NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of NCI, Inc. and its subsidiaries (NCI or the Company)
have been prepared in accordance with generally accepted accounting principles in the U. S. (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, the accompanying unaudited interim consolidated
financial statements reflect all adjustments necessary to fairly present the Companys financial position as of March 31, 2016, and its results of operations and cash flows for the three months ended March 31, 2016 and 2015, which consists of
normal and recurring adjustments. The information disclosed in the notes to the financial statements for these periods is unaudited. The current periods results of operations are not necessarily indicative of results that may be achieved for
any future period. All numbers in tables are presented in thousands except share and per share numbers. For further information, refer to the financial statements and footnotes included in NCIs Annual Report on Form 10-K for the year ended
December 31, 2015 and NCIs Annual Report on Form 10-K for the year ended December 31, 2016.
Recently Issued Accounting Pronouncements
On November 20, 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred Taxes. To simplify the
presentation of deferred income taxes, the amendments in this ASU require that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. As permitted, we elected to early adopt this ASU using the retrospective
approach, effective with our current Form
10-Q
filing for March 31, 2016. As a result of adopting this ASU, we recast our December 31, 2015 balance sheet by decreasing deferred tax assets, net, by
$4,034 thousand, and increased the line item for
non-current
deferred tax assets, net, in the amount of $4,034 thousand. There was no impact to our December 31, 2015 consolidated statements of
income, changes in stockholders equity, or cash flows.
At March 31, 2016, the adoption of ASU 2015-17 resulted in a decrease of
$4,034 thousand in deferred tax assets, net, and a corresponding increase to
non-current
deferred tax assets, net, in our condensed consolidated balance sheet. The adoption of ASU
2015-17 had no impact on our condensed consolidated statements of income or cash flows for the three-month period ended March
31, 2016.
In February 2016, the FASB issued ASU
2016-02,
which requires the recognition of
right-to-use
assets and lease liabilities arising from capital leases and operating leases in the statement of comprehensive income
and the statement of financial position, respectively. The Company will adopt the standard effective January 1, 2019 and does not anticipate that this new accounting guidance will have a material impact on its consolidated statement of operations.
The Company has not yet completed its evaluation of the impact on the consolidated balance sheet. The actual impact will depend on the Companys lease portfolio at the time of adoption.
In March 2016, the FASB issued ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations under the new revenue
recognition standard, ASU
2014-09,
Revenue from Contracts with Customers. In April 2016, the FASB issued ASU 2016-10, which clarifies the implementation guidance on identifying promised goods or services from
a principal and agent perspective. The Company will adopt the standard effective January 1, 2018. The Company is continuing to evaluate the full effect that ASU
2014-09
and related subsequent updates will have
on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the
accounting for
share-based
payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the
employees maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the
statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for
tax-
withholding purposes. The Company is evaluating the full effect that ASU 2016-09 will have
on its consolidated financial statements and will adopt the standard effective January 1, 2017.
4
2. Business Overview
NCI is a leading provider of enterprise solutions and services to U.S. defense, intelligence, health care and civilian government agencies. We have the
expertise and proven track record to solve our customers most important and complex mission challenges through technology and innovation. Our team of highly skilled professionals focuses on delivering cost-effective solutions and services in
the areas of agile software application and systems development/integration; cybersecurity and information assurance; engineering and logistics support; enterprise information management and advanced analytics; cloud computing and IT infrastructure
optimization; health IT and medical support; IT service management; and modeling, simulation and training. Headquartered in Reston, Virginia, we have more than 2,000 employees operating at more than 100 locations worldwide. The majority of the
Companys revenue was derived from contracts with the U.S. Federal Government, directly as a prime contractor or as a subcontractor. NCI primarily conducts business throughout the U. S. The Company reports operating results and financial data
as one reportable segment.
For the three months ended March 31, 2016, the Company generated approximately 63% of revenue from the Department of
Defense, including agencies within the intelligence community, and approximately 37% of revenue from federal civilian agencies. For the three months ended March 31, 2015, the Company generated approximately 60% of revenue from the Department of
Defense, including agencies within the intelligence community, and approximately 40% of revenue from federal civilian agencies.
NCIs Program
Executive Office Soldier (PEO Soldier) contract is the Companys largest revenue-generating contract and accounted for approximately 16% and 10% of revenue for the three months ended March 31, 2016 and 2015, respectively. The
Companys PEO Soldier program is a cost-plus fee contract consisting of a base period and four option periods for a total term of five years, which commenced in October 1, 2015. NCIs Cyber Network Operations and Security Support
(CNOSS) program, supporting the U.S. Army Network Enterprise Technology Command accounted for approximately 10% and 7% of revenue for the three months ended March 31, 2016, and 2015, respectively. This
cost-plus-fixed-fee,
single award indefinite delivery indefinite quantity contract consists of a
12-month
base period with two
one-year
option periods and one
six-month
option period, and commenced in October 2014.
3. Embezzlement and Restatement
In January 2017, the
Company identified a misappropriation of Company funds by its former controller. The Audit Committee engaged independent legal counsel and forensic consultants to investigate the fraud. The internal investigation was completed in March 2017, and
revealed that the former controller had embezzled $19.4 million through a circumvention of controls, which included transfers from the payroll account to his personal account, creating fictitious invoices, and altering bank account statements to
conceal the misappropriations. The Company believes that the former controller acted alone and found no evidence that any other NCI employee was aware of, or colluded in, the embezzlement of Company funds or that there was any unlawful activity
apart from that associated with the former controllers embezzlement of Company funds. The amounts embezzled were primarily classified as expenses and were included as fringe benefits costs in costs of revenue and selling, general and
administrative expenses and was originally allocated to contracts as allowable costs. After discovery of the embezzlement these costs were restated as misappropriation loss, which is an unallowable cost. The Company had sufficient allowable, but
previously unbilled costs allocated to its contracts in fiscal years 2010 through 2015 to offset the unallowable costs related to the embezzlement, such that there was no material change in revenue recognized on its cost reimbursable contracts
during such periods. During 2016, a portion of the amounts embezzled were recorded on the balance sheet. Accordingly, the Company has restated the Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2016 and 2015,
Condensed Consolidated Statement of Cash Flows for the three-month period ended March 31, 2016 and the Condensed Consolidated Balance Sheet as of March 31, 2016, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
As Reported
|
|
|
As Restated
|
|
|
As Reported
|
|
|
As Restated
|
|
Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
|
$
|
69,987
|
|
|
$
|
69,693
|
|
|
$
|
67,602
|
|
|
$
|
66,991
|
|
General and administrative expenses
|
|
|
6,129
|
|
|
|
6,107
|
|
|
|
6,629
|
|
|
|
6,575
|
|
Misappropriation loss
|
|
|
|
|
|
|
1,541
|
|
|
|
|
|
|
|
665
|
|
Provision for income taxes
|
|
|
2,224
|
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,333
|
|
|
$
|
2,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.25
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
0.24
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,333
|
|
|
$
|
2,589
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(2,458
|
)
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
(591
|
)
|
|
|
(1,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
5,847
|
|
|
$
|
4,623
|
|
|
|
|
|
|
|
|
|
Other accrued expenses
|
|
|
5,774
|
|
|
|
5,294
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
39,362
|
|
|
|
38,618
|
|
|
|
|
|
|
|
|
|
4. Earnings Per Share
Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per share include the incremental effect of stock options
calculated using the treasury stock method. Shares that are anti-dilutive are not included in the computation of diluted earnings per share. For the three months ended March 31, 2016 and 2015, approximately 30,000 and 109,000 shares, respectively,
were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. The following details the computation of basic and diluted earnings per common share (Class A and Class B) for the three months
ended March 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2016
(Restated)
|
|
|
2015
|
|
Net Income
|
|
$
|
2,589
|
|
|
$
|
2,405
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic shares outstanding during the period
|
|
|
13,153
|
|
|
|
12,968
|
|
Effect of dilutive potential common shares
|
|
|
714
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding during the period
|
|
|
13,867
|
|
|
|
13,601
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
5. Accounts Receivable
Accounts receivable consists of billed and unbilled amounts. The following table details accounts receivable at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Billed receivables
|
|
$
|
24,732
|
|
|
$
|
23,621
|
|
Unbilled receivables:
|
|
|
|
|
|
|
|
|
Amounts billable at end of period
|
|
|
30,146
|
|
|
|
27,185
|
|
Other
|
|
|
14,800
|
|
|
|
9,980
|
|
|
|
|
|
|
|
|
|
|
Total unbilled receivables
|
|
|
44,946
|
|
|
|
37,165
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
69,678
|
|
|
|
60,787
|
|
Less: Allowance for doubtful accounts
|
|
|
742
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
68,936
|
|
|
$
|
60,044
|
|
|
|
|
|
|
|
|
|
|
5
Other unbilled receivables primarily consist of amounts that will be billed upon milestone completions and other
accrued amounts that cannot be billed as of the end of the period. Substantially all unbilled receivables are expected to be billed and collected within the next 12 months.
6. Property and Equipment
The following table details
property and equipment at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
26,878
|
|
|
$
|
26,573
|
|
Leasehold improvements
|
|
|
9,357
|
|
|
|
9,323
|
|
Real property
|
|
|
549
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,784
|
|
|
|
36,444
|
|
Less: Accumulated depreciation and amortization
|
|
|
30,628
|
|
|
|
29,746
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
6,156
|
|
|
$
|
6,698
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the three months ended March 31, 2016 and 2015 was $0.9 million and
$1.0 million, respectively.
6
7. Intangible Assets
The following table details intangible assets at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Contract and customer relationships
|
|
$
|
39,594
|
|
|
$
|
39,594
|
|
Developed software
|
|
|
1,113
|
|
|
|
1,113
|
|
Less: Accumulated amortization
|
|
|
(22,387
|
)
|
|
|
(21,476
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
18,320
|
|
|
$
|
19,231
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangible assets for the three months ended March 31, 2016 and 2015 was $0.9 million and
$1.1 million, respectively. Intangible assets are primarily amortized on a straight line basis over periods ranging from seven to 11 years. Expected amortization expense for the remainder of the fiscal year ending December 31, 2016, and for
each of the fiscal years thereafter, is as follows:
|
|
|
|
|
For the year ending December 31,
|
|
|
|
2016 (remaining nine months)
|
|
$
|
2,734
|
|
2017
|
|
|
3,632
|
|
2018
|
|
|
3,149
|
|
2019
|
|
|
3,049
|
|
2020
|
|
|
3,027
|
|
Thereafter
|
|
|
2,729
|
|
|
|
|
|
|
|
|
$
|
18,320
|
|
|
|
|
|
|
8. Share-Based Payments
During the three months ended March 31, 2016, the Company did not grant any stock options to purchase shares of Class A common stock. During the three
months ended March 31, 2016, 38,332 stock options were exercised at a weighted-average price of $4.48. As of March 31, 2016, there were approximately 1,509,501 stock options outstanding. During the three months ended March 31, 2016, 5,000 restricted
shares were granted, and 6,250 restricted shares vested. As of March 31, 2016, there were 320,000 shares of restricted stock outstanding.
The
following table summarizes stock compensation expense allocated to cost of revenue and general and administrative costs for the three months ended March 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
|
|
|
2015
|
|
Cost of revenue
|
|
$
|
79
|
|
|
|
|
|
|
$
|
63
|
|
General and administrative
|
|
|
250
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329
|
|
|
|
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016, there was approximately $3.6 million of total unrecognized compensation cost related to
unvested stock compensation arrangements. This cost is expected to be fully amortized over the next five years, with approximately $0.7 million, $0.9 million, $0.8 million, $0.7 million and $0.5 million amortized during the
remainder of 2016, and the full years of 2017, 2018, 2019, and 2020, respectively. The cost of stock compensation is included in the Companys Condensed Consolidated Statements of Income and expensed over the service period of the options.
9. Debt
The Companys senior credit facility,
amended in December 2014, and referred to herein as the credit facility, consists of a revolving line of credit with a borrowing capacity of up to an $80.0 million principal amount and a $45.0 million accordion feature allowing
us to increase our borrowing capacity to up to a $125.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security interest
in substantially all of the Companys assets. The lenders also require a direct assignment of all contracts at the lenders discretion. The outstanding balance under the credit facility accrues interest based on
one-month
LIBOR plus an applicable margin, ranging from 210 to 310 basis points, based on
7
the ratio of the Companys outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) as defined in the credit facility agreement. The credit
facility expires on January 31, 2017. Accordingly all borrowings are classified as current liabilities as they are due and payable within the next 12 months.
The credit facility contains various covenants that limit, among other things, the Companys ability to incur or guarantee additional debt; make certain
distributions, investments and other restricted payments, including limits on cash dividends on the Companys outstanding common stock or equivalent equity interests; enter into transactions with certain affiliates; create or permit certain
liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain financial covenants that require the Company to maintain a minimum fixed charge coverage ratio, maintain a minimum funded debt to earnings ratio; and
limit capital expenditures below certain thresholds. As of March 31, 2016, the Company was in compliance with all of its loan covenants.
The credit
facility allows the Company to use borrowings thereunder of up to $17.5 million to repurchase outstanding shares of Class A common stock. No stock repurchases took place in the three months ended March 31, 2016. At March 31,
2016, $16.7 million was remaining under the board of directors authorization for share repurchases.
During the first quarter of 2016, NCI had
a weighted average outstanding loan balance of $16.5 million which accrued interest at a weighted average borrowing rate of 2.5%. During the first quarter of 2015, NCI had a weighted average outstanding loan balance of $28.6 million which
accrued interest at a weighted average borrowing rate of 2.3%.
As of March 31, 2016, the outstanding balance under the credit facility was
$20.5 million and interest accrued at a rate of
one-month
LIBOR plus 210 basis points, or 2.5%.
10.
Computech Acquisition
On January 1, 2015, the Company completed its purchase of 100% of the outstanding stock of Computech, Inc.
(Computech), a leader in agile and lean application software development and IT operations and maintenance, for approximately $56.7 million, net of cash acquired.
The acquisition has been accounted for under the acquisition method of accounting, which requires the total purchase consideration to be allocated to the
assets acquired and liabilities assumed based on estimates of fair value. The excess of the purchase consideration over the amounts assigned to tangible or intangible assets acquired and liabilities assumed is recognized as goodwill. Total
acquisition and integration related costs through March 31, 2015 were approximately $0.2 million.
Allocation of Purchase Price
NCI has completed the
valuation of the assets acquired and liabilities assumed of Computech. The fair values assigned to the intangible assets acquired were based on estimates, assumptions, and other information compiled by management, including independent valuations
that utilized established valuation techniques. Based on the Companys valuation, the total consideration of approximately $56.7 million, net of $3.3 million of cash acquired, has been allocated to assets acquired (including
identifiable intangible assets and goodwill) and liabilities assumed, as follows:
|
|
|
|
|
Accounts receivable and other assets
|
|
|
8,407
|
|
Goodwill
|
|
|
33,878
|
|
Definite-life intangible assets
|
|
|
19,720
|
|
Accrued salary and benefits
|
|
|
(4,112
|
)
|
Other accrued expenses
|
|
|
(1,236
|
)
|
|
|
|
|
|
|
|
$
|
56,657
|
|
|
|
|
|
|
The definite life intangibles recognized in the allocation of the Computech purchase price consists of $18.6 million in
contracts and customer relationships and $1.1 million in developed software. The fair value of the
definite-lived
intangible asset for contracts and customer relationships is based on existing customer
contracts and anticipated follow-on contracts with existing customers and will be amortized on a straight-line basis over its expected life of seven years. The fair value of the
definite-lived
intangible asset
for developed software will be amortized on a straight-line basis over its expected useful life of three years.
All goodwill and intangible asset
amortization related to the acquisition of Computech is expected to be deductible for income tax purposes.
8
11. Dividends
Our board of directors declared and the Company paid the following dividends during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
|
Total Amount
|
|
|
Payment Date
|
|
February 11, 2015
|
|
$
|
0.12
|
|
|
|
February 20, 2015
|
|
|
$
|
1,561
|
|
|
|
March 13, 2015
|
|
February 8, 2016
|
|
$
|
0.15
|
|
|
|
February 26, 2016
|
|
|
$
|
2,020
|
|
|
|
March 18, 2016
|
|
12. Related Party Transactions
The Company purchased services under a subcontract from Renegade Technology Systems, Inc., which is a government contractor wholly-owned by Rajiv Narang, the
son of Charles K. Narang, Chairman of the Board. For the three months ended March 31, 2016 and 2015, the expense incurred under this agreement was approximately $157,000 and $166,000, respectively. As of March 31, 2016 and 2015, outstanding
amounts due to Renegade Technology Systems, Inc. under this agreement were $47,410 and $68,030, respectively.
13. Contingencies
Government Audits
Payments to the Company
on U.S. Federal Government contracts are subject to adjustment upon audit by various agencies of the U.S. Federal Government. Audits of costs and the related payments have been performed by the various agencies through 2007 for NCI Information
Systems, Inc., our primary corporate vehicle for Government contracting. In the opinion of management, the final determination of costs and related payments for unaudited years will not have a material effect on the Companys financial
position, results of operations, or liquidity.
Litigation
Civil Suit Against Former Controller
As previously
disclosed on January 23, 2017, the Company commenced an internal investigation upon discovering that its former controller, Jon Frank, had been embezzling money from the Company. Upon completion of the internal investigation, the Company
determined that the actual amount of the embezzlement by Mr. Frank during the period from January 2010 through 2017 was approximately $19.4 million. The Company believes that Mr. Frank acted alone and found no evidence that any other
NCI employee was aware of or colluded in the embezzlement of Company funds and found no evidence of any unlawful activity apart from that associated with Mr. Franks embezzlement of Company funds.
On January 23, 2017, we filed a lawsuit against Mr. Frank in the Circuit Court of Fairfax County in the State of Virginia to recover the embezzled
funds.
On February 2, 2017, the Honorable Chief Judge White entered an Order for Preliminary Injunction and Asset Freeze (the Preliminary
Injunction) against Mr. Frank. Among other things, the Preliminary Injunction placed an immediate freeze on all monies and assets of Mr. Frank and ordered Mr. Frank to prepare and deliver to the Company an accounting of his
personal assets. In addition, pursuant to the Preliminary Injunction, Mr. Frank agreed to cooperate with the Company to identify, recover and return to the Company all assets that he obtained wrongfully or acquired with wrongfully-obtained
funds.
Government Agency Investigations
In
connection with the discovery of Mr. Franks embezzlement of money from the Company, we self-reported such matter to the U.S. Securities and Exchange Commission (SEC) and the civil and criminal divisions of the U.S. Department
of Justice (DOJ).
By letter to the Company dated February 1, 2017, the DOJ has identified the Company as a possible victim of
Mr. Franks conduct. On February 8, 2017, the SEC commenced a formal investigation and has served the Company with a subpoena requesting certain documents and information relevant to the embezzlement of Company funds by
Mr. Frank. The Company is cooperating fully with the DOJ and the SEC in connection with their respective investigations, which are ongoing.
The
United States Attorneys Office for the Eastern District of Virginia (USAO EDVA) has opened a civil fraud investigation into the impact of Mr. Franks conduct on the Companys government contracts. The Company is
cooperating fully with the USAO EDVA and the Inspectors General of relevant government agencies in connection with this investigation, which is ongoing. At this time, we do not have an estimate of the financial impact on the Company, if any, of the
investigation being conducted by the USAO EDVA.
Other Legal Proceedings
From time to time, we are involved in legal proceedings arising in the ordinary course of business. At this time, the probability is remote that the outcome of
any such ordinary course litigation matters currently pending will have a material adverse effect on our financial condition and results of operations.
Misappropriation lossCosts and Recovery
As discussed above, the Company initiated civil legal proceedings against our former controller seeking to recover assets acquired by him with funds wrongfully
obtained by him through his embezzlement of Company funds and that litigation is ongoing. The court has frozen all of our former controllers assets. The Company carries insurance that could cover up to $5 million of the misappropriation loss.
The timing and amount of final recoveries, net of expenses of recovery, is uncertain. The Company has not yet recognized an estimated value of the potential recovery due to the limited amount of information available to it at this time. The Company
estimates that it incurred approximately $5 million in costs during the first quarter of 2017 related to the embezzlement, including legal, auditing and forensic accounting fees.
9