ITEM 1. FINANCIAL STATEMENTS.
VERSAR, INC. AND SUBSIDIARIES
|
Condensed
Consolidated Balance Sheets
|
(In
thousands, except share amounts)
|
|
|
|
|
|
December
30,2016 (unaudited)
|
|
|
ASSETS
|
|
|
|
Current
assets
|
|
|
|
Cash
and cash equivalents
|
$
1,331
|
$
1,549
|
|
Accounts
receivable, net
|
36,064
|
47,675
|
|
Inventory,
net
|
188
|
221
|
|
Prepaid
expenses and other current assets
|
1,564
|
1,007
|
|
Income
tax receivable
|
1,514
|
1,513
|
|
Total
current assets
|
40,661
|
51,965
|
|
Property
and equipment, net
|
996
|
1,328
|
|
Intangible
assets, net
|
6,660
|
7,248
|
|
Other
assets
|
1,252
|
775
|
|
Total
assets
|
$
49,569
|
$
61,316
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$
18,896
|
$
18,156
|
|
Billing
in Excess of Revenue
|
4,811
|
7,156
|
|
Accrued
salaries and vacation
|
2,338
|
2,478
|
|
Other
current liabilities
|
6,492
|
7,724
|
|
Notes
payable, current
|
5,213
|
3,831
|
|
Line
of Credit
|
9,036
|
14,854
|
|
Total
current liabilities
|
46,786
|
54,199
|
|
|
|
|
|
Notes
payable, non-current
|
-
|
2,494
|
|
Other
long-term liabilities
|
3,175
|
3,555
|
|
Total
liabilities
|
49,961
|
60,248
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders'
(deficit) equity
|
|
|
|
Common stock $.01
par value; 30,000,000 shares authorized;10,234,277 shares issued
and 9,900,665 shares outstanding as of December 30, 2016;
10,217,227 shares issued and 9,982,778 shares outstanding as of
July 1, 2016 (10,217,277 shares issued and 9,950,958 shares
outstanding as of March 1, 2017)
|
102
|
102
|
|
Capital
in excess of par value
|
32,851
|
31,128
|
|
(Accumulated
deficit) Retained earnings
|
(30,272
)
|
(27,448
)
|
|
Treasury
stock, at cost
|
(1,484
)
|
(1,480
)
|
|
Accumulated
other comprehensive loss
|
(1,589
)
|
(1,234
)
|
|
Total
stockholders' (deficit) equity
|
(392
)
|
1,068
|
|
Total
liabilities and stockholders' (deficit) equity
|
$
49,569
|
$
61,316
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VERSAR, INC. AND SUBSIDIARIES
|
Condensed
Consolidated Statements of Operations (Unaudited)
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$
30,527
|
$
47,337
|
$
59,842
|
$
92,242
|
|
Purchased
services and materials, at cost
|
16,826
|
29,351
|
32,239
|
59,118
|
|
Direct
costs of services and overhead
|
11,535
|
14,366
|
23,681
|
27,192
|
|
GROSS
PROFIT
|
2,166
|
3,620
|
3,922
|
5,932
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
3,334
|
3,317
|
6,333
|
6,170
|
|
OPERATING
(LOSS) INCOME
|
(1,168
)
|
303
|
(2,411
)
|
(238
)
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
|
|
Interest
income
|
(3
)
|
-
|
(7
)
|
-
|
|
Interest
expense
|
197
|
176
|
409
|
351
|
|
(LOSS)
INCOME BEFORE INCOME TAXES
|
(1,362
)
|
127
|
(2,813
)
|
(589
)
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
-
|
62
|
11
|
(224
)
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
(1,362
)
|
65
|
(2,824
)
|
(365
)
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER SHARE-BASIC and DILUTED
|
$
(0.14
)
|
$
0.01
|
$
(0.28
)
|
$
(0.04
)
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC
|
9,901
|
9,850
|
9,938
|
9,831
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING-DILUTED
|
9,901
|
9,850
|
9,938
|
9,831
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VERSAR, INC. AND SUBSIDIARIES
|
Condensed
Consolidated Statements of Comprehensive Loss
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
(LOSS) INCOME
|
|
|
|
|
|
Net
(Loss) Income
|
$
(1,362
)
|
$
65
|
(2,824
)
|
$
(365
)
|
|
Foreign
currency translation adjustments
|
(324
)
|
(78
)
|
(355
)
|
(182
)
|
|
TOTAL
COMPREHENSIVE LOSS, NET OF TAX
|
$
(1,686
)
|
$
(13
)
|
(3,179
)
|
$
(547
)
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VERSAR, INC. AND SUBSIDIARIES
|
Consolidated
Statement of Changes in Stockholders' Equity
|
Six
Months Ended December 30, 2016 and Fiscal Years Ended July 1, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
17
|
-
|
179
|
-
|
-
|
-
|
-
|
179
|
|
Treasury
stock
|
-
|
-
|
-
|
-
|
-
|
(4
)
|
-
|
(4
)
|
|
Warrants
|
-
|
-
|
1,544
|
-
|
-
|
-
|
-
|
1,544
|
|
Net
loss
|
-
|
-
|
-
|
(2,824
)
|
-
|
-
|
-
|
(2,824
)
|
|
Foreign Currency
Translation Adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
(355
)
|
(355
)
|
|
Balance
at December 30, 2016 (unaudited)
|
10,234
|
$
102
|
$
32,851
|
$
(30,272
)
|
(331
)
|
$
(1,484
)
|
$
(1,589
)
|
$
(392
)
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VERSAR, INC. AND SUBSIDIARIES
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$
(2,824
)
|
$
(365
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
1,641
|
1,065
|
|
Change
in contingent notes
|
(313
)
|
-
|
|
Provision
for (recovery of) doubtful accounts receivable
|
170
|
412
|
|
Non-cash
interest expense
|
87
|
-
|
|
(Benefit)
for income taxes expense
|
(18
)
|
(81
)
|
|
Share
based compensation
|
179
|
90
|
|
Changes
in assets and liabilities:
|
|
|
|
Decrease
(increase) in accounts receivable
|
11,074
|
17,977
|
|
(Increase)
decrease in income tax receivables
|
(590
)
|
(813
)
|
|
Decrease
(increase) in prepaid and other assets
|
-
|
(134
)
|
|
Decrease
(increase) in inventories
|
761
|
(18,544
)
|
|
(Decrease)
increase in accounts payable
|
(140
)
|
(1,203
)
|
|
Decrease
in accrued salaries and vacation
|
(1
)
|
1,152
|
|
(Increase)
decrease in other assets and liabilities
|
(4,712
)
|
1,559
|
|
Net
cash provided by operating activities
|
5,314
|
1,114
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(81
)
|
(287
)
|
|
Payment
for JCSS acquisition, net of cash acquired
|
-
|
(10,460
)
|
|
Net
cash used in investing activities
|
(81
)
|
(10,747
)
|
|
Cash
flows from financing activities:
|
|
|
|
Borrowings
on line of credit
|
35,058
|
25,348
|
|
Repayments
on line of credit
|
(39,611
)
|
(10,687
)
|
|
Loan
for VSS Purchase
|
-
|
(3,644
)
|
|
Repayment
of Loan for JCSS Acquisition
|
(833
)
|
1,667
|
|
Repayments
of notes payable
|
(86
)
|
(1,447
)
|
|
Purchase
of treasury stock
|
(4
)
|
(15
)
|
|
Net
cash (used in) provided by financing activities
|
(5,476
)
|
11,220
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
25
|
22
|
|
Net
(decrease) increase in cash and cash equivalents
|
(218
)
|
1,609
|
|
Cash
and cash equivalents at the beginning of the period
|
1,549
|
2,109
|
|
Cash
and cash equivalents at the end of the period
|
$
1,331
|
$
3,718
|
|
Supplemental
disclosure of cash and non-cash activities:
|
|
|
|
Contingent
consideration payable related to JCSS acquisition
|
$
2,821
|
$
9,500
|
|
Cash
paid for interest
|
$
322
|
$
359
|
|
Cash
paid for income taxes
|
$
28
|
$
30
|
|
Note
payable discount term loan
|
$
216
|
$
-
|
|
Note
payable discount line of credit
|
$
1,328
|
$
-
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VERSAR, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
The
condensed consolidated financial statements of Versar, Inc. and its
wholly-owned subsidiaries (“Versar” or the
“Company”) contained in this report are unaudited, but
reflect all normal recurring adjustments which, in the opinion of
management, are necessary for the fair presentation of the results
of the interim periods reflected. All intercompany balances and
transactions have been eliminated in consolidation. Certain
information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP) have been omitted pursuant to applicable rules and
regulations of the Securities and Exchange Commission (SEC).
Therefore, these condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s Annual Report on
Form 10–K for the fiscal year ended July 1, 2016, filed
with the SEC on March 28, 2017. The results of operations for the
three-month periods reported herein are not necessarily indicative
of results that may be expected for the full fiscal year. The
fiscal year-end balance sheet data included in this report was
derived from audited financial statements. The Company’s
fiscal year is based upon a 52 - 53 week calendar, and ends in
most cases on the last Friday of the fiscal period. The three-month
period ended December 30, 2016 included 13 weeks compared to the
period ended January 1, 2016 which included 14 weeks. Fiscal
2017 will include 52 weeks and fiscal 2016 included 53
weeks. The extra week occurred in the period ended January 1, 2016.
Therefore, for comparative purposes, the year to date numbers
presented will include an additional week of results for fiscal
2016.
Recent Accounting Pronouncements
In
September 2015, the FASB issued Accounting Standards Update
No. 2015-16 –
Business
Combinations
(Topic 805)
“
Simplifying the Accounting for
Measurement-Period Adjustments:
(“ASU 2015-16”), which replaces the requirement
that an acquirer in a business combination account for measurement
period adjustments retrospectively with a requirement that an
acquirer recognize adjustments to the provisional amounts that are
identified during the measurement period in the reporting period in
which the adjustment amounts are determined. ASU 2015-16
requires that the acquirer record, in the same period’s
financial statements, the effect on earnings of changes in
depreciation, amortization, or other income effects, if any, as a
result of the change to the provisional amounts, calculated as if
the accounting had been completed at the acquisition date. For
public business entities, ASU 2015-16 is effective for fiscal
years beginning after December 15, 2015, including interim
periods within those fiscal years. The guidance is to be applied
prospectively to adjustments to provisional amounts that occur
after the effective date of the guidance, with earlier application
permitted for financial statements that have not been issued. The
Company will adopt the guidance for the fourth quarter of fiscal
2017 and does not expect the adoption of this guidance to have a
material impact on its consolidated financial
statements.
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 for fiscal years beginning after December 15, 2018, 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
Revenue from
Contracts with Customers (Topic 606)
(“ASU 2014-
09
”)
. 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 July
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 the Company 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
Accounting
Standards Update No.
ASU 2016-08,
Revenue from Contracts with Customers (Topic
606
):
Principal versus
Agent Considerations
(
Reporting Revenue Gross versus Net
)
(“ASU 2016-
08
”)
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.
In
April 2016, the FASB issued
Accounting
Standards Update No. (“
ASU
2016-10”),
Revenue from
Contracts with Customers (Topic 606
):
Identifying Performance Obligations and
Licensing
ASU 2016-10 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.
In May
2016, the FASB issued
Accounting
Standards Update No. (“
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. The
Company is evaluating the adoption of ASU 2014-09 and the impact
all the foregoing Topic 606 amendments will have on its
consolidated financial statements.
In
August 2014, the FASB issued Accounting Standards Update No.
2014-15, Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which requires management
to assess a company’s ability to continue as a going concern
and to provide related footnote disclosures in certain
circumstances. Under the new standard, disclosures are required
when conditions give rise to substantial doubt about a
company’s ability to continue as a going concern within one
year from the financial statement issuance date. The Company will
adopt the guidance for first quarter of fiscal 2017 and management
assessed the entity’s ability to continue as a going concern.
After considering the Company’s historical negative cash flow
from operating activities, recurring losses and accumulated deficit
management concluded that there is substantial doubt about the
entities ability to continue as a going concern. Certain
disclosures were added to comply with the disclosure requirements
of the ASU.
In
January 2017, the FASB issued Accounting Standards Update No.
2017-04,
Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. These amendments eliminate Step 2 from the
goodwill impairment test. The annual, or interim, goodwill
impairment test is performed by comparing the fair value of a
reporting unit with its carrying amount. An impairment charge
should be recognized for the amount by which the carrying amount
exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated
to that reporting unit. In addition, income tax effects from any
tax deductible goodwill on the carrying amount of the reporting
unit should be considered when measuring the goodwill impairment
loss, if applicable. The Company will adopt the guidance for fourth
quarter of fiscal 2017 and does not expect the adoption of this
guidance to have a material impact on its consolidated financial
statements.
NOTE 2 – GOING CONCERN
The
accompanying financial statements and notes have been prepared
assuming that the Company will continue as a going concern. The
Company has generated recurring losses, is operating with
constrained operating cash flows under its loan agreement with its
secured lender, and further losses are anticipated in the future.
Management evaluated the Company’s ability to continue as a
going concern and determined that the Company is dependent upon its
ability to generate profitable operations and/or raise additional
capital through equity or debt financing to meet its obligations
and repay its liabilities when they come due.
The
Company intends to continue funding its business operations and its
working capital needs and is aggressively seeking alternate
financing that could include private placements financing, and
obtaining additional term loans or borrowings from other financial
institutions, until such time profitable operations can be
achieved. As much as management believes that this plan provides an
opportunity for the Company 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 the Company’s 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
Company is aligned into three reportable segments: Engineering and
Construction Management (ECM), Environmental Services (ESG), and
Professional Services (PSG), all described below.
ECM
ECM’s
services include facility planning and programming, engineering
design, construction, construction management and security systems
installation and support. ECM supports federal, state and local
governments, as well as commercial clients, worldwide. The primary
markets for ECM’s services include a broad range of
infrastructure, master planning and engineering design for
facilities, transportation, resource management, energy and local,
regional and international development.
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. ESG’s primary technical service lines
are Compliance, Cultural Resources, Natural Resources, Remediation
and UXO/MMRP.
PSG
PSG
provides onsite environmental, engineering, construction
management, and logistics services to the United States Air Force
(USAF), United States Army (USA), United States Army Reserve
(USAR). National Guard Bureau (NGB), Federal Aviation
Administration (FAA), Bureau of Land Management (BLM) and the
Department of Justice (DOJ) through the Drug Enforcement Agency
(DEA). Versar provides onsite services that enhance a
customer’s mission though the use of subject matter experts
who are fully dedicated to accomplish mission objectives. PSG
focuses on providing onsite support to government clients to
augment their capabilities and capacities.
Presented below is
summary operating information by segment for the Company for the
three-month and six month periods ended December 30, 2016 and
January 1, 2016.
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
|
|
|
|
|
ECM
|
$
17,413
|
$
31,868
|
$
35,107
|
$
61,889
|
|
ESG
|
8,670
|
10,456
|
16,115
|
20,496
|
|
PSG
|
4,444
|
5,013
|
8,620
|
9,857
|
|
|
$
30,527
|
$
47,337
|
$
59,842
|
$
92,242
|
|
|
|
|
|
|
|
GROSS
PROFIT (a)
|
|
|
|
|
|
ECM
|
$
1,067
|
$
1,786
|
$
1,984
|
$
3,053
|
|
ESG
|
742
|
1,552
|
1,431
|
2,217
|
|
PSG
|
357
|
282
|
507
|
661
|
|
|
$
2,166
|
$
3,620
|
$
3,922
|
$
5,932
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
3,334
|
3,317
|
6,333
|
6,170
|
|
OPERATING
INCOME (LOSS)
|
$
(1,168
)
|
$
303
|
$
(2,411
)
|
$
(238
)
|
Gross
profit is defined as gross revenues less purchased services and
materials, at cost, less direct costs of services and overhead
allocated on a proportional basis.
NOTE 4
– ACQUISITION
On
September 30, 2015, the Company completed the acquisition of a
specialized federal security integration business from Johnson
Controls, Inc., which is now known as Versar Security Systems
(VSS). This group is headquartered in Germantown, Maryland and
generated approximately $34 million in trailing twelve month
revenues prior to the acquisition date from key long term customers
such as the FAA and Federal Emergency Management Agency (FEMA). The
results of operations of VSS have been included in the
Company’s consolidated results from the date of acquisition.
VSS has contributed approximately $26.0 million in revenue and
$20.7 million in expenses from the date of the acquisition through
December 30, 2016.
VSS
expands the Company’s service offerings to include higher
margin classified construction, enables Versar to generate more
work with existing clients and positions the Company to more
effectively compete for new opportunities. At closing, the Company
paid a cash purchase price of $10.5 million. In addition, the
Company agreed to pay contingent consideration of up to a maximum
of $3.2 million (undiscounted including probability weighing of
future cash flows) based on the occurrence of certain events within
the earn out period of three years from September 30, 2015. This
remaining unpaid anticipated contingent consideration is recognized
as consideration and as a liability, of which $1.6 million is
presented within other current liabilities and $1.2 million and
$1.6 million is presented within other long-term liabilities on the
condensed consolidated balance sheet as of December 30, 2016. The
potential undiscounted amount of all future payments that the
Company could be required to make under the contingent
consideration agreement ranges from $0 to a maximum payout of $3.2
million, with the amount recorded being the most
probable.
The
final purchase price allocation in the table below reflects the
Company’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 the
Company paid to acquire JCSS. The allocation of intangibles has
been completed by an independent third party and recorded on the
Company’s consolidated balance sheet as of July 1,
2016.
|
|
|
|
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
|
|
|
|
NOTE 5 – ACCOUNTS RECEIVABLE
|
|
|
|
|
|
|
|
|
|
|
Billed
receivables
|
|
|
|
U.S.
Government
|
$
10,736
|
$
7,531
|
|
Commercial
|
1,979
|
11,159
|
|
Unbilled
receivables
|
|
|
|
U.S.
Government
|
24,221
|
20,883
|
|
Commercial
|
(41
)
|
9,103
|
|
Total
receivables
|
36,895
|
48,676
|
|
Allowance
for doubtful accounts
|
(831
)
|
(1,001
)
|
|
Accounts
receivable, net
|
$
36,064
|
$
47,675
|
Unbilled receivables represent amounts earned that 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
2017; therefore, they have been presented as current assets in
accordance with industry practice. In January 2017, Versar billed
and collected $7.5 million for contract work at Dover Air Force
Base (DAFB) based on resolution with the client on a contract
modification. As part of concentration risk, management continues
to assess the impact of having the
Performance-Based
Remediation
(PBR) contracts within the
ESG segment represent a significant portion of the outstanding
receivable balance.
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Goodwill was reduced to zero as a result of goodwill
impairments taken during fiscal 2016.
Intangible Assets
In
connection with the acquisition of VSS, the Company identified
certain intangible assets. These intangible assets were
customer-related, marketing-related and technology-related. A
summary of the Company’s intangible asset balances as of
December 30, 2016 and July 1, 2016, as well as their respective
amortization periods, is as follows (in thousands):
|
|
|
|
|
|
Amortization
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$
12,409
|
$
(6,250
)
|
-
|
$
6,159
|
5-15
yrs
|
|
Marketing-related
|
1,084
|
(1,084
)
|
-
|
-
|
2-7
yrs
|
|
Technology-related
|
841
|
(841
)
|
-
|
-
|
7
yrs
|
|
Contractual-related
|
1,199
|
(856
)
|
-
|
343
|
1.75
yrs
|
|
Non-competition-related
|
211
|
(53
)
|
-
|
158
|
5
yrs
|
|
Total
|
$
15,744
|
$
(9,084
)
|
$
-
|
$
6,660
|
|
|
|
|
|
|
|
|
|
|
Gross 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
)
|
-
|
2-7
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 $0.3 million
and $0.6 million for the three and six months periods ending
December 30, 2016. Expected future amortization expense in the
fiscal quarters and years subsequent to December 30, 2016 is as
follows:
|
Years
|
Amounts
|
|
|
|
|
2017
|
$
587
|
|
2018
|
938
|
|
2019
|
938
|
|
2020
|
938
|
|
2021
|
938
|
|
Thereafter
|
2,321
|
|
Total
|
$
6,660
|
NOTE 7 – INVENTORY
The
Company’s inventory balance includes the
following:
|
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
$
108
|
$
132
|
|
Finished
Goods
|
83
|
94
|
|
Work-in-process
|
11
|
7
|
|
Reserve
|
(14
)
|
(12
)
|
|
Total
|
$
188
|
$
221
|
NOTE 8 – OTHER CURRENT LIABILITIES
The
Company’s other current liabilities balance includes the
following:
|
|
|
|
|
|
|
|
|
|
|
Project
related reserves
|
$
484
|
$
867
|
|
ARA
settlement
|
1,200
|
1,200
|
|
Lease
loss reserve
|
349
|
370
|
|
Payroll
related
|
50
|
110
|
|
Deferred
rent
|
119
|
330
|
|
Earn-out
obligations
|
1,577
|
1,577
|
|
Deferred
compensation obligation
|
148
|
148
|
|
Legal
reserves
|
50
|
165
|
|
Severance
accrual
|
23
|
96
|
|
Acquired
capital lease liability
|
-
|
97
|
|
Warranty
Reserve
|
174
|
302
|
|
PPS
Reserve
|
1,314
|
1,314
|
|
Other
|
1,004
|
1,831
|
|
Total
|
$
6,492
|
$
7,724
|
As of
December 30, 2016, other accrued liabilities include accrued legal,
audit, value added tax liabilities, and foreign entity
obligations.
NOTE 9 – ABANDONED LEASED FACILITIES
In March 2016, the Company abandoned its field office facilities in
Mount Pleasant, SC and Lynchburg, VA, both within the ESG segment.
Although the Company remains obligated under the terms of these
leases for the rent and other costs associated with these leases,
the Company made the decision to cease using these spaces on April
1, 2016, and has no foreseeable plans to occupy them in the future.
Therefore, for the quarter ended April 1, 2016, the Company
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 the Company to the landlord exceeds any rent paid
to the Company by a tenant under a sublease over the remainder of
the lease terms, which expire in April 2019 for Mount Pleasant, SC,
and June 2020 for Lynchburg, VA. The Company also recognized $0.1
million of costs in the quarter ending April 1, 2016 for the
associated leasehold improvements related to the Lynchburg, VA
office.
In June 2016, the Company abandoned its field office facilities in
San Antonio, TX within the ECM segment. Although the Company
remains obligated under the terms of the lease for the rent and
other costs associated with the lease, the Company made the
decision to cease using this space on July 1, 2016, and has no
foreseeable plans to occupy it in the future. Therefore, the
Company recorded a charge to selling, general and administrative
expenses of approximately $0.2 million in the quarter ending July
1, 2016 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 the Company
to the landlord exceeds any rent paid to the Company by a tenant
under a sublease over the remainder of the lease terms, which
expires in February 2019. The Company also recognized $0.2 million
of costs in the quarter ending July 1, 2016 for the associated
leasehold improvements related to the San Antonio, TX
office.
The Company has entered into subleases for its locations in San
Antonio, TX (September 2016) and Mount Pleasant, SC (April 2017).
Both of these subleases will continue for the duration of the
respective underlying leases.
The following table summarizes information related to our accrued
lease loss liabilities at December 30, 2016 and July 1,
2016.
|
|
|
|
|
|
|
|
|
|
Balance,
July 1, 2016
|
$
698
|
|
Lease
loss accruals
|
-
|
|
Rent
payments
|
(177
)
|
|
Balance,
December 30, 2016
|
$
521
|
|
|
|
|
|
|
|
As
of
|
|
July 1,
2016
|
|
Balance,
June 26, 2015
|
$
-
|
|
Lease
loss accruals
|
718
|
|
Rent
payments
|
(20
)
|
|
Balance,
July 1, 2016
|
$
698
|
NOTE 10 – DEBT
Notes Payable
As part of the purchase price for J.M. Waller Associates, Inc.
(JMWA) in July 2014, the Company agreed to pay to the three JMWA
stockholders with an aggregate principal balance of up to $6.0
million, which are 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
December 30, 2016, the outstanding principal balance of the JMWA
stockholders was $3.5 million.
On
October 3, 2016 the Company did not make the quarterly principal
payments to the three individuals who were the former owners of
JMWA. However, the Company 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 the Company in Fairfax County
District Court, Virginia for failure to make such payments and to
enforce their rights to such payments. The Company will
aggressively defend its interests. During the second quarter of
fiscal 2017, the Company moved the long term portion of the debt to
short term notes payable for a total of $3.5 million. In January
2017, the Company 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, the Company, together with certain of
its domestic subsidiaries acting as guarantors (the Guarantors),
entered into a Loan Agreement with the Bank of America, N.A. (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 accrues 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, 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.
As of December 30, 2016, the Company’s outstanding principal
debt balance, not including amounts due on the revolving line of
credit, was $5.4 million comprised of the term loan balance under
the Loan Agreement of $1.9 million, and the JMWA Note balance of
$3.5 million. The following maturity schedule presents all
outstanding term debt as December 30, 2016.
|
Years
|
Amounts
|
|
|
|
|
2017
|
5,405
|
|
2018
|
-
|
|
2019
|
-
|
|
Total
|
$
5,405
|
Line of Credit
As
noted above, the Company had a $25.0 million revolving line of
credit facility pursuant to the Loan Agreement with the Lender. The
revolving credit facility is scheduled to mature on
September 30, 2018. On December 9, 2016 Versar, together with
the Guarantors, entered into an First Amendment and Waiver (the
Amendment) to the Loan Agreement among other things, reducing the
maximum permitted under the revolving line of credit facility to
$13.0 million. The Company had $10.3 million outstanding under its
line of credit as of December 30, 2016.
The
Company adopted 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, the Company 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, and 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 constituted a default under the Loan
Agreement. On May 12, 2016, the Company, the 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 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 the Company and the Lender, through
December 9, 2016. During the Forbearance Period, the Company
was allowed to borrow funds pursuant to the terms of the Loan
Agreement, consistent with current Company 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
$13.0 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 the Company provide a 13 week
cash flow forecast updated on a weekly basis to the Lender, and
waives 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 the Company’s 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 has engaged an advisor to review the Company’s
financial condition on the Lender’s behalf, and pursuant to
the Forbearance Agreements and the Amendment,
the Company must pursue alternative sources of
funding for its ongoing business operations.
Additionally, the Lender required that the Company
provide it with 10 year warrants for the purchase of 10% of the
fully diluted common stock of the Company (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 by the Company in
December 2016. If all obligations under the Loan agreement are paid
in full prior to August 30, 2017 and no Event of Default has
occurred before such time, the Lender will return all warrants,
unexercised, and will waive and forgive (or repay to the Company)
the Amendment fee of $0.3 million.
The value of the warrant,
$1,544,263, was
as 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
|
62%
|
|
Expected life (in years)
|
4.27
|
|
Risk-free interest rate
|
1.80%
|
|
Expected dividend yield
|
0.00%
|
On
March 31, 2017, the Company failed its minimum quarterly 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 the Company entered into a Second Amendment
and Waiver pursuant to which the Lender provided a one-time waiver
to this Event of Default effective May 5, 2017 in exchange for an
amendment fee of $15,000. As a result of this waiver, the warrants
remain outstanding, but unexercisable, and the Amendment fee may
still be waived and forgiven subject to no further Events of
Default and repayment of all obligations under the Loan Agreement
prior to August 30, 2017.
If the Company is
unable to raise additional financing, the Company will need to
adjust its operational plans so that the Company can continue to
operate with its existing cash resources. The actual amount of
funds that the Company will need will be determined by many
factors, some of which are beyond its control and the Company may
need funds sooner than currently anticipated.
As of
the fiscal quarter ended December 30, 2016, we are in compliance
with all covenants under the Amendment to the Loan
Agreement.
NOTE 11 – 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. The
Company’s common stock equivalent shares consist of shares to
be issued under outstanding stock options and unvested restricted
stock units.
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding-basic
|
9,901
|
9,850
|
9,938
|
9,831
|
|
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
|
-
|
-
|
-
|
-
|
|
Weighted
average common shares outstanding-diluted
|
9,901
|
9,850
|
9,938
|
9,831
|
Common stock equivalent shares are not included in the computation
of diluted loss per share, as the Company has a net loss and the
inclusion of such shares would be anti-dilutive due to the net
loss. At December 30, 2016 and 2015, the common stock equivalent
shares were, as follows:
|
|
For the Three Months
Ended
|
For the Six Months
Ended
|
|
|
December 30,
2016
|
January 1,
2016
|
December 30,
2016
|
January 1,
2016
|
|
|
(in
thousands)
|
(in
thousands)
|
|
Unvested restricted stock
unit awards
|
82,098
|
-
|
67,350
|
-
|
|
Shares of common stock
issuable upon conversion of warrants
|
1,095
|
-
|
1,095
|
-
|
|
Common stock equivalent
shares excluded from diluted net loss per
share
|
83,193
|
-
|
68,445
|
-
|
NOTE 12
– SHARE-BASED COMPENSATION
Restricted Stock Unit Activity
In
November 2010, the stockholders approved the Versar, Inc. 2010
Stock Incentive Plan (the “2010 Plan”), under which the
Company may grant incentive awards to directors, officers, and
employees of the Company and its affiliates and to service
providers to the Company and its 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 December 30, 2016, a
total of 667,103 restricted stock units have been issued under
the 2010 Plan and there are 335,897 shares remaining
available for future issuance of awards (including restricted stock
units) under the 2010 Plan.
During
the three month period ended December 30, 2016, the Company awarded
17,050 restricted stock units to its executive officers and certain
employees, all of which vest over a period of two years following
the date of grant. The total unrecognized compensation cost,
measured on the grant date, that relates to non-vested restricted
stock awards at December 30, 2016, was approximately $84,326, 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 $100,000 and $179,000 for the three months and six
months ended December 30, 2016, respectively. These expenses were
included in direct costs of services and overhead and SG&A
expenses in the Company?s Condensed Consolidated Statements of
Operations.
NOTE 13 – INCOME TAXES
The
effective tax rates were approximately 34.0% and 37.5% for the
first six months of fiscal 2017 and 2016,
respectively.
NOTE 14 – NYSE MKT LLC COMPLIANCE
On
October 17, 2016, the Company received a letter from the NYSE MKT
LLC (the Exchange) in which the Exchange determined that the
Company was not in compliance with Sections 134 and 1101 of the
Exchange’s Company Guide (the Company Guide) due to the
Company’s failure to timely file its Annual Report on Form
10-K with the Securities and Exchange Commission (SEC) for the year
ended July 1, 2016. The letter also stated that this failure was a
material violation of the Company’s listing agreement with
the Exchange and unless the Company took prompt corrective action,
the Exchange may suspend and remove the Company’s securities
from the Exchange. The Exchange also informed the Company that it
must submit a plan by November 16, 2016 advising the Exchange of
actions the Company has taken or will take to regain compliance
with the Company Guide by January 17, 2017. If the Exchange
accepted the plan, the Company would be subject to periodic
monitoring for compliance. If the Company failed to submit a plan,
or if the submitted plan was not accepted by the Exchange,
delisting proceedings would commence. Furthermore, if the plan was
accepted, but the Company was not in compliance with the Company
Guide by January 17, 2017, or if the Company did not make progress
consistent with the plan, the Exchange may initiate delisting
proceedings.
On
November 14, 2016, Versar filed a Form 12b-25 with the SEC
indicating that the Company was delaying the filing of its
Quarterly Report on Form 10-Q for the three months ended September
30, 2016.
On
December 15, 2016, the Company received a letter from the Exchange
indicating that the Exchange accepted the Company’s plan and
extension request and granted the Company an extension of time
through May 31, 2017 to restore compliance under the Company Guide.
The staff of the Exchange will review the Company periodically for
compliance with the initiatives outlined in its plan. If the
Company is not in compliance with the continued listing standards
by May 31, 2017 or if the Company does not make progress consistent
with the plan during the plan period, the Exchange staff has
indicated that it would initiate delisting proceedings as
appropriate. With the filing of this Quarterly Report on Form 10-Q,
the Company has restored its compliance with Sections 134 and 1101
of the Company Guide.
NOTE 15 – SUBSEQUENT EVENTS
In January 2017, the U.S. Army Reserve
88
th
Regional Support Command (RSC)
exercised its first option to extended its staff augmentation
contract for an additional year effective April 1, 2017. Management
expects that its continuation of the work under this contract
extension to operate at a loss and intends to record a charge of
$1.3 million during its fiscal fourth quarter of 2017. The base
contract performance period for this contract was awarded in
September 2016 and is discussed in the PSG segment
above.
On
February 13, 2017, Versar filed a Form 12b-25 with the SEC
indicating that the Company was delaying the filing of its
Quarterly Report on Form 10-Q for the three months ended December
30, 2016.
On
March 31, 2017, the Company failed its minimum quarterly
consolidated EBITDA covenant set forth in the Amendment the Loan
Agreement, which constitutes an Event of Default under the Loan
Agreement.
On
May 8, 2017, the Lender and the Company entered into a Second
Amendment and Waiver pursuant to which the Lender provided a
one-time waiver to this Event of Default effective as of May 5,
2017 in exchange for an amendment fee of $15,000. As a result of
this waiver, the warrants remain outstanding, but unexercisable,
and the amendment fee may still be waived and forgiven subject to
no further Events of Default and repayment of all obligations under
the Loan Agreement prior to August 30, 2017.
On
April 4, 2017, the Company sold its PPS subsidiary 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 agreed upon with the
buyer of PPS.
On
April 6, 2017, the Company received a letter from the Exchange in
which the Exchange determined that the Company was not in
compliance with Section 1003(a)(i) of the Exchange’s Company
Guide because the Company’s stockholder’s equity
reported for the fiscal year ended July 1, 2016 was below $2.0
million and it has reported net losses in two of its three most
recent fiscal years. The Exchange also informed the Company that it
must submit a plan to the Exchange by May 6, 2017 identifying the
actions the Company has taken, or will take, to regain compliance
with the Company Guide by October 6, 2018. If the Company fails to
submit a plan, or if the Exchange does not accept the submitted
plan, delisting proceedings will commence. Furthermore, if the plan
is accepted, but the Company is not in compliance with the Company
Guide by October 6, 2018, or if the Company does not make progress
consistent with the plan, the Exchange may initiate delisting
proceedings. In addition, the letter provided the Company an early
warning regarding potential noncompliance with Section 1003(a)(iv)
of the Company Guide, due to uncertainty regarding the
Company’s ability to generate sufficient cash flows and
liquidity to fund operations. This uncertainty raises substantial
doubt about the Company’s ability to continue as a going
concern. On May 8, 2017, the Company submitted its plan to the
Exchange.
On
April 15, 2017, the U.S. Army Reserve 88th Regional Support Command
(RSC) executed the first option period for an additional 12 months
for its staff augmentation contract. Management expects that its
continuation of the work under this contract extension to operate
at a loss and intends to record a charge of $1.3 million during its
fiscal fourth quarter of 2017. The base contract performance period
for this contract was awarded in September 2016 and ended April 15,
2017.
ITEM
2 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations
General Information
The following
discussion and analysis relates to the Company’s financial
condition and results of operations for the three month periods
ended September 30, 2016 and 2015. This discussion should be read
in conjunction with the condensed consolidated financial statements
and other information disclosed herein as well as the
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in our Annual
Report on Form 10-K for the fiscal year ended July 1, 2016,
including the critical accounting policies and estimates discussed
therein. Unless this Form 10-Q indicates otherwise or the
context otherwise requires, the terms “we,”
“our,” the “Company,” “us,” or
“Versar” as used in this Form 10-Q refer
collectively to Versar, Inc. and its
subsidiaries.
This quarterly
report on Form 10-Q contains forward-looking statements in
accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, which are
subject to risks and uncertainties. Forward-looking statements
typically include assumptions, estimates or descriptions of our
future plans, strategies and expectations, are generally
identifiable by the use of the words “anticipate,”
“will,” “believe,” “estimate,”
“expect,” “intend,” “seek,” or
other similar expressions. Examples of these include discussions
regarding our operations and financial growth strategy, projections
of revenue, income or loss and future
operations.
These
forward-looking statements and our future financial performance,
may be affected by a number of factors, including, but not limited
to, the “Risk Factors” contained in Part I,
Item 1A., “Risk Factors” of our Annual Report on
Form 10-K for the fiscal year ended July 1, 2016. Actual
operations and results may differ materially from those
forward-looking statements expressed in this
Form 10-Q.
Overview
Versar, Inc.
is 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 construction management, security system integration,
performance-based remediation, and hazardous material
management.
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 facility
planning and programming, engineering design, construction,
construction management and security systems installation and
support. ECM supports federal, state and local governments, as well
as 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, master planning, and engineering design for
facilities, transportation, resource management, energy, and local,
regional and international development.
Our services
include:
●
Facility Condition Assessments and Space Utilization Analysis
providing Architect-Engineer studies, master planning and area
development plans, sustainability and energy audits, full
Sustainment, Restoration and Modernization (SRM) and Military
Construction (MILCON) design capabilities
●
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 includes 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
●
Security Systems planning and analysis that includes developing and
updating physical security plans, site surveys and physical
security risk assessments. Engineering and design turnkey solutions
integrating physical and electronic security systems, full
program/project documentation, and configuration management and
design control expertise.
ECM's key
projects that contributed to the revenue include integration and
maintenance of access control and security systems for the FAA,
construction management services for the U.S. Air Force (USAF) and
U.S. Army, 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 construction management services for the
District of Columbia Courts and commercial customers. The largest
ECM project during fiscal 2016 was the $109.5 million firm fixed
price Design/Bid/Build runway repair task order at Dover Air Force
Base (DAFB) awarded, on August 13, 2014 under Versar's S/R&M
Acquisition Task Order Contract (SATOC) indefinite
delivery/indefinite quantity (IDIQ) with the Air Force Civil
Engineer Center (AFCEC), held with our joint venture partner,
Johnson Controls Federal Systems. The SATOC IDIQ primarily services
Air Force 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 the task order stopped due to the seasonal
weather related conditions. This contract is anticipated to be
completed by the end of June 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 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 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 Air Force 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.
● UXO/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 the revenue are our New England, Great
Lakes, Tinker and Front Range PBRs, Range Sustainment Services at
Nellis 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 U.S. Environmental Protection
Agency (EPA).
PSG
PSG provides
onsite environmental, engineering, construction management, and
logistics services to the U. S. Air Force (USAF), U.S. Army (USA),
U.S. Army Reserve (USAR), National Guard Bureau (NGB), Federal
Aviation Administration (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
Department of Defense (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 plans 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.
●
Assisting 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, to include facility and
utilities integration, National Environmental Policy Act (NEPA)
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 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.
●
Engineering and facilities planning support for the
implementation and completion of Sustainment, Restoration, and
Modernization projects.
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,
regulatory changes 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 continue to place
substantial funding and which clearly align with Versar’s
capabilities. These opportunities include construction management,
security system integration, remediation, and hazardous materials
management. We also continue to focus on areas that we believe
offer attractive enough 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. We continue to see a decline in some of our PSG contract
positions largely due to the continued shift to more contract
solicitations being targeted at small business companies eligible
for similar such set-aside programs. If we cannot expand our
relationships with such set-aside firms and increase our ability to
capture more of this work, this may result in a material impact on
future periods. Overall, our pipeline remains robust, but longer
timelines for contract awards and project start dates have slowed
the transition from pipeline to backlog, which directly impacts the
start of 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 in the coming year to address these concerns. Our
business is segregated based on the nature of the work, business
processes, customer bases and the business environment in which
each of the segments operates.
Versar
remains committed to our customers, shareholders, employees and
partners. 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. To reiterate
our long-term strategy to reflect our new reality, the following
elements are driving our strategy:
1.
Re-Establish Financial Stability
and Grow Shareholder Value.
With the filing of this
Quarterly Report on Form 10-Q, Versar has become current with our
financial reporting requirements with the Exchange and SEC. While
we continue to seek a long-term financial solution, we are
exploring all strategic options. We are committed to conservatively
managing our resources to ensure maximum shareholder value and
re-establish our financial stability.
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 their efforts to support our front-line
employees efficiently and effectively serve our customers. We are
committed to innovatively transform 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 our win rate. While we reduced back-office staff in our
Business Development group, 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.
For the
three months ended December 30, 2016, the Company operated at a
financial loss. We continue to experience delays in contract
awards, as well as delays in funding values for work which has been
previously awarded. The Company made certain cost cutting measures
during fiscal 2016 and 2017. The results of these cost savings will
continue into future periods. Included in second quarter were
approximately $0.6 million of costs related to the requirements of
the Bank of America Loan Amendment, and additional costs associated
with the retention of the CRO. Going forward, we will continue to
aggressively manage our controllable costs as needed based on the
performance of the Company.
On
March 31, 2017, the Company failed its minimum quarterly
consolidated EBITDA covenant set forth in the Amendment the Loan
Agreement, which constitutes an Event of Default under the Loan
Agreement.
On
May 8, 2017, the Lender and the Company entered into a Second
Amendment and Waiver pursuant to which the Lender provided a
one-time waiver to this Event of Default effective as of May 5,
2017 in exchange for an Amendment fee of $15,000. As a result of
this waiver, the warrants remain outstanding, but unexercisable,
and the Amendment fee may still be waived and forgiven subject to
no further Events of Default and repayment of all obligations under
the Loan Agreement prior to August 30, 2017.
For the
three months ended April 1, 2016, Management identified a material
weakness in our internal control over financial reporting. The
weakness arose because the Company 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 we 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, the Company
has developed a remediation plan under which it has retained, an
independent accounting firm to provide expert advice to identify
and account for non-routine, complex transactions and facilitate
resolution of such issues. While the Company has developed and is
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. We cannot assure you that our efforts to
fully remediate this internal control weakness will be successful.
If we are not able to properly remediate the identified material
weakness, we may not be able to identify errors in our financial
statements on a timely basis, which could have a material adverse
effect on our financial condition and results of operations. (See
ITEM 4 - Controls and Procedures).
Consolidated
Results of Operations
The
table below sets forth our consolidated results of operations for
the three and six months ended December 30, 2016 and January 1,
2016:
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$
30,527
|
$
47,337
|
59,842
|
$
92,242
|
|
Purchased
services and materials, at cost
|
16,826
|
29,351
|
32,239
|
59,118
|
|
Direct
costs of services and overhead
|
11,535
|
14,366
|
23,681
|
27,192
|
|
GROSS
PROFIT
|
$
2,166
|
$
3,620
|
3,922
|
$
5,932
|
|
Gross
Profit percentage
|
7
%
|
13
%
|
7
%
|
9
%
|
|
|
|
|
|
|
|
Selling
general and administrative expenses
|
3,334
|
3,317
|
6,333
|
6,170
|
|
OPERATING
(LOSS) INCOME
|
(1,168
)
|
303
|
(2,411
)
|
(238
)
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
|
|
Interest
(income)
|
(3
)
|
-
|
(7
)
|
351
|
|
Interest
expense
|
197
|
176
|
409
|
-
|
|
(LOSS)
INCOME BEFORE INCOME TAXES
|
(1,362
)
|
$
127
|
(2,813
)
|
$
(589
)
|
Three Months Ended December 30, 2016 compared to the Three Months
Ended January 1, 2016
Gross
revenue for the second quarter of fiscal 2017 was
$30.5 million, a decrease of 36% compared to
$47.3 million during the second quarter of the last fiscal
year. This decrease is driven by lower revenue year over year on
the DAFB project, down $6.6 million, PBR projects, down $2.6
million, VSS projects, down $2.0 million, and historical business
in PSG, down $1.7 million. In total, these four drivers accounted
for a revenue decline of approximately $12.1 million. The DAFB
project, as reported in previous financial filings and earnings
calls, was scheduled to scale back significantly from fiscal 2016
to fiscal 2017. In anticipation of that, we aggressively sought and
have won higher margin work, such as our successful new initiative
to obtain Petroleum, Oils and Lubricants (POL) work at various Air
Force installations. The decline in the PBR program was also
anticipated, as we moved into the later stages of an eight-year
program. The program is currently scheduled to be completed in
2020. VSS suffered a delay in new orders caused in part, by the
lack of a reseller agreement with Johnson Controls, Inc. (JCI) for
critical equipment. A reseller agreement was signed in the
beginning of the third quarter of fiscal 2017 and we expect
increased new orders in subsequent quarters. The historical
business losses in PSG were caused by the aforementioned initiative
by the federal government to shift more and more of staff
augmentation work to small and similar such set-aside
companies.
To
offset some of those revenue decreases, we experienced contract
revenue growth such as the contributions of approximately $1.0
million from new ECM projects, in particular the Hanscom project,
and work overseas on the in Iraq and Kuwait, all within the ECM
segment. Within ESG, shoreline stabilization projects contributed
$1.2 million and within PSG, staff augmentation services related to
the 88
th
AFOS project contributed $1.2 million.
Purchased services
and materials for the second quarter of fiscal 2017 was
$16.8 million, a decrease of 43% compared to
$29.4 million during the second quarter of the last fiscal
year. In general, as gross revenue declines on projects where
Versar acts as the general contractor, such as the DAFB project,
purchased services and materials decline as well.
Direct
costs of services and overhead for the second quarter of fiscal
year 2017 were $11.5 million, a decrease of 20%
compared to $14.4 million during the second quarter of the
last fiscal year.
Gross
profit for the second quarter of fiscal 2017 was $2.2 million,
compared to a gross profit of $3.6 million during the second
quarter of the previous fiscal year. VSS contributed gross profit
of $1.3 million, off-set by the decline in our Title II work in
Iraq and Afghanistan within the ECM segment and reduced gross
profit from the decrease in gross revenue for the DAFB project of
$0.4 million. Overall gross profit margin decreased from 13%
to 7%. The margins on the DAFB project are lower than on other
projects because it is a construction project for which we are the
prime contractor. Versar sub-contracted much of the work, while
earning a minor fee. However, as a result of the full integration
of VSS, we expect to see increased margins from the additional
projects in that technical service line and anticipate that such
higher margins will off-set some of the margin compression
resulting from the DAFB project. In addition, as the DAFB project
progresses and becomes a smaller percentage of our overall revenue
mix and as ESG’s recent project wins which we anticipate will
have higher margins begin to ramp up, we expect to see margins
improve.
Selling, general
and administrative expenses for the second quarter of fiscal 2017,
increased to 11% of gross revenue from 7% of gross revenue, when
compared to the second quarter of last fiscal year. Although
increasing as a percentage of gross revenue, SG&A expenses
remained consistent with the second quarter of last fiscal year in
absolute dollars. Included in second quarter SG&A expenses were
approximately $0.5 million related to the requirements of the
Amendment of the Loan Agreement. This includes costs associated
with the addition of a Chief Restructuring Officer and the costs of
Bank of America's outside auditors and amendment fees. Despite this
additional expense, the Company continued to control indirect costs
during the quarter, including rent savings from the consolidation
of ESG and VSS offices in Gaithersburg and Germantown,
Maryland.
Loss
before income taxes, for the second quarter of fiscal 2017 was $1.4
million, compared to income before income taxes, of
$0.1 million for the second quarter of the last fiscal year.
This decrease is attributable to the decline in revenue and gross
profit, and the increase in selling, general and administrative
expenses as a percentage of revenue as discussed
above.
Six Months Ended December 30, 2016 compared to the Six Months Ended
January 1, 2016
Gross
revenue for the first six months of fiscal 2017 was
$59.8 million, a decrease of 36% compared to
$92.2 million during the first six months of the last fiscal
year. This decrease is driven by lower revenue year over year on
the DAFB project, down $19.5 million, PBR projects down $3.9
million, VSS projects down $2.0 million, and a number of projects
within ESG ending down $2.8 million. In total, these four drivers
accounted for a revenue decline of approximately $28.2 million. The
DAFB project, as reported in previous financial filings and
earnings calls, was scheduled to scale back significantly from
fiscal 2016 to fiscal 2017. In anticipation of that, we
aggressively sought and obtained higher margin work, such as the
successful new initiative in POL work at various Air Force
installations. The decline in the PBR program was also anticipated,
as the we moved into the later stages of an eight-year program. The
program is scheduled to be completed in 2020. VSS suffered a delay
in new orders caused in part, by the lack of a reseller agreement
with JCI for critical equipment. As mentioned above, the reseller
agreement was signed in the beginning of the third quarter of
fiscal 2017 and we expect increased new orders in subsequent
quarters.
To
offset some of those revenue decrease drivers, we experienced
contract revenue growth, such as the contributions of approximately
$1.4 million in our Fort Belvoir project, $0.8 million from the
Blue Brick Building project, $0.6 million from the Hanscom project,
and $0.2 million new construction management projects in Iraq and
Kuwait, all within ECM. Within ESG, the shoreline projects
contributed $1.8 million and PSG contributed $0.2 million from the
Facilities Management Unit work and for various staff augmentation
services.
Purchased services
and materials for the first six months of fiscal 2017 was
$32.2 million, a decrease of 43% compared to
$59.1 million during the first six months of the last fiscal
year. As gross revenue declines on projects where Versar acts as
the general contractor, such as the DAFB project, purchased
services and materials decline as well. Additionally, we
experienced a one-time GAAP adjustment of $0.6 million to
complete a fixed price project within our PSG segment.
Direct
costs of services and overhead for the first six months of fiscal
year 2016 were $23.7 million, a decrease of 20%
compared to $27.2 million during the first six months of the last
fiscal year.
Gross
profit for the first six months of fiscal 2017 was $3.9
million, compared to a gross profit of $5.9 million during the
first six months of the previous fiscal year. Overall, gross profit
decreased from 9% to 7%. The decline in gross profit was largely
attributable to two items: (1) the overall decline in gross
revenue, and (2) the shift in the revenue mix. The margins on the
DAFB project are lower than on other projects because it is a
construction project for which we are the prime contractor. Versar
sub-contracted much of the work, while earning a minor fee.
However, as a result of the full integration of VSS which has
higher margins than DAFB project, we expect to see increased
overall margins from the additional number of projects in that
technical service line and anticipate that such higher margins will
off-set some of the margin compression resulting from the DAFB
project. VSS contributed gross profit of $1.6 million, offset by
the decrease in gross profit for the DAFB project of $0.4 million.
In addition, as the DAFB project winds down and becomes a smaller
percentage of our overall revenue mix and as ESG’s recent
project wins (which we anticipate will have higher margins) begin
to ramp up, we expect to see margins improve.
Selling, general
and administrative expenses for the first six months of fiscal
2017, increased to 11% of gross revenue from 7% of gross revenue,
when compared to the first six months of last fiscal year, SG&A
expenses increased $0.2 million or 3% in absolute dollars. Included
in second quarter SG&A expenses were approximately $0.6 million
related to the Loan Amendment requirements (see Note 10 - Debt)
which did not occur during the second quarter of the previous
fiscal year. This includes costs associated with the retention of
the CRO, and the costs of Bank of America's outside auditors and
amendment fees. Despite these additional expenses, the Company
continued to control indirect costs during the quarter, including
rent savings from consolidating ESG and VSS offices in Germantown,
Maryland and renegotiating the Company's Springfield, Virginia
office lease.
Loss,
before income taxes, for the first six months of fiscal 2017 was
$2.8 million, compared to loss before income taxes, of
$0.6 million for the first six months of the last fiscal year.
This decrease is attributable to the decline in revenue and gross
profit, and the increase in selling, general and administrative
expenses as a percentage of revenue discussed above.
Backlog
We
report “funded” backlog, which represents orders for
goods and services for which firm contractual commitments have been
received. As of December 30, 2016, funded backlog was approximately
$154.0 million, a increase of 14% compared to approximately
$136.0 million of backlog at the end of fiscal 2016. The
increase in backlog was attributable to an improved contract award
environment.
Results of Operations by Reportable Segment
The
tables below set forth our operating results by reportable segment
for the three and six month periods ended December 30, 2016 and
January 1, 2016. (Dollar amounts in following tables are in
thousands).
|
Engineering and Construction Management
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$
17,413
|
$
31,868
|
$
35,107
|
$
61,889
|
|
Purchased
services and materials, at cost
|
12,534
|
24,509
|
25,161
|
49,648
|
|
Direct
costs of services and overhead
|
3,812
|
5,574
|
7,962
|
9,188
|
|
GROSS
PROFIT
|
$
1,067
|
$
1,786
|
$
1,984
|
$
3,053
|
|
Gross
profit percentage
|
6
%
|
6
%
|
6
%
|
5
%
|
Three Months Ended December 30,
2016 compared to the Three Months Ended January 1,
2016
Gross
revenue for the second quarter of fiscal 2017 was
$17.4 million, an decrease of 45% compared to
$31.9 million during the second quarter of fiscal 2016. The
principal drivers of this decrease are the $6.6 million in lower
revenues associated with the DAFB project, $2.0 million related to
the lack of reseller agreement with JCI to purchase critical
equipment within VSS and $0.7 million in work related to the
Company’s subsidiary, PPS, which was divested in April 2017.
In additional purchases services declined on multiple contracts
which lowered revenue from the comparative quarter
.
The Hanscom project contributed revenues
of $0.6 million, construction management projects in Iraq and
Kuwait contributed $0.4 million.
Gross
profit was $1.1 million, compared to a gross profit of
$1.8 million during the second quarter of the last fiscal
year. During the second quarter of fiscal 2017, overall profit
margins have remained constant at 6%. VSS contributed gross profit
of $1.6 million as a result of changes in subcontractors used for
the installation of equipment, off-set by the decline in our Title
II work in Iraq and Afghanistan. We also incurred costs for several
projects that will be recovered via negotiations for REAs.
Additionally, we experienced a decline in gross profit for the DAFB
project as we negotiate with the client for contract
modifications.
Six Months Ended December 30, 2016 compared to the Six Months Ended
January 1, 2016
Gross
revenue for the first six months of fiscal 2017 was
$35.1 million, a decrease of 43% compared to
$61.9 million during the first six months of the last fiscal
year. The drivers of this decrease are the $19.5 million in lower
revenues associated with the DAFB project, $2.0 million related to
the lack of reseller agreement with JCI to purchase critical
equipment within VSS, and $1.5 million related to the decrease in
work at Homestead AFB and $0.7 million in work related to our
subsidiary, PPS, which was sold in April 2017.
The
Hanscom project contributed revenues of $0.6 million and new Iraq
and Kuwait construction management projects of $0.6 million. We
also saw revenue increases in our Blue Brick Building project of
$0.8 million and our Ft. Belvoir project of $1.4
million.
Gross
profit was $2.0 million during the first six months of fiscal
2017, compared to a gross profit of $3.1 million during the
first six months of the last fiscal year. During the first six
months of fiscal 2017, overall profit margins increased from 5% to
6%. VSS contributed gross profit of $1.3 million as a result
of changes in subcontractors used for the installation of
equipment, off-set by the reduced gross profit from the decrease in
gross profit for the DAFB project of $0.4 million. We completed the
work on Homestead project in the prior fiscal year and did not
incur additional losses for the six months ended December 30, 2016.
We incurred costs on the several project which will be recovered
via negotiations for REAs. The Company also experienced a decrease
in gross profit from the continued wind-down of our Title II work
in Iraq and Afghanistan.
|
Environmental Services Group
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$
8,670
|
$
10,456
|
$
16,115
|
$
20,496
|
|
Purchased
services and materials, at cost
|
3,891
|
4,245
|
6,345
|
8,381
|
|
Direct
costs of services and overhead
|
4,037
|
4,659
|
8,339
|
9,897
|
|
GROSS
PROFIT
|
$
742
|
$
1,552
|
$
1,431
|
$
2,217
|
|
Gross
profit percentage
|
9
%
|
15
%
|
9
%
|
11
%
|
Three Months Ended December 30, 2016 compared to the Three Months
Ended January 1, 2016
Gross
revenue for the second quarter of fiscal 2017 was
$8.7 million, a decrease of 17% compared to
$10.5 million during the second quarter of the last fiscal
year. This decrease in revenue was due to the completion of the
significant contract at Ft. Irwin, the ending of numerous smaller
size projects of $1.2 million, and the revenue decrease associated
with the PBR program. The decline in PBR revenue is consistent with
the expected program profile of the remaining period of performance
through fiscal 2020. The PBR contract revenues also saw some timing
impact due to work shifting to later quarters at a number of site
locations. Revenue declines were partially offset by a contract
award for weather-related services for $0.6 million and increases
in the shoreline projects of $1.2 million.
Gross
profit for the second quarter of fiscal 2017 was
$0.7 million, compared to $1.6 million in the second quarter
of the last fiscal year. During the second quarter of fiscal 2017,
overall profit margins have decreased from 15% to 9%. As a
percentage of revenue, purchased services has declined and is
associated with the PBR program.
Six Months Ended December 30, 2016 compared to the Six Months Ended
January 1, 2016
Gross
revenue for the first six months of fiscal 2017 was
$16.1 million, a decrease of 21% compared to
$20.5 million during the first six months of the last fiscal
year. This decrease in revenue was due to the completion of the
significant contract at Ft. Irwin, the contract ending of numerous
smaller size projects of $ 2.8 million and the revenue decrease
associated with the PBR program. The decline in PBR revenue is
consistent with the expected program profile of the remaining
period of performance through fiscal year 2020. The PBR
contract revenues also saw some timing impact due to work shifting
to later quarters at a number of site locations. Revenue declines
were offset by a contract award for performance of weather related
services for $0.6 million and increases in the shoreline
stabilization projects of $ 1.8 million.
Gross
profit for the first six months of fiscal 2017 was
$1.4 million, compared to $2.2 million in the first six months
of the last fiscal year. During the first six months of fiscal
2017, overall profit margins have decreased from 11% to 9%.
This is due to mix of the current project work has greater gross
profit than the contracts which ended in the current quarter. As a
percentage of revenue, purchased services has declined and is
associated with the PBR program.
|
Professional Services Group
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$
4,445
|
$
5,013
|
$
8,621
|
$
9,857
|
|
Purchased
services and materials, at cost
|
401
|
598
|
734
|
1,089
|
|
Direct
costs of services and overhead
|
3,687
|
4,133
|
7,380
|
8,107
|
|
GROSS
PROFIT
|
$
357
|
$
282
|
$
507
|
$
661
|
|
Gross
profit percentage
|
8
%
|
6
%
|
6
%
|
7
%
|
Three Months Ended December 30, 2016
compared to the Three Months Ended January 1,
2016
Gross
revenue for the second quarter of fiscal 2017 was
$4.4 million, a decrease of 11% compared to
$5.0 million during the second quarter of the last fiscal
year. The decrease in revenue was due to decreases of $0.6 million
in revenue from PSG’s historical business line as a result of
the loss of several task orders. These decreases were offset by
increases in the Facilities Management Unit work of $0.2 million
and a new contract award for staff augmentation services related to
the 88
th
RSC project of $1.8 million. The segment continues to experience a
decline in contract positions largely due to the continued shift by
the U.S. Government to targeted solicitations to businesses that
qualify for small business and similar set-aside
programs.
Gross
profit for the second quarter of fiscal 2017 was $0.4 million,
compared to gross profit of $0.2 million in the second quarter
of the last fiscal year as a result of cost cutting measures in
non-project related costs initiated during fiscal
2016.
Six Months Ended December 30, 2016 compared to the Six Months Ended
January 1, 2016
Gross
revenue for the first six months of fiscal 2017 was
$8.6 million, a decrease of 13% compared to
$9.9 million during the first six months of the last fiscal
year. This decrease was due in part to a decrease in revenue from
PSG’s historical business line as a result of the loss of
several task orders. This decrease was partially offset by an
increase in our Facilities Management Unit work and the new project
award for the 88
th
RSC staff
augmentation project. The segment continues to experience a net
decline in contract positions largely due to the continued shift by
the U.S. Government to targeted solicitations to businesses that
qualify for small business and similar set-aside
programs.
Gross
profit for the first six months of fiscal 2017 was
$0.5 million, compared to gross profit of $0.6 million in
the first quarter of the last fiscal year. Additionally, we
experienced a one-time charge of $0.6 million for additional cost
incurred to complete a fixed price project with the 88
th
RSC
project.
Liquidity
and Capital Resources
On
September 30, 2015, the Company, together with the Guarantors,
entered into a loan with the Lender 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 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 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 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, Consolidated
Senior Leverage Ratio, Consolidated Fixed Charge Coverage
Ratio.
During the third and fourth quarters of fiscal 2016, following
discussion with the Lender, the Company 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. On May 12, 2016,
the Company, the 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 other default or event of default
under the Loan Agreement or (c) June 1, 2016 (the Forbearance
Period). Subsequently, the Company and the Lender entered into
additional forbearance agreements to extend the Forbearance Period
through December 9, 2016, and to allow the Company to borrow
funds pursuant to the terms of the Loan Agreement, consistent with
current Company 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%. The
Company is 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 the Company’s business and in amounts
consistent with past practices. The Lender has engaged an advisor
to review the Company’s financial condition on the
Lender’s behalf, and also required the Company to pursue
alternative sources of funding for its ongoing business
operations.
As of
December 30, 2016 the available balance on the Company’s
revolving credit facility was approximately $2.7
million.
On
December 9, 2016 (the Closing Date), Versar, together with the
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 $13,000,000 from $25,000,000.
The interest rate on borrowings under the revolving facility and
the term facility will 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
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, which fee is due and payable on the
earlier of a subsequent event of default or August 30, 2017. The
Company paid $0.3 million in amendment fees in December
2016.
Finally, the Amendment continued the requirement for Versar to
retain a CRO and recognized Versar’s ongoing efforts to work
with the Lender and continued the requirements to engage a
strategic financial advisor to assist with the structuring and
consummation of a transaction, the purpose of which is the
replacement or repayment in full of all obligations under the Loan
Agreement.
Our working capital as of December 30, 2016 was negative
$7.1 million, compared to negative working capital at July 1,
2016 of $2.2 million. Our current ratio at December 30, 2016
was 0.85 compared to 0.96 at July 1, 2016. Our expected
capital requirements for the full 2017 fiscal year is
approximately $0.5 million, which will be funded through
existing working capital. All payments related to the contingent
consideration related to the VSS purchase (See Note 3 –
Acquisition), over the next two years will also be funded through
existing working capital.
The
Company made certain cost cutting measures during fiscal 2016 and
2017 so that we could continue to operate within existing cash
resources.
We believe that our cash
balance of $1.3 million at the end of December 30, 2016, 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 2017
. Going forward, the
Company will continue to aggressively manage our cash flows and
costs as needed based on the performance of the Company.
Additionally, our
surety broker has informed the Company
that bonding for new work may be limited due to our accumulated
deficit. The surety broker has 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 the Company’s name, oversees all
of the payment disbursements from the Company, and delivers checks
from each payment for the Company to distribute to their vendors
working on the project. The surety essentially becomes the
Company’s accounts payable back office.
We continue to
work with our surety broker and bonding companies to find ways to
issue bonds. As we commit to obtaining new financing our
bonding capacity’s availability is also expected to
increase.
Critical Accounting Policies and Related Estimates
There
have been no material changes with respect to the critical
accounting policies and related estimates as disclosed in our
Annual Report on Form 10-K for the fiscal year ended July 1,
2016.
ITEM 3 - Quantitative and Qualitative Disclosure about Market
Risk
We have
not entered into any transactions using derivative financial
instruments or derivative commodity instruments and we believe that
our exposure to interest rate risk and other relevant market risk
is not material.
ITEM 4 - Controls and Procedures
As of
the last day of the period covered by this report, the Company
carried out an evaluation, under the supervision of the
Company’s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that
certain of the Company’s disclosure controls and procedures
are not effective, as of such date, to ensure that required
information will be disclosed on a timely basis in its reports
under the Exchange Act as a result of the material weakness in
internal control over financial reporting identified as discussed
below.
Further, our Chief
Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures are not effective in
ensuring that information required to be disclosed in reports filed
by us under the Exchange Act is accumulated and communicated to our
management, including the Chief Executive Officer and Chief
Financial Officer, in a manner to allow timely decisions regarding
the required disclosure.
There
were no changes in the Company’s internal controls over
financial reporting during the quarter ended December 30, 2016 that
have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
PART
II -
OTHER
INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We are
party from time to time to various legal actions arising in the
normal course of business. We believe that any ultimate unfavorable
resolution of these legal actions will not have a material adverse
effect on our consolidated financial condition and results of
operations.
ITEM 6 -
Exhibits
|
Exhibit No.
|
Description
|
|
31.1
|
Certifications
by Anthony L. Otten, Chief Executive Officer pursuant to Securities
Exchange Act Rule 13a-14
|
|
31.2
|
Certifications
by Cynthia A. Downes, Executive Vice President, Chief Financial
Officer and Treasurer, pursuant to Securities Exchange Act
Rule 13a-14
|
|
32.1
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 made by
Anthony L. Otten, Chief Executive Officer.
|
|
32.2
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 made by
Cynthia A. Downes, Executive Vice President, Chief Financial
Officer and Treasurer.
|
|
101
|
The following financial statements from Versar, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended December
30, 2016, formatted in eXtensible Business Reporting Language
(“XBRL”): (i) Unaudited Condensed Consolidated
Balance Sheets, (ii) Unaudited Condensed Consolidated
Statements of Income, (iii) Unaudited Consolidated
Statements of Comprehensive Income, (iv) Unaudited Condensed
Consolidated Statements of Cash Flows, and (v) Notes to
Condensed Consolidated Financial Statements, tagged as blocks of
text.
|
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
|
|
VERSAR, INC.
|
|
|
|
|
|
|
|
May 10, 2017
|
By:
|
/s/ Anthony L. Otten
|
|
|
|
|
Anthony L. Otten
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
May 10, 2017
|
By:
|
/s/ Cynthia A. Downes
|
|
|
|
|
Cynthia A. Downes
|
|
|
|
|
Executive Vice President,
Chief Financial Officer,
and Treasurer
|
|