ITEM 1. FINANCIAL STATEMENTS.
VERSAR, INC. AND
SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
(In
thousands, except share amounts)
|
|
|
|
|
|
March
31,2017 (unaudited)
|
|
|
ASSETS
|
|
|
|
Current
assets
|
|
|
|
Cash
and cash equivalents
|
$
987
|
$
1,549
|
|
Accounts
receivable, net
|
24,453
|
47,675
|
|
Inventory,
net
|
74
|
221
|
|
Prepaid
expenses and other current assets
|
1,891
|
1,007
|
|
Income
tax receivable
|
1,514
|
1,513
|
|
Total
current assets
|
28,919
|
51,965
|
|
Property
and equipment, net
|
846
|
1,328
|
|
Intangible
assets, net
|
6,374
|
7,248
|
|
Other
assets
|
1,368
|
775
|
|
Total
assets
|
$
37,507
|
$
61,316
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$
12,920
|
$
18,156
|
|
Billing
in Excess of Revenue
|
4,201
|
7,156
|
|
Accrued
salaries and vacation
|
2,940
|
2,478
|
|
Other
current liabilities
|
6,843
|
7,724
|
|
Notes
payable, current
|
4,549
|
3,831
|
|
Line
of Credit
|
5,918
|
14,854
|
|
Total
current liabilities
|
37,371
|
54,199
|
|
|
|
|
|
Notes
payable, non-current
|
-
|
2,494
|
|
Deferred
income taxes
|
-
|
-
|
|
Other
long-term liabilities
|
2,056
|
3,555
|
|
Total
liabilities
|
39,427
|
60,248
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
Stockholders'
(deficit) equity
|
|
|
|
Common stock $.01
par value; 30,000,000 shares authorized;10,283,217 shares issued
and 9,950,958 shares outstanding as of March 31, 2017; 10,217,227
shares issued and 9,982,778 shares outstanding as of July 1,
2016
|
102
|
102
|
|
Capital
in excess of par value
|
32,889
|
31,128
|
|
(Accumulated
deficit)
|
(31,655
)
|
(27,448
)
|
|
Treasury
stock, at cost
|
(1,484
)
|
(1,480
)
|
|
Accumulated
other comprehensive loss
|
(1,772
)
|
(1,234
)
|
|
Total
stockholders' (deficit) equity
|
(1,920
)
|
1,068
|
|
Total
liabilities and stockholders' (deficit) equity
|
$
37,507
|
$
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
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$
25,287
|
$
36,484
|
$
85,129
|
$
128,726
|
|
Purchased
services and materials, at cost
|
12,234
|
21,365
|
44,473
|
80,483
|
|
Direct
costs of services and overhead
|
11,093
|
14,276
|
34,773
|
41,468
|
|
GROSS
PROFIT
|
1,960
|
843
|
5,883
|
6,775
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
2,846
|
3,032
|
9,179
|
9,203
|
|
Goodwill
Impairment
|
-
|
15,931
|
-
|
15,931
|
|
Intangible
Impairment
|
-
|
2,938
|
-
|
2,938
|
|
OPERATING
(LOSS)
|
(886
)
|
(21,058
)
|
(3,296
)
|
(21,297
)
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
|
|
Interest
income
|
(6
)
|
(10
)
|
(13
)
|
(10
)
|
|
Interest
expense
|
597
|
189
|
918
|
540
|
|
(LOSS)
BEFORE INCOME TAXES
|
(1,477
)
|
(21,237
)
|
(4,201
)
|
(21,827
)
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
-
|
(7,952
)
|
6
|
(8,176
)
|
|
|
|
|
|
|
|
NET
(LOSS)
|
(1,477
)
|
(13,285
)
|
(4,207
)
|
(13,651
)
|
|
|
|
|
|
|
|
NET
(LOSS) PER SHARE-BASIC and DILUTED
|
$
(0.15
)
|
$
(1.34
)
|
$
(0.42
)
|
$
(1.39
)
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC
|
9,901
|
9,885
|
9,925
|
9,849
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING-DILUTED
|
9,901
|
9,885
|
9,925
|
9,849
|
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
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
COMPREHENSIVE
LOSS
|
|
|
|
|
|
Net
Loss
|
$
(1,477
)
|
(13,285
)
|
$
(4,207
)
|
(13,651
)
|
Foreign
currency translation adjustments
|
(180
)
|
(28
)
|
(538
)
|
(210
)
|
|
TOTAL COMPREHENSIVE LOSS, NET OF TAX
|
(1,657
)
|
(13,313
)
|
(4,745
)
|
(13,861
)
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VERSAR, INC. AND SUBSIDIARIES
|
Consolidated
Statement of Changes in Stockholders' (Deficit) Equity
|
Nine
Months Ended March 31, 2017 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
|
66
|
-
|
217
|
-
|
-
|
-
|
-
|
217
|
|
Treasury
stock
|
-
|
-
|
-
|
-
|
-
|
(4
)
|
-
|
(4
)
|
|
Warrants
|
-
|
-
|
1,544
|
-
|
-
|
-
|
-
|
1,544
|
|
Net
loss
|
-
|
-
|
-
|
(4,207
)
|
-
|
-
|
-
|
(4,207
)
|
|
Foreign Currency
Translation Adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
(538
)
|
(538
)
|
|
Balance
at March 31, 2017 (unaudited)
|
10,283
|
$
102
|
$
32,889
|
$
(31,655
)
|
(331
)
|
$
(1,484
)
|
$
(1,772
)
|
$
(1,920
)
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VERSAR, INC. AND SUBSIDIARIES
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
For the
Nine Months Ended
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$
(4,207
)
|
$
(13,651
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
2,335
|
2,378
|
|
Change
in contingent notes
|
(371
)
|
-
|
|
Non-cash
interest expense
|
349
|
|
|
Provision
for (recovery of) doubtful accounts receivable
|
133
|
(406
)
|
|
(Benefit)
for income taxes expense
|
-
|
(7,737
)
|
|
Share
based compensation
|
217
|
285
|
|
Goodwill
impairment
|
-
|
15,931
|
|
Intangibles
impairment
|
-
|
2,938
|
|
Changes
in assets and liabilities:
|
|
|
|
Decrease
in accounts receivable
|
22,685
|
19,983
|
|
(Increase)
decrease in income tax receivables
|
(7
)
|
855
|
|
(Increase)
in prepaid and other assets
|
(890
)
|
(110
)
|
|
Decrease
(increase) in inventories
|
33
|
(91
)
|
|
(Decrease)
in accounts payable
|
(5,266
)
|
(21,064
)
|
|
Decrease
(increase) in accrued salaries and vacation
|
459
|
(465
)
|
|
(Increase)
decrease in other assets and liabilities
|
(6,361
)
|
2,046
|
|
Net
cash provided by operating activities
|
9,109
|
892
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(102
)
|
(459
)
|
|
Payment
for JCSS acquisition, net of cash acquired
|
-
|
(10,460
)
|
|
Net
cash used in investing activities
|
(102
)
|
(10,919
)
|
|
Cash
flows from financing activities:
|
|
|
|
Borrowings
on line of credit
|
52,918
|
48,540
|
|
Repayments
on line of credit
|
(60,778
)
|
(32,604
)
|
|
Loan
for JCSS acquisition
|
-
|
1,667
|
|
Repayment
of Loan for JCSS acquisition
|
(1,329
)
|
-
|
|
Repayment
of Loan for Waller Purchase
|
-
|
(4,477
)
|
|
Repayments
of notes payable
|
(327
)
|
(2,206
)
|
|
Purchase
of treasury stock
|
(4
)
|
(18
)
|
|
Net
cash (used in) provided by financing activities
|
(9,520
)
|
10,902
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
(49
)
|
(18
)
|
|
Net
decrease (increase) in cash and cash equivalents
|
(562
)
|
883
|
|
Cash
and cash equivalents at the beginning of the period
|
1,549
|
2,109
|
|
Cash
and cash equivalents at the end of the period
|
$
987
|
$
2,992
|
|
Supplemental
disclosure of cash and non-cash activities:
|
|
|
|
Contingent
consideration payable related to JCSS acquisition
|
$
-
|
$
3,154
|
|
Cash
paid for interest
|
$
569
|
$
540
|
|
Cash
paid for income taxes
|
$
589
|
$
44
|
|
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- and nine- 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 March 31, 2017 and April 1,
2016 each included 13 weeks. Fiscal 2017 will include 52 weeks
and fiscal 2016 included 53 weeks. The extra week occurred in
the period ended December 30, 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
adopted 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 nine month periods ended March 31, 2017 and April
1, 2016.
|
|
For the
Three Months Ended
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
|
|
|
|
|
ECM
|
$
12,441
|
$
23,960
|
$
47,546
|
$
85,850
|
|
ESG
|
8,695
|
8,279
|
24,810
|
28,775
|
|
PSG
|
4,151
|
4,245
|
12,773
|
14,101
|
|
|
$
25,287
|
$
36,484
|
$
85,129
|
$
128,726
|
|
|
|
|
|
|
|
GROSS
PROFIT (a)
|
|
|
|
|
|
ECM
|
$
647
|
$
893
|
$
2,632
|
$
3,945
|
|
ESG
|
908
|
248
|
2,339
|
2,466
|
|
PSG
|
405
|
(298
)
|
912
|
364
|
|
|
$
1,960
|
$
843
|
$
5,883
|
$
6,775
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
2,846
|
3,032
|
9,179
|
9,203
|
|
Goodwill
Impairment
|
-
|
15,931
|
-
|
15,931
|
|
Intangible
Impairment
|
-
|
2,938
|
-
|
2,938
|
|
OPERATING
INCOME (LOSS)
|
$
(886
)
|
$
(21,058
)
|
$
(3,296
)
|
$
(21,297
)
|
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 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 is
presented within other long-term liabilities on the condensed
consolidated balance sheet as of March 31, 2017. 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 VSS. 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
|
$
8,850
|
$
7,531
|
|
Commercial
|
1,850
|
11,159
|
|
Unbilled
receivables
|
|
|
|
U.S.
Government
|
14,621
|
20,883
|
|
Commercial
|
-
|
9,103
|
|
Total
receivables
|
25,321
|
48,676
|
|
Allowance
for doubtful accounts
|
(868
)
|
(1,001
)
|
|
Accounts
receivable, net
|
$
24,453
|
$
47,675
|
Unbilled receivables represent amounts earned that
have not yet been billed and other amounts that 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 the contract to
do 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 representing a significant portion
of the outstanding receivable balance.
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Goodwill has been 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
March 31, 2017 and July 1, 2016, as well as their respective
amortization periods, is as follows (in thousands):
|
|
|
|
|
|
|
|
As of
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$
12,409
|
$
(6,354
)
|
-
|
$
6,055
|
5-15
yrs
|
|
Marketing-related
|
1,084
|
(1,084
)
|
-
|
-
|
2-7
yrs
|
|
Technology-related
|
841
|
(841
)
|
-
|
-
|
7
yrs
|
|
Contractual-related
|
1,199
|
(1,027
)
|
-
|
172
|
1.75
yrs
|
|
Non-competition-related
|
211
|
(64
)
|
-
|
147
|
5
yrs
|
|
Total
|
$
15,744
|
$
(9,370
)
|
$
-
|
$
6,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $0.9 million for the three and nine months periods ending March
31, 2017. Expected future amortization expense in the fiscal
quarters and years subsequent to March 31, 2017 is as
follows:
|
|
|
|
|
|
|
2017
|
$
294
|
|
2018
|
938
|
|
2019
|
938
|
|
2020
|
938
|
|
2021
|
938
|
|
Thereafter
|
2,328
|
|
Total
|
$
6,374
|
NOTE 7 – INVENTORY
The
Company’s inventory balance includes the
following:
|
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
$
45
|
$
132
|
|
Finished
Goods
|
24
|
94
|
|
Work-in-process
|
19
|
7
|
|
Reserve
|
(14
)
|
(12
)
|
|
Total
|
$
74
|
$
221
|
NOTE 8 – OTHER CURRENT LIABILITIES
The
Company’s other current liabilities balance includes the
following:
|
|
|
|
|
|
|
|
|
|
|
Project
related reserves
|
$
350
|
$
867
|
|
ARA
settlement
|
1,200
|
1,200
|
|
Lease
Loss reserve
|
349
|
370
|
|
Payroll
related
|
(5
)
|
110
|
|
Deferred
rent
|
976
|
330
|
|
Earn-out
obligations
|
1,577
|
1,577
|
|
Deferred
compensation obligation
|
148
|
148
|
|
Legal
reserves
|
33
|
165
|
|
Severance
accrual
|
-
|
96
|
|
Acquired
capital lease liability
|
(29
)
|
97
|
|
Warranty
Reserve
|
230
|
302
|
|
PPS
Reserve
|
1,314
|
1,314
|
|
Other
|
700
|
1,148
|
|
Total
|
$
6,843
|
$
7,724
|
As of
March 31, 2017, 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, 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 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 March 31, 2017 and July 1,
2016.
|
|
|
|
|
|
|
|
|
|
Balance,
July 1, 2016
|
$
698
|
|
Lease
loss accruals
|
-
|
|
Rent
payments
|
(234
)
|
|
Balance,
March 31, 2017
|
$
464
|
|
|
|
|
|
|
|
|
|
|
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 over time an aggregate principal balance of $6.0
million, which is 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 March
31, 2017, the outstanding principal balance owed to 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 is aggressively
defending this lawsuit. 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) 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. The Loan Amendment increased the current interest on
the revolving credit facility to the LIBOR Daily floating rate plus
5%. 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 March 31, 2017, the Company’s outstanding principal
debt balance not including amounts due on the revolving line of
credit was $4.5 million comprised of the term loan balance under
the Loan Agreement of $1.0 million, and the JMWA Note balance of
$3.5 million. The following maturity schedule presents all
outstanding term debt as March 31, 2017.
|
|
|
|
|
|
|
2017
|
4,549
|
|
2018
|
-
|
|
2019
|
-
|
|
2020
|
-
|
|
2021
|
-
|
|
Total
|
4,549
|
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. The Company had $14.9 million
outstanding under its line of credit for the fiscal year ended July
1, 2016. 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 Loan Amendment increased the
current interest on the revolving credit facility to the LIBOR
Daily floating rate plus 5%.
The Company had $5.9
million outstanding under its line of credit as of March 31,
2017.
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 the Lender 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
|
277%
|
|
Expected life (in years)
|
5
|
|
Risk-free interest rate
|
1.15%
|
|
Expected dividend yield
|
0.00%
|
On
March 31, 2017, the Company failed its minimum quarterly
consolidated EBITDA covenant set forth in the Amendment to the Loan
Agreement, which constitutes an Event of Default under the Loan
Agreement. On May 8, 2017, the Lender and 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.
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.
.
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
|
|
For the Six Months Ended
|
|
|
March 31, 2017
|
|
April 1, 2016
|
|
March 31, 2017
|
|
April 1, 2016
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Weighted average common shares outstanding-basic
|
9,901
|
|
9,850
|
|
9,925
|
|
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
|
|
9,925
|
|
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. For the three and nine months ended March 31, 2017 and April
1, 2016, the common stock equivalent shares were, as
follows:
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
March 31, 2017
|
|
April 1, 2016
|
|
March 31, 2017
|
|
April 1, 2016
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock unit awards
|
37
|
|
-
|
|
49
|
|
-
|
|
Shares of common stock issuable upon conversion of
warrants
|
1,095
|
|
-
|
|
1,095
|
|
-
|
|
Common stock equivalent shares excluded from diluted net loss per
share
|
1,132
|
|
-
|
|
1,144
|
|
-
|
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 March 31, 2017, 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.
Share-based
compensation expense relating to all outstanding restricted stock
unit awards totaled approximately $37,000 and $217,000 for the
three months and nine months ended March 31, 2017, 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 0% and 37.5% for the first
nine months of fiscal 2017 and 2016, respectively.
NOTE 14 – NYSE MKT LLC COMPLIANCE
On
April 6, 2017, the Company received a letter from the NYSE MKT (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.
NOTE 15 – SUBSEQUENT EVENTS
Effective April 15, 2017 the U.S. Army Reserve
88
th
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 ends April 15,
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.
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 and
nine month periods ended March 31, 2017 and April 1, 2016. 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
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 (ESG), and (3) Professional
Services (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 materials
management.
Business Segments
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 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 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
USAF customers, providing a fast track, efficient method for
execution of all types of facility repairs, renovations and
construction. During the months of December 2016 through February
2017, the work on 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 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 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 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 USAF, USA, USAR, NGB,
FAA, BLM, and DOJ through the DEA. Versar provides on-site services
that enhance a customer’s mission through the use of subject
matter experts who are fully dedicated to accomplish mission
objectives. These services are particularly attractive as the
federal agencies and DOD continue to be impacted by budgetary
pressures. This segment focuses on providing onsite support to
government clients to augment their capabilities and
capacities.
Our
services include:
● Facilities
and operational support by delivering comprehensive facility
maintenance, life cycle management plans minimizing operating
costs, space utilization, operational planning/forecasting, and
automated planning technical support services ensuring operational
readiness of reserve forces to the USAR.
● Assisting
the USAR 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 NGB.
● Providing
the DOJ’s DEA 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 such
a 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 and similar such
set-aside companies. 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.
Versar is now 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 March 31, 2017, 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 third quarter were
approximately $0.3 million of costs related to the requirements of
the 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 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 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 nine months ended March 31, 2017 and April 1,
2016:
|
|
For the
Three Months Ended
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$
25,287
|
$
36,484
|
$
85,129
|
$
128,726
|
|
Purchased
services and materials, at cost
|
12,234
|
21,366
|
44,473
|
80,484
|
|
Direct
costs of services and overhead
|
11,093
|
14,275
|
34,773
|
41,467
|
|
GROSS
PROFIT
|
$
1,960
|
$
843
|
$
5,883
|
$
6,775
|
|
Gross
Profit percentage
|
8
%
|
2
%
|
7
%
|
5
%
|
|
|
|
|
|
|
|
Selling
general and administrative expenses
|
2,846
|
3,032
|
9,179
|
9,203
|
|
Goodwill
Impairment
|
-
|
15,931
|
-
|
15,931
|
|
Intangible
Impairment
|
-
|
2,938
|
-
|
2,938
|
|
OPERATING
(LOSS) INCOME
|
$
(886
)
|
$
(21,058
)
|
$
(3,296
)
|
$
(21,297
)
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
-
|
|
Interest
(income)
|
(6
)
|
(10
)
|
(13
)
|
(10
)
|
|
Interest
expense
|
597
|
189
|
918
|
540
|
|
(LOSS)
INCOME BEFORE INCOME TAXES
|
$
(1,477
)
|
$
(21,237
)
|
$
(4,201
)
|
$
(21,827
)
|
Three Months Ended March 31, 2017 compared to the Three Months
Ended April 1, 2016
Gross
revenue for the third quarter of fiscal 2017 was
$25.3 million, a decrease of 31% compared to
$36.5 million during the third quarter of the last fiscal
year. This decrease is driven by lower revenue year over year on
the DAFB project, down $6.5 million, PBR projects, down $2.2
million and VSS projects, was $2.1 million. In total, these three
drivers accounted for a revenue decline of approximately $10.8
million. The DAFB project, as reported in previous periodic reports
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.
To
offset some of those revenue decreases, we experienced contract
revenue growth such as the contributions of approximately $1.6
million from the Andrews Air Force Base project, and work overseas
in Iraq and Kuwait, all within the ECM segment. Within ESG,
shoreline stabilization projects contributed $ 1.1 million and
within PSG, staff augmentation services related to the
88
th
RSC
project contributed $1.9 million.
Purchased services
and materials for the third quarter of fiscal 2017 was $12.2
million, a decrease of 43% compared to $21.4 million
during the third 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 will decline as well.
Direct
costs of services and overhead for the third quarter of fiscal
year 2017 were $11.1 million, a decrease of 22%
compared to $14.4 million during the third quarter of the last
fiscal year. Part of this decrease is a result of cost cutting
measures within the PSG segment.
Gross
profit for the third quarter of fiscal 2017 was $2.0 million,
compared to a gross profit of $0.8 million during the third
quarter of the previous fiscal year. Overall gross profit margin
increased from 2% to 8%. VSS contributed gross profit of
$1.0 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 profit for the DAFB project of $0.2
million. 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 third quarter of fiscal 2017
increased to 11% of gross revenue from 8% of gross revenue when
compared to the third quarter of last fiscal year. Although
increasing as a percentage of gross revenue, SG&A expenses
remained consistent with the third quarter of last fiscal year in
absolute dollars. Included in third quarter SG&A expenses were
approximately $0.3 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
the Lender's outside auditors and associated costs. Despite this
additional expense, the Company continued to control indirect costs
during the quarter, including a renegotiation of its office lease
in Springfield, Virginia and rent savings from the consolidation of
ESG and VSS offices in Germantown, Maryland.
Loss
before income taxes, for the third quarter of fiscal 2017 was $1.5
million, compared to loss before income taxes, of $22.2 million for
the third quarter of the last fiscal year. In the third quarter of
fiscal 2016, the Company recorded $18.9 million in goodwill and
intangible impairment charges. The loss is also attributable to the
decline in revenue and gross profit.
Nine Months Ended March 31, 2017 compared to the Nine Months Ended
April 1, 2016
Gross
revenue for the first nine months of fiscal 2017 was
$85.1 million, a decrease of 34% compared to
$128.7 million during the first nine months of the last fiscal
year. This decrease is driven by lower revenue year over year on
the DAFB project, down $26.1 million, PBR projects, down $6.1
million, VSS projects, was $4.1 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 $39.1 million. The
DAFB project, as reported in previous periodic reports and earnings
calls, was scheduled to scale back significantly from fiscal 2016
to fiscal 2017. In anticipation of that, we aggressively sought
higher margin projects, such as the successful new initiative in
POL work. The decline in the PBR program was also anticipated, as
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, $0.9 million from the
Hanscom project, and $0.2 million of new construction management
projects in Iraq and Kuwait, all within ECM. Within ESG, the
shoreline stabilization projects contributed $2.9 million and PSG
contributed $4.3 million for various staff augmentation services,
including the recently awarded project with the 88
th
RSC, at $3.9
million.
Purchased services
and materials for the first nine months of fiscal 2017 was
$44.5 million, a decrease of 45% compared to
$80.5 million during the first nine 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 charge of $0.6 million for additional costs
incurred to complete a fixed price project with the 88
th
RSC within our PSG
segment.
Direct
costs of services and overhead for the first nine months of
fiscal 2017 were $34.8 million, a decrease of 16%
compared to $41.5 million during the first nine months of the
last fiscal year.
Gross
profit for the first nine months of fiscal 2017 was $5.9
million, compared to a gross profit of $6.8 million during the
first nine months of the previous fiscal year. Overall, gross
profit increased from 5% to 7%. The increase in gross profit was
largely attributable to 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 the 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 $2.7 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 nine months of fiscal
2017 increased to 11% of gross revenue from 7% of gross revenue.
Although increasing as a percentage of revenue, when compared to
the first nine months of last fiscal year, while SG&A expenses
remained flat in absolute dollars. Included in nine months of
SG&A expenses were approximately $0.9 million related to the
requirements of the Loan Amendment which did not occur during the
third quarter of the previous fiscal year. This includes costs
associated with the retention of the CRO, and the costs of the
Lender's outside auditors and fees associated with the Amendment.
In addition, the Company paid for two fiscal 2017 audits totaling
$0.7 million, of which $0.4 million were duplicate costs. Legal
fees for the first nine months increased $0.6 million from fiscal
2016 due to various disputes and related matters that arose during
the first nine months. 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 nine months of fiscal 2017 was
$4.2 million, compared to loss before income taxes, of
$21.8 million for the first nine months of the last fiscal
year. In the third quarter of fiscal 2016, the Company recorded
$18.9 million in goodwill and intangible impairment charges. This
loss is also attributable to the decline in revenue and gross
profit as discussed above.
Backlog
We
report “funded” backlog, which represents orders for
goods and services for which firm contractual commitments have been
received. As of March 31, 2017, funded backlog was approximately
$151.5 million, an increase of 11% compared to approximately
$136.0 million of backlog at the end of fiscal 2016. The
increase in backlog was attributable to an improved contract awards
environment.
Results
of Operations by Reportable Segment
The
tables below set forth our operating results by reportable segment
for the three and nine month periods ended March 31, 2017 and April
1, 2016. (Dollar amounts in following tables are in
thousands).
|
Engineering and Construction Management
|
|
|
|
|
|
|
For the
Three Months Ended
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
(in thousands)
|
(in thousands)
|
|
GROSS
REVENUE
|
$
12,441
|
$
23,960
|
$
47,546
|
$
85,850
|
|
Purchased
services and materials, at cost
|
8,060
|
17,761
|
33,220
|
67,410
|
|
Direct
costs of services and overhead
|
3,734
|
5,306
|
11,694
|
14,495
|
|
GROSS
PROFIT
|
$
647
|
$
893
|
$
2,632
|
$
3,945
|
|
Gross
profit percentage
|
5
%
|
4
%
|
6
%
|
5
%
|
Three Months Ended March 31, 2017 compared to the Three
Months Ended April 1, 2016
Gross
revenue for the third quarter of fiscal 2017 was
$12.4 million, a decrease of 48% compared to
$24.0 million during the third quarter of fiscal 2016. The
principal drivers of this decrease are the $6.6 million in lower
revenues associated with the DAFB project, $2.1 million related to
the lack of reseller agreement with JCI to purchase critical
equipment within VSS and $0.3 million in work related to the
Company’s subsidiary, PPS, which was divested in April
2017.
In
addition, purchased services declined on multiple contracts, which
lowered revenue from the comparative quarter
.
The Andrews Air Force Base project
contributed approximately $1.6 million and work overseas in Iraq
and Kuwait contributed approximately $3.5
million.
Gross
profit was $0.6 million over the period, compared to a gross
profit of $0.9 million during the third quarter of the last
fiscal year. During the third quarter of fiscal 2017, overall
profit margins increased from 4% to 5%. VSS contributed gross
profit of $1.0 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
Requests for Equitable Adjustments (REA). Additionally, we
experienced a decline in gross profit for the DAFB project as we
negotiate with the client for contract modifications.
Nine Months Ended March 31, 2017 compared to the Nine Months Ended
April 1, 2016
Gross
revenue for the first nine months of fiscal 2017 was
$47.5 million, a decrease of 45% compared to
$85.9 million during the first nine months of the last fiscal
year. The drivers of this decrease are the $26.1 million in lower
revenues associated with the DAFB project, and $2.1 million related
to the decrease in work at Mountain Home Air Force Base project,
$2.7 million at the Laughlin Air Force Base Centralized Aircraft
Support System project and $0.9 million in work related to our
subsidiary, PPS, which was sold in April 2017.
The
Hanscom project contributed revenues of $0.9 million, new Iraq and
Kuwait construction management projects contributed revenues of
$0.2 million, and
$1.4 million
on
our Ft. Belvoir project.
Gross
profit was $2.6 million over this period, compared to a gross
profit of $3.9 million during the first nine months of the
last fiscal year. During the first nine months of fiscal 2017,
overall profit margins increased from 5% to 6%. VSS
contributed gross profit of $2.7 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 nine months ended March 31, 2017. We incurred costs
on several projects which will be recovered via negotiations for an
REA. The Company also experienced a decrease in gross profit from
the continued wind-down in our Title II work in Iraq and
Afghanistan.
|
Environmental Services Group
|
|
|
|
|
|
|
For the
Three Months Ended
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
(in thousands)
|
(in thousands)
|
|
GROSS
REVENUE
|
$
8,695
|
$
8,279
|
$
24,810
|
$
28,775
|
|
Purchased
services and materials, at cost
|
3,787
|
3,177
|
10,132
|
11,558
|
|
Direct
costs of services and overhead
|
4,000
|
4,854
|
12,339
|
14,751
|
|
GROSS
PROFIT
|
$
908
|
$
248
|
$
2,339
|
$
2,466
|
|
Gross
profit percentage
|
10
%
|
3
%
|
9
%
|
9
%
|
Three Months Ended March 31, 2017 compared to the Three Months
Ended April 1, 2016
Gross
revenue for the third quarter of fiscal 2017 was
$8.7 million, a increase of 5% compared to
$8.3 million during the third quarter of the last fiscal year.
This increase in revenue was due to a contract award for a
commercial client $0.5 million, weather-related services for $0.4
million and increases in the shoreline projects of $1.1 million
offset by 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.
Gross
profit for the third quarter of fiscal 2017 was
$0.9 million, compared to $0.2 million in the third quarter of
the last fiscal year. During the third quarter of fiscal 2017,
overall profit margins have increased from 3% to 10%. Related to
cost savings initiatives implemented in fiscal 2016.
Nine Months Ended March 31, 2017 compared to the Nine Months Ended
April 1, 2016
Gross
revenue for the first nine months of fiscal 2017 was
$24.8 million, a decrease of 14% compared to
$28.8 million during the first nine 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 totaling $2.81 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 PBR 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. The revenue
decline was partially offset by a contract award for
$0.5 million
from a commercial client, performance of weather-related services
for $1.0 million, and increases in the shoreline stabilization
projects of $2.9 million.
Gross
profit for the first nine months of fiscal 2017 was
$2.3 million, compared to $2.5 million in the first nine
months of the last fiscal year. During the first nine months of
fiscal 2017, overall profit margins have increased approximately
one percentage point from 8.6% to 9.4%. This is a result of a mix
shift in current project work towards higher gross profit projects.
As a percentage of revenue, purchased services has declined and as
work on the PBR program has declined.
|
Professional Services Group
|
|
|
|
|
|
|
For the
Three Months Ended
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
(in
thousands)
|
(in thousands)
|
|
GROSS
REVENUE
|
$
4,151
|
$
4,245
|
$
12,773
|
$
14,101
|
|
Purchased
services and materials, at cost
|
387
|
429
|
1,121
|
1,516
|
|
Direct
costs of services and overhead
|
3,359
|
4,114
|
10,740
|
12,221
|
|
GROSS
PROFIT
|
$
405
|
$
(298
)
|
$
912
|
$
364
|
|
Gross
profit percentage
|
10
%
|
-7
%
|
7
%
|
3
%
|
Three Months Ended March 31, 2017 compared to the Three
Months Ended April 1, 2016
Gross
revenue for the third quarter of fiscal 2017 was essentially flat
at $4.2 million from the third quarter of the last fiscal
year. Revenue increases in the Facilities Management Unit work of
$0.1 million, Army Stationing and Installation Plan (ASIP) project
of $0.1 million, and the staff augmentation services contract
related to the 88
th
RSC project of $1.9
million have offset the decline in revenue due to the loss of
several task orders in PSG’s historical business line. 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 third quarter of fiscal 2017 was $0.4 million,
compared to gross profit loss of $0.3 million in the third
quarter of the last fiscal year. The improvement is a result of
cost cutting measures in non-project related costs initiated during
fiscal 2016.
Nine Months Ended March 31, 2017 compared to the Nine Months Ended
April 1, 2016
Gross
revenue for the first nine months of fiscal 2017 was
$12.8 million, a decrease of 9% compared to
$14.1 million during the first nine 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, ASIP project, and 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 nine months of fiscal 2017 was
$0.9 million, compared to gross profit of $0.4 million in
the first nine months of the last fiscal year, largely due to cost
cutting measures in non-project related costs initiated during
fiscal 2016. Additionally, we experienced a one-time charge of $0.6
million for additional costs to complete a fixed price project with
the 88
th
RSC project. Overall, gross margin improved to 7% for the first
nine months of the current fiscal year, compared to 3% for the
prior fiscal year.
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 and
Consolidated Asset 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 one or more of 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 pursuant to the Forbearance Agreements
and the Amendment, the Company must pursue alternative sources of
funding for its ongoing business operations.
As of
March 31, 2017 the available balance on the Company’s
revolving credit facility was approximately $7.1
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.
On
March 31, 2017, the Company failed its minimum quarterly
consolidated EBITDA covenant set forth in the Amendment to the Loan
Agreement, which constitutes an Event of Default under the Loan
Agreement. On May 8, 2017, the Lender and 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.
Our
working capital as of March 31, 2017 was negative
$8.5 million, compared to negative working capital at July 1,
2016 of $2.2 million. Our current ratio at March 31, 2017
was 0.77 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 4 –
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 $1.0 million at the end of March 31, 2017, our
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 March 31, 2017 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.