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
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
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.
|
|
|
|
Description
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
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):
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
8
|
$
640
|
$
640
|
|
Equipment
|
|
4,556
|
4,446
|
|
Capital
leases
|
|
565
|
565
|
|
Leasehold
improvements
|
|
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
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
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.