|
|
As
of July 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$12,409
|
$(2,407)
|
$(3,618)
|
$6,384
|
5-15
yrs
|
|
Marketing-related
|
1,084
|
(980)
|
(104)
|
-
|
5-7
yrs
|
|
Technology-related
|
841
|
(751)
|
(90)
|
-
|
7
yrs
|
|
Contractual-related
|
1,199
|
(514)
|
-
|
685
|
1.75
yrs
|
|
Non-competition-related
|
211
|
(32)
|
-
|
179
|
5
yrs
|
|
Total
|
$15,744
|
$(4,684)
|
$(3,812)
|
$7,248
|
|
Amortization expense for intangible assets was approximately $1.2
million and $1.7 million for fiscal 2017 and 2016,
respectively.
No intangible asset impairment charges were recorded during fiscal
2017.
During fiscal 2016 based on the results of the impairment testing
of goodwill, Versar concluded that the value of definite-lived
assets with a carrying value of $3.8 million was not recoverable.
We recorded a charge of $3.8 million in fiscal 2016 for the full
impairment of definite-lived intangible assets acquired from JMWA,
GMI, Charron and PPS and as a result of these charges, the carrying
amount of intangible assets has been reduced to zero.
Expected future amortization expense in the fiscal years subsequent
to June 30, 2017 is as follows:
|
Years
|
Amounts
|
|
|
(in
thousands)
|
|
2018
|
490
|
|
2019
|
490
|
|
2020
|
490
|
|
2021
|
459
|
|
2022
|
448
|
|
Thereafter
|
3,695
|
|
Total
|
$6,072
|
NOTE 7 - ACCOUNTS RECEIVABLE
Unbilled
receivables represent amounts earned which have not yet been billed
and other amounts which can be invoiced upon completion of
fixed-price contract milestones, attainment of certain contract
objectives, or completion of federal and state governments’
incurred cost audits. Management anticipates that such unbilled
receivables will be substantially billed and collected in fiscal
2018; therefore, they have been presented as current assets in
accordance with industry practice. As part of concentration risk,
management continues to assess the impact of having the PBR
contracts within the ESG segment represent a significant portion of
the outstanding receivable balance.
|
|
As
of
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
Billed
receivables
|
|
|
|
U.S.
Government
|
$6,785
|
$7,531
|
|
Commercial
|
4,057
|
11,159
|
|
Unbilled
receivables
|
|
|
|
U.S.
Government
|
20,946
|
20,883
|
|
Commercial
|
121
|
9,103
|
|
Total
receivables
|
31,909
|
48,676
|
|
Allowance
for doubtful accounts
|
(156)
|
(1,001)
|
|
Accounts
receivable, net
|
$31,753
|
$47,675
|
NOTE 8 - CUSTOMER INFORMATION
A substantial portion of Versar’s revenue from continuing
operations is derived from contracts with the U.S. government as
follows:
|
|
As
of
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
|
|
|
|
DOD
|
$82,491
|
$116,062
|
|
U.S.
EPA
|
3,321
|
4,583
|
|
Other
US Government agencies
|
17,588
|
38,415
|
|
Total
US Government
|
$103,400
|
$159,060
|
A majority of the DOD work is related to Versar’s runway
repair project at DAFB, support of the reconstruction efforts in
Iraq and Afghanistan with the USAF and U.S. Army, and our PBR
contracts with AFCEC. Revenue of approximately $15.7 million for
fiscal 2017 and $16.6 million for fiscal 2016, was derived from
international work for the U.S. government,
respectively.
NOTE 9 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets include the
following:
|
|
As
of
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Prepaid
insurance
|
$196
|
$18
|
|
Prepaid
rent
|
239
|
48
|
|
Other
prepaid expenses
|
1,164
|
457
|
|
Collateralized
Cash
|
-
|
472
|
|
Miscellaneous
receivables
|
46
|
12
|
|
Total
|
$1,645
|
$1,007
|
Other prepaid expenses include maintenance agreements, licensing,
subscriptions, and miscellaneous receivables from employees and a
service provider. The collateralized cash amount is related to a
bid bond Versar issued.
NOTE 10 – INVENTORY
Versar’s inventory balance includes the
following:
|
|
As
of
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
Raw
Materials
|
$-
|
$132
|
|
Finished
Goods
|
-
|
94
|
|
Work-in-process
|
-
|
7
|
|
Reserve
|
-
|
(12)
|
|
Total
|
$-
|
$221
|
During the fourth quarter of fiscal 2016, Versar recorded a $0.6
million charge to write-down certain PPS assets, primarily
inventory, to their estimated net realizable value as of July 1,
2016. This amount is recorded as Other Expense (Income) in the
financial statements. On April 4, 2017, we sold the PPS subsidiary
(including all of its inventory) for cash of $0.2 million. We are
entitled to additional cash payments for PPS up to £400,000
contingent on PPS’ attainment of certain performance
thresholds agreed upon with the buyer of PPS.
NOTE 11 - PROPERTY AND EQUIPMENT
|
|
|
As
of
|
|
|
Description
|
Useful
life
|
June
30, 2017
|
July 1,
2016
|
|
|
|
(in
thousands)
|
|
|
Furniture
and fixtures
|
8
|
$640
|
$640
|
|
Equipment
|
3 to
10
|
4,556
|
4,446
|
|
Capital
leases
|
Life of
lease
|
565
|
565
|
|
Leasehold
improvements
|
(a)
|
751
|
684
|
|
Property
and equipment, gross
|
|
$6,512
|
$6,335
|
|
Accumulated
depreciation
|
|
(5,673)
|
(5,007)
|
|
Property
and equipment, net
|
|
$839
|
$1,328
|
(a)
The useful life is the shorter of lease term or the life of the
asset.
Depreciation of property and equipment was approximately $0.7
million and $1.3 million, for the fiscal 2017 and 2016,
respectively.
Maintenance and repair expense approximated $0.1 million for both
fiscal 2017 and 2016, respectively.
NOTE 12 - DEBT
Notes Payable
As part of the purchase price for JMWA in July 2014, Versar issued
notes payable to the three JMWA stockholders with an aggregate
principal balance of up to $6.0 million, which were payable
quarterly over a four and a half-year period with interest accruing
at a rate of 5% per year. Accrued interest is recorded in the
consolidated balance sheet. As of June 30, 2017, the outstanding
principal balance owed to the JMWA stockholders was $3.5
million.
On
October 3, 2016 Versar did not make the quarterly principal
payments to the three individuals who were the former owners of
JMWA. However, we continued to make monthly interest payments
through the end of calendar year 2016 at an increased interest rate
(seven percent per annum, rather than five percent per annum). On
November 21, 2016, two of the former JMWA shareholders filed an
action against Versar in Fairfax County District Court, VA for
failure to make such payments and to enforce their rights to such
payments. Consequently, during the second quarter of fiscal 2017,
we moved the long term portion of the debt to short term notes
payable for a total of $3.5 million. Starting January 2017, we
stopped making the interest only payments to two of the former
owners and continues to make the monthly interest only payment at
seven percent per annum to one former owner.
On September 30, 2015, Versar, together with certain of its
domestic subsidiaries acting as guarantors, entered into a loan
agreement with the lender and letter of credit issuer for a
revolving credit facility in the amount of $25.0 million, $14.6
million of which was drawn on the date of closing, and a term
facility in the amount of $5.0 million, which was fully drawn on
the date of closing.
The maturity date of the revolving credit facility is
September 30, 2018 and the maturity date of the term facility
was originally March 31, 2017 (the latter was subsequently
changed to September 30, 2017 by amendment). The principal amount
of the term facility amortizes in quarterly installments equal to
$0.8 million with no penalty for prepayment. Interest accrued on
the revolving credit facility and the term facility at a rate per
year equal to the LIBOR Daily Floating Rate (as defined in the loan
agreement) plus 1.95% and was payable in arrears on
December 31, 2015 and on the last day of each quarter
thereafter. The loan agreement contains customary affirmative and
negative covenants and during fiscal 2016 contained financial
covenants related to the maintenance of a Consolidated Total
Leverage Ratio, Consolidated Senior Leverage Ratio, Consolidated
Fixed Charge Coverage Ratio and a Consolidated Asset Coverage
Ratio. On December 9, 2016 Versar, together with the Guarantors,
entered into an amendment to the loan agreement with the
lender removing these covenants and adding a covenant
requiring Versar to maintain certain minimum quarterly consolidated
EBITDA amounts.
The proceeds of the term facility and borrowings under the
revolving credit facility were used to repay amounts outstanding
under the Versar’s Third Amended and Restated Loan and
Security Agreement with United Bank and to pay a portion the
purchase price for the acquisition of VSS.
As of June 30, 2017, Versar’s outstanding principal term debt
balance was $4.4 million comprised of the lender's facility term
loan balance of $0.9 million, and JMWA Note balance of $3.5 million
including interest. The following maturity schedule presents all
outstanding debt as of June 30, 2017.
|
Fiscal Years
|
Amounts
|
|
|
(in
thousands)
|
|
2018
|
$4,407
|
|
2019
|
-
|
|
2020
|
-
|
|
Total
|
$4,407
|
On January 1, 2017 Versar did not make $0.1 million in periodic
payment to three individuals who participate in a Deferred
Compensation Agreement plan established in 1988. We continue to
negotiate with the individuals to reschedule the payments for a
future period (Note 21 – Subsequent Events).
Line of Credit
As noted above, Versar had a $25.0 million revolving line of
credit facility pursuant to the loan agreement. The revolving
credit facility is scheduled to mature on September 30, 2018.
We had $14.8 million outstanding under this line of credit for
the fiscal year ended July 1, 2016. On December 9, 2016 Versar
entered into a First Amendment and Waiver to the loan agreement
which, among other things, reduced the revolving line of credit
facility to $13.0 million. The amendment increased the current
interest on the revolving credit facility to LIBOR Daily floating
rate plus 5%. The Company had $8.0 million outstanding under its
line of credit as of June 30, 2017.
Versar has elected to adopt ASU No. 2015-13 to simplify the
presentation of debt issuance costs for the fiscal year ended July
1, 2016. $0.2 million of remaining unamortized cost associated with
the loan agreement as of July 1, 2016 is therefore no longer
presented as a separate asset - deferred charge on the consolidated
balance sheet, and instead reclassified as a direct deduction from
the carrying value of the line of credit.
Debt Covenants
During the third and fourth quarters of fiscal 2016, following
discussion with the lender, Versar determined that it was not in
compliance with the Consolidated Total Leverage Ratio covenant for
the fiscal quarters ended January 1, 2016, and April 1, 2016,
the Consolidated Total Leverage Ratio covenant, Consolidated Senior
Leverage Ratio covenant and the Asset Coverage Ratio covenant for
the fiscal quarter ended April 1, 2016, which defaults continued as
of July 1, 2016. Each failure to comply with these covenants
constitutes a default under the original loan agreement. On May 12,
2016, the Company, certain of its subsidiaries and the lender
entered into a forbearance agreement pursuant to which the lender
agreed to forbear from exercising any and all rights or remedies
available to it under the loan agreement and applicable law related
to these defaults for a period ending on the earliest to occur of:
(a) a breach Versar of any obligation or covenant under the
forbearance agreement, (b) any other default or event of default
under the loan agreement or (c) June 1, 2016 (the Forbearance
Period).
The Forbearance Period was subsequently extended by additional
forbearance agreements between Versar and the lender, through
December 9, 2016. During the Forbearance Period, we were
allowed to borrow funds pursuant to the terms of the loan
agreement, consistent with current operating needs as set forth in
a required 13-week cash flow forecast and subject to certain caps
on revolving borrowings initially of $15.5 million and reducing to
$13 million. In addition, the forbearance agreements provided that
from and after June 30, 2016 outstanding amounts under the credit
facility will bear interest at the default interest rate equal to
the LIBOR Daily Floating Rate (as defined in the loan agreement)
plus 3.95%, required that we provide a 13-week cash flow forecast
updated on a weekly basis to the lender, and waived any provisions
prohibiting the financing of insurance premiums for policies
covering the period of July 1, 2016 to June 30, 2017 in the
ordinary course of business and in amounts consistent with past
practices. On
December 9, 2016, Versar, together with the Guarantors, entered
into an amendment to the loan agreement, eliminating the events of
default. The lender engaged an advisor to review our financial
condition, and pursuant to the Forbearance Agreements and the
amendment, Versar must pursue a transaction to refinance or replace
the loan agreement.
Additionally, the lender required that Versar provide it with
10-year warrants for the purchase of 10% (subsequently reduced to
9.9% by mutual agreement) of the fully diluted common stock (or
1,095,222 shares) with an exercise price of $.01 per share
containing customary provisions for warrants issued by public
companies and which may be exercised at any time after the earlier
of an Event of Default under the loan agreement or August 30, 2017.
The amendment also required the payment of an amendment fee of $0.3
million, which was originally to be paid on the earlier of August
30, 2017 or demand upon an Event of Default, but was prepaid in
December 2016. As consideration for the amendment and the waiver of
the existing events of default, Versar agreed to pay an amendment
fee of .5% of the aggregate principal amount of the term facility
outstanding as of November 30, 2016 plus the commitments under the
revolving facility in effect as of the same date (totaling
$73,333.54), which fee was due and payable on the earlier of a
subsequent event of default or August 30, 2017. Due to subsequent
defaults discussed herein, the fee was paid on August 7, 2017.
On August 9, 2017, Versar issued the warrant to purchase 9.9% of
our outstanding common stock to lender. The value of the warrant,
$1,544,263, was deferred and amortized as additional interest
expense over the term of the loan agreement, as amended. The value
was calculated using the Black-Scholes model with the following
assumptions:
|
Expected
volatility
|
277%
|
|
Expected life (in years)
|
5
|
|
Risk free interest
rate
|
1.15%
|
|
Expected dividend
yield
|
0.00%
|
On March 31, 2017, Versar failed its minimum quarterly consolidated
EBITDA covenant set forth in the amendment to the loan agreement,
which constitutes an Event of Default under the loan agreement. On
May 8, 2017, the lender and Versar entered into a Second Amendment
and Waiver pursuant to which the lender provided a onetime waiver
to this Event of Default effective as of May 5, 2017 in exchange
for an amendment fee of $15,000.
If Versar is unable to raise additional financing, we will need to
adjust operational plans so that we can continue to operate within
existing cash resources. The actual amount of needed will be
determined by many factors, some of which are beyond our control
and we may need funds sooner than currently
anticipated.
As of
the end of fiscal 2017, we are not in compliance with the
consolidated EBITDA covenant under the amendment to the loan
agreement. (See Note 21 – Subsequent Events).
On September 22, 2017, the Company, the subsidiary guarantors and
the lender entered into a forbearance agreement pursuant to which
the Lender agreed to forbear from exercising any and all rights or
remedies available to it under the Loan Agreement and applicable
law related to these defaults for a period ending on the earliest
to occur of: (a) a breach by the Company of any obligation or
covenant under the forbearance agreement, (b) any default or event
of default under any of the Loan Documents (other than the
Acknowledged Events of Default, as defined in the forbearance
agreement), (c) the transaction between Kingswood Genesis Fund I,
LLC, KW Genesis Merger Sub, Inc. and Borrower is terminated, or (d)
November 17, 2017 (each, a “Forbearance Termination
Event”). The period from the effective date under the
forbearance agreement to (but excluding) the date that a
Forbearance Termination Event occurs is referred to as the
“Forbearance Period”.
Additionally,
in exchange for the lender’s forbearance, the Company agreed
to pay to the lender a forbearance fee in the amount of $150,000
(the “Forbearance
Fee”), which shall be fully-earned and non-refundable
as of the effective date of the forbearance agreement. The
Forbearance Fee is due and payable on the earlier of a Forbearance
Termination Event or November 17, 2017, provided that if Borrower
repays in full all outstanding obligations due under the Loan
Agreement on or before the earlier of a Forbearance Termination
Event or November 17, 2017, the Forbearance Fee will be
waived.
On September 22, 2017, the Company,
KW Genesis Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of Kingswood Genesis Fund I, LLC (the latter two
“Purchaser”), entered into an Agreement and Plan of
Merger (Merger Agreement). The Merger Agreement provides that,
among other things, subject to the satisfaction or waiver of
certain conditions, following completion of a tender offer for all
outstanding common stock of the Company for a cash price of $0.15
per share, and in accordance with the General Corporation Law of
the State of Delaware, as amended (the “DGCL”),
Purchaser will be merged into and with the Company (the
“Merger”). Any common stock not purchased in the tender
offer will be exchanged for a cash price of $0.15 per share in the
Merger. Following the consummation of the Merger, the Company will
continue as the surviving corporation as a wholly owned subsidiary
of Parent. The Merger will be effected under Section 251(h) of the
DGCL, which provides that following consummation of a successful
tender offer for a public corporation, and subject to certain
statutory provisions, if the acquirer holds at least the amount of
shares of each class of stock of the acquired corporation that
would otherwise be required to approve a merger of the acquired
corporation, and the stockholders that did not tender their shares
in the tender offer receive the same consideration for their stock
in the merger as was payable in the tender offer, the acquirer can
effect a merger without the vote or written consent of the
stockholders of the acquired corporation. Accordingly, if Purchaser
consummates the tender offer, the Merger Agreement contemplates
that the parties will effect the closing of the Merger without a
vote of the stockholders of the Company in accordance with Section
251(h) of the DGCL.
NOTE 13 - OTHER CURRENT LIABILITIES
Other
current liabilities include the following:
|
|
As
of
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
|
|
|
Project
related reserves
|
$2,349
|
$867
|
|
ARA
settlement
|
1,445
|
1,200
|
|
Lease
Loss reserve
|
349
|
370
|
|
Payroll
related
|
380
|
110
|
|
Deferred
rent
|
101
|
330
|
|
Earn-out
obligations
|
1,577
|
1,577
|
|
Deferred
compensation obligation
|
107
|
148
|
|
Legal
reserves
|
247
|
165
|
|
Severance
accrual
|
-
|
96
|
|
Acquired
capital lease liability
|
7
|
97
|
|
Warranty
Reserve
|
248
|
302
|
|
PPS
Reserve
|
-
|
1,314
|
|
JMWA
Settlement
|
275
|
-
|
|
Other
|
1,478
|
1,148
|
|
Total
|
$8,563
|
$7,724
|
|
|
|
|
Other accrued and miscellaneous liabilities include accrued legal,
audit, VAT tax liability, foreign entity obligations, and other
miscellaneous items.
NOTE 14 – LEASE LOSS LIABILITIES
In March 2016, Versar abandoned field office facilities in
Charleston, SC and Lynchburg, VA, both within the ESG segment.
Although we remain obligated under the terms of these leases for
the rent and other associated costs, we decided to cease using
these spaces on April 1, 2016, and have no foreseeable plans to
occupy them in the future. Therefore, we recorded a charge to
selling, general and administrative expenses of approximately $0.4
million to recognize the costs of exiting these spaces. The
liability is equal to the total amount of rent and other direct
costs for the period of time the space is expected to remain
unoccupied plus the present value of the amount by which the rent
paid by us to the landlord exceeds any rent paid to us by a tenant
under a sublease over the remainder of the lease terms, which
expire in April 2019 for Charleston, SC, and June 2020 for
Lynchburg, VA. We also recognized $0.1 million of costs for the
associated leasehold improvements related to the Lynchburg, VA
office.
In June 2016, Versar abandoned field office facilities in San
Antonio, TX within the ECM segment. Although we remain obligated
under the terms of the lease for the rent and other costs
associated with the lease, we decided to cease using this space on
July 1, 2016, and have no foreseeable plans to occupy it in the
future. Therefore, we recorded a charge to selling, general and
administrative expenses of approximately $0.2 million to recognize
the costs of exiting this space. The liability is equal to the
total amount of rent and other direct costs for the period of time
the space is expected to remain unoccupied plus the present value
of the amount by which the rent paid by us to the landlord exceeds
any rent paid to us by a tenant under a sublease over the remainder
of the lease terms, which expires in February 2019. We also
recognized $0.2 million of costs for the associated leasehold
improvements related to the San Antonio, TX office.
The following table summarizes information related to our accrued
lease loss liabilities at June 30, 2017 and July 1,
2016.
|
|
As
of
|
As
of
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(in
thousands)
|
(in
thousands)
|
|
Lease
loss accruals
|
$467
|
$718
|
|
Rent
payments
|
(56)
|
(20)
|
|
Balance
|
$411
|
$698
|
NOTE 15 – NET INCOME (LOSS) PER SHARE
Basic net income per common share is computed by dividing net
income by the weighted average number of common shares outstanding
during the period. Diluted
net income per common share also includes common stock equivalents
outstanding during the period, if dilutive. Versar’s common
stock equivalent shares consist of shares to be issued under
outstanding stock options and unvested restricted stock
units.
|
|
As
of
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
Weighted
average common shares outstanding-basic
|
10,002
|
9,857
|
|
Effect
of assumed exercise of options and vesting of restricted stock unit
awards, using the treasury stock method
|
-
|
-
|
|
Shares
of common stock issuable upon conversion of warrants
|
1,095
|
-
|
|
Weighted
average common shares outstanding-diluted
|
11,097
|
9,857
|
Common stock equivalent shares are not included in the computation
of diluted loss per share, as we have a net loss and the inclusion
of such shares would be antidilutive due to the net loss. For the
fiscal year ended June 30, 2017 and July 1, 2016, the common stock
equivalent shares were, as follows:
|
|
As
of
|
|
|
|
June
30, 2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Unvested
restricted stock unit awards
|
30
|
-
|
|
Shares
of common stock issuable upon conversion of warrants
|
1,095
|
-
|
|
Common
stock equivalent shares excluded from diluted net loss per
share
|
1,125
|
-
|
NOTE 16 – SHARE-BASED COMPENSATION
In November 2010, the stockholders approved the Versar, Inc. 2010
Stock Incentive Plan (the “2010 Plan”), under which we
may grant incentive awards to directors, officers, and employees
and its affiliates and to service providers and affiliates. One
million shares of Versar common stock were reserved for issuance
under the 2010 Plan. The 2010 Plan is administered by the
Compensation Committee of the Board of Directors. Through June 30,
2017 a total of 562,994 restricted stock units have been issued
under the 2010 Plan. As of June 30, 2017 there are 437,056 shares
remaining available for future issuance of awards (including
restricted stock units) under the 2010 Plan.
During the twelve month period ended June 30, 2017, Versar awarded
11,575 restricted stock units to certain employees, which generally
vest over a two-year period following the date of grant. The grant
date fair value of these awards is approximately $14,672. The total
unrecognized compensation cost, measured on the grant date, that
relates to 30,275 non-vested restricted stock awards at June 30,
2017 was approximately $0.1 million, which if earned, will be
recognized over the weighted average remaining service period of
two years. Share-based compensation expense relating to all
outstanding restricted stock unit awards totaled approximately $0.3
million and $0.4 million for the year ended June 30, 2017 and July
1, 2016, respectively. These expenses were included in the direct
costs of services and overhead and general and administrative lines
of the Condensed Consolidated Statements of Operations. There were
no stock options outstanding and exercisable as of June 30,
2017.
NOTE 17 - INCOME
TAXES
Versar regularly reviews the recoverability of its deferred tax
assets and establishes a valuation allowance as deemed appropriate.
We established a full valuation allowance against our U.S. deferred
tax assets at June 30, 2017 and July 1, 2016 of $18.4 and $14.8
million, respectively, as we determined we were not more likely
than not to realize the deferred tax assets due to current year
losses and projections for the near future. We also maintained full
valuation allowance on the Philippine branch of $0.1 million. The
deferred tax assets in the foreign jurisdictions are related
primarily to net operating loss carryforwards, as these
jurisdictions have a history of losses and it is not more likely
than not that the deferred tax assets will be
realized.
At June 30, 2017, Versar had net operating loss carryforwards in
the Philippines branch of approximately $0.1 million ($0.2 million
gross) and $0.4 million ($1.1 million gross) from the acquisition
of Geo-Marine, Inc. In addition, they had $0.1 million of R&D
credits carry forward.
Pretax income (loss) is comprised of the following:
|
|
For the Fiscal
Year Ended
|
|
|
|
June 30,
2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
|
|
|
|
US
Entities
|
$(6,345)
|
$(39,395)
|
|
Foreign
Entities
|
(3,303)
|
2,775
|
|
Total pretax
(loss) income
|
$(9,648)
|
$(36,620)
|
Income tax expense (benefit) for continuing operations is as
follows:
|
|
For the Fiscal
Year Ended
|
|
|
|
June 30,
2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
Current
|
|
|
|
Federal
|
$(2)
|
$(459)
|
|
State
|
22
|
2
|
|
|
|
|
|
Deferred
|
|
|
|
Federal
|
(3,414)
|
(10,033)
|
|
State
|
(1,156)
|
(1,981)
|
|
Change
in Valuation allowance
|
4,475
|
13,738
|
|
|
|
|
|
Income tax
(benefit) expenses
|
$(75)
|
$1,267
|
Deferred tax assets (liabilities) are comprised of the following as
of the dates indicated below:
|
|
For the Fiscal
Year Ended
|
|
|
|
June 30,
2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Deferred Tax
Assets
|
|
|
|
Employee
benefits
|
$248
|
$283
|
|
Bad
debt reserves
|
61
|
382
|
|
All
other reserves
|
1,438
|
1,174
|
|
Net
operating losses and tax credit
|
9,708
|
4,969
|
|
Accrued
expenses
|
485
|
435
|
|
Depreciation
and amortization
|
6,463
|
7,430
|
|
Other
|
1
|
239
|
|
Total
deferred tax assets
|
$18,404
|
$14,912
|
|
|
|
|
|
Valuation
Allowance
|
$(18,393)
|
$(14,781)
|
|
|
|
|
|
Deferred Tax
Liabilities
|
|
|
|
Goodwill
and intangibles
|
$-
|
$(70)
|
|
Depreciation
and amortization
|
-
|
(28)
|
|
Other
|
(11)
|
(33)
|
|
Net
deferred tax assets
|
$-
|
$-
|
In accordance with FASB’s guidance regarding uncertain tax
positions, Versar recognizes income tax benefits in its financial
statements only when it is more likely than not that the tax
positions creating those benefits will be sustained by the taxing
authorities based on the technical merits of those tax positions.
At June 30, 2017, we did not have any uncertain tax positions. Our
2014-2016 tax years remain open to audit in most
jurisdictions.
Versar’s policy is to recognize tax interest expense and
penalties as a component of general and administrative
expenses.
The provision for income taxes compared with income taxes based on
the federal statutory tax rate of 34% follows (in
thousands):
|
|
For the Fiscal
Year Ended
|
|
|
|
June 30,
2017
|
July 1,
2016
|
|
|
(in
thousands)
|
|
|
United States
Federal tax at statutory rate
|
$(3,261)
|
$(12,004)
|
|
State
taxes (net of federal benefit)
|
(1,134)
|
(1,686)
|
|
Permanent
items
|
65
|
12
|
|
Goodwill
Impairment
|
-
|
1,194
|
|
Change
in tax rates
|
(301)
|
(44)
|
|
Change in
valuation allowance
|
4,475
|
13,738
|
|
Other
|
81
|
57
|
|
Total income
tax (benefit) expense
|
$(75)
|
$1,267
|
NOTE 18 - EMPLOYEE SAVINGS AND STOCK PURCHASE PLAN
Versar continues to maintain the Versar, Inc. 401(k) Plan
(“401(k) Plan”), which permits voluntary participation
upon employment. The 401(k) Plan was adopted in accordance with
Section 401(k) of the Internal Revenue Code.
Under the 401(k) Plan, participants may elect to defer up to 50% of
their salary through contributions to the plan, which are invested
in selected mutual funds. Versar matches 100% of the first 3% and
50% of the next 2% of the employee-qualified contributions for a
total match of 4%. The employer contribution is made in the
Company’s cash. Versar made cash contributions in fiscal 2017
and fiscal 2016 of $1.1 million and $1.3 million, respectively. All
contributions to the 401(k) Plan vest immediately.
In January 2005, Versar established an Employee Stock Purchase Plan
(ESPP) under Section 423 of the United States Internal Revenue
Code. The ESPP was amended and restated in November 2014, for an
extended term expiring July 31, 2024. The ESPP allows eligible
employees to purchase, through payroll deductions, shares of common
stock from the open market. Versar will not reserve shares of
authorized but unissued common stock for issuance under the ESPP.
Instead, a designated broker will purchase shares for participants
on the open market. Eligible employees may purchase the shares at a
discounted rate equal to 95% of the closing price of shares on the
NYSE American on the purchase date.
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Lease Obligations
Versar leases approximately 147,000 square feet of office space, as
well as data processing and other equipment under agreements
expiring through 2021. Minimum future obligations under operating
and capital leases are as follows:
|
Fiscal
Year Ended
|
Total
Amount
|
|
|
|
|
2018
|
$2,790
|
|
2019
|
2,265
|
|
2020
|
1,579
|
|
2021
|
1,339
|
|
2022
|
1,125
|
|
Thereafter
|
2,025
|
|
Total
|
$11,123
|
Certain
of the lease payments are subject to adjustment for increases in
utility costs and real estate taxes. Total office rental expense
approximated $2.0 million, and $2.9 million for fiscal years 2017
and 2016, respectively. Lease concessions and other tenant
allowances are amortized over the life of the lease on a straight
line basis. For leases with fixed rent escalations, the total lease
costs including the fixed rent escalations are totaled and the
total rent cost is recognized on a straight line basis over the
life of the lease.
Disallowed Costs
Versar
has a substantial number of U.S. government contracts, and certain
of these contracts are cost reimbursable. Costs incurred on these
contracts are subject to audit by the Defense Contract Audit Agency
(DCAA). All fiscal years through 2014 have been audited and closed.
We believe that the effect of disallowed costs, if any, for the
periods not yet audited and settled with DCAA will not have a
material adverse effect on our Consolidated Balance Sheets or
Consolidated Statements of Operations. Versar accrues a liability
from the DCAA audits if needed. As of both June 30, 2017 and July
1, 2016, the accrued liability for such matters was
immaterial.
Legal Proceedings
Versar
and its subsidiaries are parties from time to time to various legal
actions arising in the normal course of business. We believe that
any ultimately unfavorable resolution of currently ongoing legal
actions will not have a material adverse effect on its consolidated
financial condition and/or results of operations.
NOTE 20 – NYSE American LLC COMPLIANCE
On April 6, 2017, Versar received a letter from the NYSE American
LLC, formerly NYSE MKT (the Exchange) in which the Exchange
determined that we were not in compliance with Section 1003(a)(i)
of the Exchange’s Company Guide because our
stockholder’s equity reported for the fiscal year ended July
1, 2016 was below $2.0 million and we had reported net losses for
two of the last three fiscal years. The Exchange also informed us
that we must submit a plan to the Exchange by May 6, 2017
identifying actions we had taken, or will take, to regain
compliance with the Company Guide by October 6, 2018 which period
was subsequently shortened as discussed below. In addition, the
letter provided us an early warning regarding potential
noncompliance with Section 1003(a)(iv) of the Company Guide, due to
uncertainty regarding our ability to generate sufficient cash flows
and liquidity to fund operations. This uncertainty raised
substantial doubt about our ability to continue as a going concern.
On May 8, 2017, Versar submitted a plan to the Exchange which was
accepted by the Exchange via a letter dated June 30, 2017 for a
plan period through August 15, 2017. Versar received a letter dated
August 11, 2017, from the Exchange stating that they had extended
the period for implementation of our plan to restore compliance
with Section 1003(a)(i) of the Exchange Company Guide and had
granted a plan period through September 15, 2017, subject to
extensions. We are in discussion with the Exchange for the further
extension of the plan period. The staff of the Exchange will review
us periodically for compliance with the initiatives outlined in its
plan. If we are not in compliance with the continued listing
standards by September 15, 2017 or if we do not make progress
consistent with the plan during the plan period, the Exchange staff
has indicated that it would initiate delisting proceedings as
appropriate. As of the date of this filing, we have not been
provided any update by the Exchange.
NOTE 21– SUBSEQUENT EVENTS
On June 30, 2017, Versar failed the minimum quarterly consolidated
EBITDA covenant set forth in the amendment to its loan agreement,
which constitutes an Event of Default under the loan agreement. By
letters dated July 24, 2017 and August 1, 2017, the lender provided
notice to us of this Event of Default and an additional Event of
Default due to our failure to meet the timeline for consummating a
transaction to refinance or replace the loan agreement and demanded
payment of a previously agreed fee of $0.1 million. This fee was
provided for by the amendment entered into in December 2016 and
became payable as a result of the Events of Default. The lender
also terminated the automatic advance feature under the loan
agreement, effective August 8, 2017, and on August 9,
2017, Versar issued warrants to purchase 9.9% of the outstanding
common stock to the lender. These warrants were also required by
the December 2016 amendment, but had not been issued as they had
not become exercisable.
See
Note 20 – NYSE American LLC compliance for subsequent events
related to Versar’s listing on the Exchange.
On
July 28, 2017, Versar and two JMWA note holders entered into a full
and final settlement of issues related to the payment of the notes
(Settlement) in the litigation arising from our payment under the
relevant notes. This litigation did not involve the third JMWA note
holder, who was not a party to the action. We will pay the note
holders’ attorney’s fees of $80,000 and the parties
will continue to discuss resolution of any additional legal fees
and costs. Additionally, we will pay during fiscal 2018, $0.2
million representing quarterly interest payments from October 2016
through September 2017. This resolution will become effective on
October 20, 2017.
In August, 2017 Versar received a decision from an impartial
referee regarding the fiscal 2014 acquisition of GMI, and the
related price agreement dated September 2, 2013 between Versar and
ARA. Per the agreement, Versar was required to calculate the net
working capital adjustment and then make a payment to, or receive a
payment from, ARA for the adjusted amount. The decision is for $1.4
million. We recorded a loss contingency accrual of $1.2 million in
fiscal 2016. As a result of this decision, we recorded an
additional $0.5 million of costs in fiscal 2017 including legal
expenses related to the negotiation process. The contracts acquired
related to this acquisition are reported within the ECM and ESG
segments on a 58.6% and 41.4% allocation with the segments
receiving their proportional share of the loss contingency
accrual.
On
September 22, 2017, the Company, the subsidiary guarantors and the
lender entered into a forbearance agreement pursuant to which the
Lender agreed to forbear from exercising any and all rights or
remedies available to it under the Loan Agreement and applicable
law related to these defaults for the Forbearance Period, ending
upon a Forbearance Termination Event.
Additionally,
in exchange for the lender’s forbearance, the Company agreed
to pay to the Forbearance
Fee (of $150,000), which shall be fully-earned and
non-refundable as of the effective date of the forbearance
agreement. The Forbearance Fee is due and payable on the earlier of
a Forbearance Termination Event or November 17, 2017, provided that if Borrower
repays in full all outstanding obligations due under the Loan
Agreement on or before the earlier of a Forbearance Termination
Event or November 17, 2017, the Forbearance Fee will be
waived.
On September 22, 2017, the Company,
KW Genesis Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of Kingswood Genesis Fund I, LLC (the latter two
“Purchaser”), entered into an Agreement and Plan of
Merger (Merger Agreement). The Merger Agreement provides that,
among other things, subject to the satisfaction or waiver of
certain conditions, following completion of a tender offer for all
outstanding common stock of the Company for a cash price of $0.15
per share, and in accordance with the General Corporation Law of
the State of Delaware, as amended (the “DGCL”),
Purchaser will be merged into and with the Company (the
“Merger”). Any common stock not purchased in the tender
offer will be exchanged for a cash price of $0.15 per share in the
Merger. Following the consummation of the Merger, the Company will
continue as the surviving corporation as a wholly owned subsidiary
of Parent. The Merger will be effected under Section 251(h) of the
DGCL, which provides that following consummation of a successful
tender offer for a public corporation, and subject to certain
statutory provisions, if the acquirer holds at least the amount of
shares of each class of stock of the acquired corporation that
would otherwise be required to approve a merger of the acquired
corporation, and the stockholders that did not tender their shares
in the tender offer receive the same consideration for their stock
in the merger as was payable in the tender offer, the acquirer can
effect a merger without the vote or written consent of the
stockholders of the acquired corporation. Accordingly, if Purchaser
consummates the tender offer, the Merger Agreement contemplates
that the parties will effect the closing of the Merger without a
vote of the stockholders of the Company in accordance with Section
251(h) of the DGCL.
Subsequent events have been evaluated through
September 25, 2017 which
is the date the financial statements were available to be issued.
We did not identify any events requiring recording or disclosure in
the financial statements for the year ended June 30, 2017, except
those described above.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Evaluation
of the effectiveness of the design and operation of Versar’s
“disclosure controls and procedures” (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) was carried out as of June 30, 2017,
the last day of the fiscal period covered by this report. This
evaluation was made by the Chief Executive Officer and Chief
Financial Officer. Based upon this evaluation, the Chief Executive
Officer and Chief Financial Officer of Versar have concluded that,
as a result of the material weakness in internal control over
financial reporting discussed below, Versar’s disclosure
controls and procedures (a) are not effective to ensure that
information required to be disclosed in reports filed or submitted
under the Exchange Act is timely recorded, processed, summarized
and reported and (b) do not fully include controls and procedures
designed to ensure that information required to be disclosed by
Versar in reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial
Reporting
Management
is responsible for establishing and maintaining adequate internal
control over financial reporting for Versar. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act as a process designed by, or
under the supervision of, Versar’s principal executive and
principal financial officers and effected by the board of
directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
●
Pertain
to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets
of Versar;
●
Provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with authorizations
of management and directors of Versar; and
●
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Versar’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Internal
control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failure.
Internal control over financial reporting can also be circumvented
by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk.
Versar’s
management, including the Chief Executive Officer and Chief
Financial Officer, assessed the effectiveness of internal control
over financial reporting as of June 30, 2017. In making this
assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission’s
Internal Control-Integrated Framework (2013
Framework).
Based
on our assessment and as a result of the material weakness in
internal control over financial reporting discussed below,
management has concluded that, as of June 30, 2017, Versar’s
internal control over financial reporting was not effective based
on those criteria.
Material Weakness in Internal Control Over Financial
Reporting
As
previously reported, during the third quarter of fiscal 2016, after
consultation with Versar’s independent auditors, management
concluded that due to sustained delay in contract awards and
contract funding and the direct impact on the results of
operations, coupled with the continued decrease in the stock price,
the goodwill in the ECM and PSG segments was impaired and
recognized impairment charges of $18.8 million. Management then
concluded that a material weakness existed as a result of
management not recognizing that the third quarter results could
have accelerated the triggering event with regard to undertaking
Step 1 of the impairment analysis, rather than following its normal
practice of conducting such an analysis during the fourth quarter.
Versar did not maintain sufficient resources to provide the
appropriate level of accounting knowledge and experience regarding
certain complex, non-routine transactions and technical accounting
matters and lacked adequate controls regarding training in the
relevant accounting guidance, review and documentation of such
transactions, such as identifying the triggering factors for an
impairment analysis, in accordance with GAAP. A material weakness
is a deficiency, or combination of deficiencies in internal
controls over financial reporting that results in a reasonable
possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely
basis. To address this weakness, Versar developed a remediation
plan, which includes retaining an independent accounting firm to
provide expert advice to identify and account for non-routine,
complex transactions and facilitate resolution of such issues.
While we have developed and are implementing these substantive
procedures, the material weakness will not be considered remediated
until these improvements have been fully implemented, tested and
are operating effectively for an adequate period of time. As a
result, management concluded that as of June 30, 2017, sufficient
time had not occurred since remediation efforts commenced for the
material weakness to be fully remediated and thus a material
weakness continued to exist at such date. Therefore, Versar did not
have effective internal control over financial reporting and
therefore did not have effective disclosure controls and
procedures.
Attestation Report of the Independent Registered Public Accounting
Firm
This
Annual Report does not include an attestation report of
Versar’s independent registered public accounting firm
regarding internal control over financial reporting. Internal
control over financial reporting was not subject to attestation by
our independent registered public accounting firm pursuant to a
permanent exemption granted under Section 989G of the Dodd-Frank
Wall Street Reform and Consumer Protection Act for smaller
reporting companies that permits Versar to provide only
management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
An
independent accounting firm was retained to provide expert advice
to identify and account for non-routine, complex transactions and
facilitate resolution of such issues and we implemented the
remediation plan discussed above. There were no other changes made
to Versar’s internal control over financial reporting
identified in connection with the evaluation of such internal
control that occurred during the fourth quarter of fiscal 2017 that
have materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
Information
required by this item is incorporated herein by reference to the
Proxy Statement for its 2017 Annual Meeting of Stockholders, which
is expected to be filed with the Commission not later than 120 days
after the end of fiscal 2017.
Item 11. Executive Compensation
Information
required by this item is incorporated herein by reference to the
Proxy Statement for its 2017 Annual Meeting of Stockholders, which
is expected to be filed with the Commission not later than 120 days
after the end of fiscal 2017.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Information required
by this item is incorporated herein by reference to the Proxy
Statement for its 2017 Annual Meeting of Stockholders, which is
expected to be filed with the Commission not later than 120 days
after the end of fiscal 2017.
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Information
required by this item is incorporated herein by reference to the
Proxy Statement for its 2017 Annual Meeting of Stockholders, which
is expected to be filed with the Commission not later than 120 days
after the end of fiscal 2017.
Item 14. Principal Accountant Fees and Services
Information
required by this item is incorporated herein by reference to the
Proxy Statement for its 2017 Annual Meeting of Stockholders, which
is expected to be filed with the Commission not later than 120 days
after the end of fiscal 2017.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(1) Financial Statements:
The
following consolidated financial statements of Versar, Inc. and
Subsidiaries are included as part of this report on Form 10-K in
Item 8. Financial Statements and Supplementary Data.
●
Report
of Independent Registered Public Accounting Firm
●
Consolidated
Balance Sheets as of June 30, 2017 and July 1, 2016
●
Consolidated
Statements of Operations for the Years Ended June 30, 2017 and July
1, 2016.
●
Consolidated
Statements of Comprehensive Income (Loss) for the Years Ended June
30, 2017 and July 1, 2016.
●
Consolidated
Statements of Changes in Stockholders’ Equity for the Years
Ended June 30, 2017 and July 1, 2016.
●
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2017 and July
1, 2016,
●
Notes
to Consolidated Financial Statements
(2)
Financial Statement Schedules:
●
Schedule
II - Valuation and Qualifying Accounts for the Years Ended June 30,
2017 and July 1, 2016.
All
other schedules, except those listed above, are omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(3)
Exhibits:
The
exhibits to this Form 10-K are set forth in the Exhibit Index which
is included on this report.
Exhibit Index
|
Item No
|
Description
|
Reference
|
|
|
|
|
|
|
|
|
|
Restated Certificate of Incorporation of Versar, Inc. filed on
September 25, 1986
|
(L)
|
|
|
Certificate of Amendment of Restated Certificate of Incorporation
of Versar, Inc. filed on December 24, 1996
|
(L)
|
|
|
Certificate of Amendment of Restated Certificate of Incorporation
of Versar, Inc. filed on January 26, 1999
|
(L)
|
|
|
Second Amended and Restated By-laws of Versar, Inc. Specimen of
Certificate of Common Stock of Versar, Inc. (A)
|
(B)
|
|
|
Versar, Inc. Restated Employee 401(k) Plan
|
(C)
|
|
|
Amendment to the Versar, Inc. Restated Employee 401(k) Plan
implementing automatic enrollment unless the participant makes a
contrary election
|
(C)
|
|
|
Amendment merging the Advent 401(k) Profit Sharing Plan and Trust
to the Versar, Inc. Restated Employee 401(k) Plan
|
(C)
|
|
|
Amendment to the Versar, Inc. Restated Employee 401(k) Plan
implementing 1% automatic annual increase of deferral amount to all
participants under 6% deferral rate effective January 1, 2013 until
it reached the maximum cap of 6%
|
(C)
|
|
|
Amendment to the Versar, Inc. Restated Employee 401(k) Plan
excluding employees who are already eligible to participate in the
Charron Construction Consulting, Inc. 401(k) Plan
|
(C)
|
|
|
Amendment to the Versar, Inc. Restated Employee 401(k) Plan adding
Roth Deferrals in the Contribution types and merging the Charron
Construction Consulting, Inc. 401(k) Plan with and into the
Plan
|
(C)
|
|
|
10.1
|
Executive Tax and Investment Counseling Program
|
(A)
|
|
Form of Indemnification Agreement*
|
(F)
|
|
|
Change in Control Severance Agreement between Anthony L. Otten and
Versar, Inc. effective as of May 24, (G) 2011*
|
(E)
|
|
|
2010 Stock Incentive Plan*
|
(G)
|
|
|
Form of Restricted Share Award Agreement*
|
(G)
|
|
|
Form of Performance Stock Award Agreement*
|
(G)
|
|
|
Form of Deferral Election Agreement for Deferred Share
Units*
|
(G)
|
|
|
Form of Stock Option Award Agreement*
|
(G)
|
|
|
Form of Stock Appreciation Right Award Agreement*
|
(G)
|
|
|
Form of Restricted Stock Unit Award Agreement*
|
(G)
|
|
|
Change in Control Severance Agreement between Christine B. Tarrago
and Versar, Inc. effective as of June 1, 2017*
|
(H)
|
|
|
Amendment to Change in Control Severance Agreement dated March 9,
2012 between Versar, Inc. and Anthony L. Otten*
|
(D)
|
|
|
Versar, Inc. 2012 Long-Term Incentive Compensation
Program*
|
(I)
|
|
|
Amended and Restated Loan and Security Agreement date September 13,
2012 between the Registrant, certain of the Registrant’s
subsidiaries and United Bank
|
(M)
|
|
|
Amended and Restated Revolving Commercial Note dated September 14,
2012
|
(N)
|
|
|
Change in Control Severance Agreement between Versar, Inc. and
Anthony L. Otten
|
(J)
|
|
|
Change in Control Severance Agreement between Versar, Inc. and
Jeffrey A. Wagonhurst
|
(J)
|
|
|
Change in Control Severance Agreement between Versar, Inc. and
Christine B. Tarrago
|
(S)
|
|
|
Change in Control Severance Agreement between Versar, Inc. and
Linda M. McKnight
|
(J)
|
|
|
Change in Control Severance Agreement between Versar, Inc. and
James D. Villa
|
(K)
|
|
|
Loan agreement, dated September 30, 2015, by and among Versar, Inc.
and Bank of America, N.A.
|
(O)
|
|
|
Security Agreement, dated September 30, 2015, by and among Versar,
Inc. and GEO-Marine, Inc., Versar International, Inc., J.M. Waller
Associates, Inc. and Bank of America, N.A.
|
(P)
|
|
|
First Amendment and Waiver dated as of December 9, 2016, by and
among Versar, Inc. and Bank of America, N.A. as lender and l/c
issuer
|
(Q)
|
|
|
Second Amendment and Waiver dated as of May 5, 2017, by and among
Versar, Inc. and Bank of America, N.A. as lender and l/c
issuer
|
|
|
|
Letter Agreement, dated June 1, 2017, by and between Versar, Inc.
and Christine B. Tarrago*
|
(R)
|
|
|
Change in Control Severance Agreement, dated June 15, 2017, by and
between Versar, Inc. and Christine B. Tarrago*
|
(S)
|
|
|
Separation Agreement and General Release dated June 12, 2017, by
and between Versar, Inc. and Cynthia A. Downes
|
(T)
|
|
|
Common Stock Purchase Warrant dated August 8, 2017 by and between
Versar, Inc. and Bank of America, N.A.
|
(U)
|
|
|
Subsidiaries of the Registrant
|
|
|
|
Consent of Independent Registered Public Accounting Firm, Urish
Popeck & Co., LLC
|
|
|
|
Certifications by Anthony L. Otten, Chief Executive Officer
Pursuant to Securities Exchange Rule 13a-14
|
|
|
|
Certifications by Christine B. Tarrago, Senior. Vice President,
Chief Financial Officer and Treasurer pursuant to Securities
Exchange Rule 13a-14
|
|
|
|
Certifications Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002, for the
period ending July 1, 2016 by Anthony L. Otten, Chief Executive
Officer
|
|
|
|
Certifications Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002, for the
period ending July 1, 2016 by Christine B. Tarrago, Exec. Vice
President, Chief Financial Officer and Treasurer
|
|
|
|
101+
|
The following materials from Versar Inc.’s Annual Report on
Form 10-K for the fiscal year ended July 1, 2016, formatted in XBRL
(Extensible Business Reporting Language): (i) Consolidated Balance
Sheets as of July 1, 2016, June 29, 2014; (ii) Consolidated
Statements of Operations for the years ended June 29, 2012; (iii)
Consolidated Statements of Comprehensive Income (Loss) for the
years ended June 27, 2014 and June 29, 2012; (iv) Consolidated
Statements of Changes in Stockholders’ Equity for the years
ended June 27, 2014 and June 29, 2012; (v) Consolidated Statements
of Cash Flows for the years ended July 1, 2016, June 29, 2012,;
(vi) Schedule II — Valuation and Qualifying Accounts; and
(vi) Notes to Consolidated Financial Statements, tagged as blocks
of text
|
|
|
(A)
|
Incorporated by reference to the similarly numbered exhibit to the
Registrant’s Form S-1 Registration Statement effective
November 20, 1986.
|
|
(B)
|
Incorporated by reference to the exhibit to the Registrant’s
Form 8-K filed with the Commission on February 17,
2010.
|
|
(C)
|
Incorporated by reference to exhibits 4.1 through 4.6 to the
Registrant’s Form S-8 Registration Statement filed with the
Commission on March 22, 2013.
|
|
(D)
|
Incorporated by reference to exhibit 10.30 to the
Registrant’s Form 10-K Annual Report for the fiscal year
ended June 27, 2014 filed with the Commission on September 18,
2012.
|
|
(E)
|
Incorporated by reference to exhibit 10.1 to the Registrant’s
Form 10-Q filed with the Commission on November 8,
2010.
|
|
(F)
|
Incorporated by reference to exhibit 10.1 to the Registrant’s
Form 8-K filed with the Commission on May 11, 2009.
|
|
(G)
|
Incorporated by reference to exhibits 4.1 through 4.7 to the
Registrant’s Form S-8 filed with the Commission on February
15, 2011.
|
|
(H)
|
Incorporated by reference to exhibit 10.1 to the Registrant’s
Form 8-K filed with the Commission on September 13,
2011.
|
|
(I)
|
Incorporated by reference to exhibit 10.1 to the Registrant’s
Form 8-K filed with the Commission on May 9, 2012.
|
|
(J)
|
Incorporated by reference to exhibits 10.35 through 10.37 and
exhibit 10.40 to the Registrant’s Form 8-K filed with the
Commission on September 18, 2013.
|
|
(K)
|
Incorporated by reference to exhibit 10.1 to the Registrant’s
Form 8-K filed with the Commission on May 14, 2014.
|
|
(L)
|
Incorporated by reference to exhibit 3.1 to the Registrant’s
Form 10-K filed with the Commission on September 10,
2014.
|
|
(M)
|
Incorporated by reference to exhibit 10.34 to the
Registrant’s Form 8-K filed with the Commission on
September 17, 2012.
|
|
(N)
|
Incorporated by reference to exhibit 10.33 to the
Registrant’s Form 8-K filed with the Commission on
September 17, 2012.
|
|
(O)
|
Incorporated by reference to exhibit 10.1 to the Registrant’s
Form 8-K filed with the Commission on October 6,
2015.
|
|
(P)
|
Incorporated by reference to exhibit 10.2 to the Registrant’s
Form 8-K filed with the Commission on October 6,
2015.
|
|
(Q)
|
Incorporated
by reference to exhibit 10.1 to the Registrant’s Form 8-K
filed with the Commission on December 12, 2016
|
|
(R)
|
Incorporated
by reference to exhibit 10.1 to the Registrant’s Form 8-K
filed with the Commission on June 5, 2017
|
|
(S)
|
Incorporated
by reference to exhibit 10.2 to the Registrant’s Form 8-K
filed with the Commission on June 5, 2017
|
|
(T)
|
Incorporated
by reference to exhibit 10.1 to the Registrant’s Form 8-K
filed with the Commission on June 22, 2017
|
|
(U)
|
Incorporated
by reference to exhibit 10.1 to the Registrant’s Form 8-K
filed with the Commission on August 15, 2017
|
__________________________________________________
* Indicates management contract or compensatory plan or
arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
VERSAR, INC.
|
|
||
|
|
|
|
|
|
Date: September 25,
2017
|
By:
|
/s/ Paul J.
Hoeper
|
|
|
|
|
Paul J.
Hoeper
|
|
|
|
|
Chairman and
Director
|
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Paul J.
Hoeper
|
|
Chairman and
Director
|
|
September 25,
2017
|
|
Paul J.
Hoeper
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Anthony L.
Otten
|
|
Chief Executive
Officer and Director
|
|
September 25,
2017
|
|
Anthony L.
Otten
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Christine B.
Tarrago
|
|
Senior
Vice President, Chief Financial Officer, and Principal Accounting
Officer
|
|
September 25,
2017
|
|
Christine B.
Tarrago
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Frederick M.
Strader
|
|
Director
|
|
September 25,
2017
|
|
Frederick M.
Strader
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Robert L.
Durfee
|
|
Director
|
|
September 25,
2017
|
|
Robert L.
Durfee
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James L.
Gallagher
|
|
Director
|
|
September 25,
2017
|
|
James L.
Gallagher
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Amoretta M.
Hoeber
|
|
Director
|
|
September 25,
2017
|
|
Amoretta M.
Hoeber
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Amir A.
Metry
|
|
Director
|
|
September 25,
2017
|
|
Amir A.
Metry
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jeffrey A.
Wagonhurst, Sr.
|
|
Director
|
|
September 25,
2017
|
|
Jeffrey A.
Wagonhurst, Sr.
|
|
|
|
|
Schedule II
VERSAR, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
|
|
BALANCE
AT BEGINNING OF YEAR
|
ADDITIONS
CHARGED TO COSTS AND EXPENSES
|
CHARGEOFFS
|
BALANCE
AT END OFYEAR
|
|
Allowance
for Doubtful Accounts
|
|
|
|
|
|
2017
|
$1,001,000
|
$-
|
$845,000
|
$156,000
|
|
2016
|
$616,000
|
$890,000
|
$(505,000)
|
$1,001,000
|
|
|
|
|
|
|
|
Deferred
Tax Valuation Allowance
|
|
|
|
|
|
2017
|
$14,781,000
|
$ 4,470,000
|
$ (883,000)
|
$18,368,000
|
|
2016
|
$756,000
|
$14,025,000
|
$-
|
$14,781,000
|