Intangible
Assets
In
connection with our acquisition of VSS in prior years, the Company
identified certain intangible assets. These intangible assets were
customer-related, contractual-related and non-competition-related.
A summary of the Company’s intangible asset balances as of
September 30, 2016 and July 1, 2016, as well as their respective
amortization periods, is as follows (in thousands):
|
|
|
|
|
|
Amortization
Period
|
|
As
of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$
12,409
|
$
(6,138
)
|
-
|
$
6,271
|
5-15
yrs
|
|
Marketing-related
|
1,084
|
(1,084
)
|
-
|
-
|
2-7
yrs
|
|
Technology-related
|
841
|
(841
)
|
-
|
-
|
7
yrs
|
|
Contractual-related
|
1,199
|
(685
)
|
-
|
514
|
1.75
yrs
|
|
Non-competition-related
|
211
|
(42
)
|
-
|
169
|
5
yrs
|
|
Total
|
$
15,744
|
$
(8,790
)
|
-
|
$
6,954
|
|
|
|
|
|
|
|
Amortization
Period
|
|
As
of July 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$
12,409
|
$
(2,407
)
|
$
(3,618
)
|
$
6,384
|
5-15
yrs
|
|
Marketing-related
|
1,084
|
(980
)
|
(104
)
|
-
|
2-7
yrs
|
|
Technology-related
|
841
|
(751
)
|
(90
)
|
-
|
7
yrs
|
|
Contractual-related
|
1,199
|
(514
)
|
-
|
685
|
1.75
yrs
|
|
Non-competition-related
|
211
|
(32
)
|
-
|
179
|
5
yrs
|
|
Total
|
$
15,744
|
$
(4,684)
|
$
(3,812)
|
$
7,248
|
|
Amortization
expense for intangible assets was approximately $0.3 million for
the three months ending September 30, 2016. Expected future
amortization expense in the fiscal quarter and years subsequent to
September 30, 2016 is as follows:
|
Years
|
|
|
|
|
|
2017
|
661
|
|
2018
|
938
|
|
2019
|
938
|
|
2020
|
938
|
|
2021
|
938
|
|
Thereafter
|
2,541
|
|
Total
|
$
6,954
|
NOTE 7
– INVENTORY
The
Company’s inventory balance includes the
following:
|
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
$
107
|
$
132
|
|
Finished
Goods
|
73
|
94
|
|
Work-in-process
|
11
|
7
|
|
Reserve
|
(14
)
|
(12
)
|
|
Total
|
$
177
|
$
221
|
NOTE 8 –
OTHER CURRENT LIABILITIES
The
Company’s other current liabilities balance includes the
following:
|
|
|
|
|
|
|
|
|
|
|
Project
related reserves
|
$
907
|
$
867
|
|
ARA
reserve
|
1,200
|
1,200
|
|
Lease
loss reserve
|
370
|
370
|
|
Payroll
related
|
427
|
110
|
|
Deferred
rent
|
110
|
330
|
|
Earn-out
obligations
|
1,577
|
1,577
|
|
Deferred
compensation obligation
|
148
|
148
|
|
Legal
reserves
|
165
|
165
|
|
Severance
accrual
|
-
|
96
|
|
Acquired
capital lease liability
|
83
|
97
|
|
Warranty
reserve
|
259
|
302
|
|
PPS
reserve
|
1,314
|
1,314
|
|
Other
|
341
|
1,148
|
|
Total
|
$
6,901
|
$
7,724
|
As of
September 30, 2016, other accrued liabilities include accrued
legal, audit, value added tax liabilities, and foreign entity
obligations.
NOTE 9
– ABANDONED LEASED FACILITIES
In
March 2016, the Company abandoned its field office facilities in
Mount Pleasant, SC and Lynchburg, VA, both within the ESG segment.
Although the Company remains obligated under the terms of these
leases for the rent and other costs associated with these leases,
the Company made the decision to cease using these spaces on April
1, 2016, and has no foreseeable plans to occupy them in the future.
Therefore, 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 to recognize the costs of exiting this space. The
liability is equal to the total amount of rent and other direct
costs for the period of time the space is expected to remain
unoccupied plus the present value of the amount by which the rent
paid by the Company to the landlord exceeds any rent paid to the
Company by a tenant under a sublease over the remainder of the
lease terms, which expires in February 2019. The Company also
recognized $0.2 million of costs in the quarter ending July 1, 2016
for the associated leasehold improvements related to the San
Antonio, TX office.
The
Company has entered into subleases for its locations in San
Antonio, TX (September 2016) and Mount Pleasant, SC (April 2017).
Both of these subleases will continue for the duration of the
respective underlying leases.
The
following table summarizes information related to our accrued lease
loss liabilities at September 30, 2016 and July 1,
2016.
|
|
|
|
|
|
|
|
|
|
Balance, July 1,
2016
|
$
698
|
|
Lease loss
accruals
|
-
|
|
Rent
payments
|
(80
)
|
|
Balance, September 30,
2016
|
$
618
|
|
|
|
|
|
|
|
|
|
|
Balance, June 26,
2015
|
$
-
|
|
Lease loss
accruals
|
718
|
|
Rent
payments
|
(20
)
|
|
Balance, July 1,
2016
|
$
698
|
NOTE 10
– DEBT
Notes
Payable
As
part of the purchase price for J.M. Waller Associates Inc. (JMWA)
in July 2014, the Company agreed to pay to the three JMWA
stockholders with an aggregate principal balance of up to $6.0
million, which are payable quarterly over a four and a half-year
period with interest accruing at a rate of 5% per year. Accrued
interest is recorded in the consolidated balance sheet. As of
September 30, 2016, the outstanding principal balance of the JMWA
stockholders was $3.5 million.
On
October 3, 2016 the Company did not make the quarterly principal
payments to the three individuals who were the former owners of
JMWA. However, the Company continued to make monthly interest
payments through the end of calendar year 2016 at an increased
interest rate (seven percent per annum, rather than five percent
per annum). On November 21, 2016, two of the former JMWA
shareholders filed an action against the Company in Fairfax County
District Court, Virginia for failure to make such payments and to
enforce their rights to such payments. The Company will
aggressively defend its interests. During the second quarter of
fiscal 2017, the Company moved the long term portion of the debt to
short term notes payable for a total of $3.5 million. In January
2017, the Company stopped making the interest only payments to two
of the former owners and continues to make the monthly interest
only payment at seven percent per annum to one former
owner.
On
September 30, 2015, the Company, together with certain of its
domestic subsidiaries acting as guarantors (Guarantors), entered
into a Loan Agreement with the Bank of America, N.A. (Lender)
and letter of credit issuer for a revolving credit facility in the
amount of $25.0 million, $14.6 million of which was drawn on the
date of closing, and a term facility in the amount of $5.0 million,
which was fully drawn on the date of closing.
The maturity date of the revolving credit facility
is September 30, 2018 and the maturity date of the term
facility was originally March 31, 2017 (the latter was
subsequently changed to September 30, 2017 by Amendment). The
principal amount of the term facility amortizes in quarterly
installments equal to $0.8 million with no penalty for prepayment.
Interest accrues on the revolving credit facility and the term
facility at a rate per year equal to the LIBOR Daily Floating Rate
(as defined in the Loan Agreement) plus 1.95% and was payable in
arrears on December 31, 2015 and on the last day of each
quarter thereafter. Obligations under the Loan Agreement are
guaranteed unconditionally and on a joint and several basis by the
Guarantors and secured by substantially all of the assets of Versar
and the Guarantors. The Loan Agreement contains customary
affirmative and negative covenants and during fiscal 2016 contained
financial covenants related to the maintenance of a Consolidated
Total Leverage Ratio, Consolidated Senior Leverage Ratio,
Consolidated Fixed Charge Coverage Ratio and a Consolidated Asset
Coverage Ratio. On December 9, 2016 Versar, together with the
Guarantors, entered into an Amendment to the Loan Agreement with
the Lender
removing these covenants and adding a covenant
requiring Versar to maintain certain minimum quarterly consolidated
EBITDA amounts.
As
of September 30, 2016, the Company’s outstanding principal
term debt balance, not including amounts due on the revolving line
of credit, was $5.8 million comprised of the term loan balance
under the Loan Agreement of $1.9 million, and the JMWA Note balance
of $3.9 million. The following maturity schedule presents all
outstanding term debt as of September 30, 2016.
|
Years
|
|
|
|
|
|
2017
|
$
5,763
|
|
2018
|
-
|
|
2019
|
-
|
|
2020
|
-
|
|
2021
|
-
|
|
Total
|
$
5,763
|
|
|
|
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 was originally scheduled to mature on
September 30, 2018. The Company had $9.6 million
outstanding under its line of credit as of September 30, 2016. On
December 9, 2016 Versar, together with the Guarantors, entered into
a First Amendment and Waiver (the Amendment) to the Loan Agreement
among other things, reducing the maximum permitted under the
revolving line of credit facility to $13.0 million. The Company had
$9.6 million outstanding under its line of credit as of September
30, 2016.
The
Company adopted ASU No. 2015-13 to simplify the presentation of
debt issuance costs for the fiscal year ended July 1, 2016. $0.2
million of remaining unamortized cost associated with the Loan
Agreement as of July 1, 2016 is therefore no longer presented as a
separate asset - deferred charge on the consolidated balance sheet,
and instead reclassified as a direct deduction from the carrying
value of the line of credit.
Debt Covenants
During
the third and fourth quarters of fiscal 2016, following discussion
with the Lender, the Company determined that it was not in
compliance with the Consolidated Total Leverage Ratio covenant for
the fiscal quarters ended January 1, 2016, and April 1, 2016,
and the Consolidated Total Leverage Ratio covenant, Consolidated
Senior Leverage Ratio covenant and the Asset Coverage Ratio
covenant for the fiscal quarter ended April 1, 2016, which defaults
continued as of July 1, 2016. Each failure to comply with
these covenants constituted a default under the Loan Agreement. On
May 12, 2016, the Company, the Guarantors, and the Lender entered
into a Forbearance Agreement pursuant to which the Lender agreed to
forbear from exercising any and all rights or remedies available to
it under the Loan Agreement and applicable law related to these
defaults for a period ending on the earliest to occur of: (a) a
breach by the Company of any obligation or covenant under the
Forbearance Agreement, (b) any other default or event of default
under the Loan Agreement or (c) June 1, 2016 (the Forbearance
Period).
The Forbearance Period was subsequently extended
by additional Forbearance Agreements between the Company and the
Lender, through December 9, 2016. During the Forbearance
Period, the Company was allowed to borrow funds pursuant to the
terms of the Loan Agreement, consistent with current Company needs
as set forth in a required 13-week cash flow forecast and subject
to certain caps on revolving borrowings initially of $15.5 million
and reducing to $13.0 million. In addition, the Forbearance
Agreements provided that from and after June 30, 2016 outstanding
amounts under the credit facility will bear interest at the default
interest rate equal to the LIBOR Daily Floating Rate (as defined in
the Loan Agreement) plus 3.95%, required that the Company provide a
13 week cash flow forecast updated on a weekly basis to the Lender,
and waives any provisions prohibiting the financing of insurance
premiums for policies covering the period of July 1, 2016 to June
30, 2017 in the ordinary course of the Company’s business and
in amounts consistent with past practices. On December 9, 2016
Versar and the Guarantors, entered into an Amendment to the Loan
Agreement with the Lender, among other things, eliminating the
events of default.
The Lender has engaged an advisor to
review the Company’s financial condition on the
Lender’s behalf, and pursuant to the Forbearance Agreements
and the Amendment,
the Company must
pursue alternative sources of funding for its ongoing business
operations.
Additionally, the Lender required that the Company
provide it with 10 year warrants for the purchase of 10% of the
fully diluted common stock of the Company (or 1,095,222 shares)
with an exercise price of $.01 per share containing customary
provisions for warrants issued by public companies and which may be
exercised at any time after the earlier of an Event of Default
under the Loan agreement or August 30, 2017.
The Amendment
also required the payment of an Amendment fee of $0.3 million,
which was originally to be paid on the earlier of August 30,
2017 or demand upon an Event of Default, but was prepaid by
the Company in December 2016. If all obligations under the Loan
Agreement are paid in full prior to August 30, 2017 and no Event of
Default has occurred before such time, the Lender will return all
warrants, unexercised, and will waive and forgive (or repay to the
Company) the Amendment fee of $0.3 million. If the Company is
unable to raise additional financing, the Company will need to
adjust its operational plans so that the Company can continue to
operate with its existing cash resources. The actual amount of
funds that the Company will need will be determined by many
factors, some of which are beyond its control and the Company may
need funds sooner than currently anticipated.
As of
the fiscal quarter ended September 30, 2016, we are in compliance
with all covenants under the Amendment to the Loan
Agreement.
NOTE 11
– NET INCOME (LOSS) PER SHARE
Basic
net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the
period. Diluted net income per common share also includes common
stock equivalents outstanding during the period, if dilutive. The
Company’s common stock equivalent shares consist of shares to
be issued under outstanding stock options and unvested restricted
stock units.
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding-basic
|
9,885
|
9,808
|
|
Effect
of assumed exercise of options and vesting of restricted stock unit
awards, using the treasury stock method
|
-
|
-
|
|
Weighted
average common shares outstanding-diluted
|
9,885
|
9,808
|
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 September 30,
2016, a total of 754,503 restricted stock units have been
issued under the 2010 Plan and there are 248,497 shares
remaining available for future issuance of awards (including
restricted stock units) under the 2010 Plan.
During
the three month period ended September 30, 2016, the Company did
not award any restricted stock units to its executive officers and
employees. The total unrecognized compensation cost, measured on
the grant date, that relates to non-vested restricted stock awards
at September 30, 2016, was approximately $ 252,683. Share-based
compensation expense relating to all outstanding restricted stock
unit awards totaled approximately $99,579 and $90,837 for the three
months ended September 30, 2016 and September 25, 2015,
respectively. These expenses were included in direct costs of
services and overhead and SG&A expenses in the Company's
Condensed Consolidated Statements of Operations.
NOTE 13
– INCOME TAXES
The
effective tax rates were approximately 34.0% and 37.5% for the
first three months of fiscal 2017 and 2016,
respectively.
NOTE 14 – NYSE MKT LLC COMPLIANCE
On
October 17, 2016 the Company received a letter from the NYSE MKT
LLC (the Exchange) in which the Exchange determined that the
Company was not in compliance with Sections 134 and 1101 of the
Exchange’s Company Guide (the Company Guide) due to the
Company’s failure to timely file its Annual Report on Form
10-K with the Securities and Exchange Commission (SEC) for the year
ended July 1, 2016. The letter also stated that this failure was a
material violation of the Company’s listing agreement with
the Exchange and unless the Company took prompt corrective action,
the Exchange may suspend and remove the Company’s securities
from the Exchange. The Exchange also informed the Company that it
must submit a plan by November 16, 2016 advising the Exchange of
actions the Company has taken or will take to regain compliance
with the Company Guide by January 17, 2017. If the Exchange
accepted the plan, the Company would be subject to periodic
monitoring for compliance. If the Company failed to submit a plan,
or if the submitted plan was not accepted by the Exchange,
delisting proceedings would commence. Furthermore, if the plan was
accepted, but the Company was not in compliance with the Company
Guide by January 17, 2017, or if the Company does not make progress
consistent with the plan, the Exchange may initiate delisting
proceedings.
On
November 14, 2016, Versar filed a Form 12b-25 with the SEC
indicating that the Company was delaying the filing of its
Quarterly Report on Form 10-Q for the three months ended September
30, 2016.
On
December 15, 2016, the Company received a letter from the Exchange
indicating that the Exchange has accepted the Company’s plan
and extension request and granted the Company an extended plan
period through May 31, 2017 to restore compliance under the Company
Guide. The staff of the Exchange will review the Company
periodically for compliance with the initiatives outlined in its
plan. If the Company is not in compliance with the continued
listing standards by May 31, 2017 or if the Company does not make
progress consistent with the plan during the plan period, the
Exchange staff has indicated that it would initiate delisting
proceedings as appropriate.
NOTE
15 – SUBSEQUENT EVENTS
In January 2017, the U.S. Army Reserve
88
th
Regional Support Command (RSC)
exercised its first option to extended its staff augmentation
contract for an additional year effective April 1, 2017. Management
expects that its continuation of the work under this contract
extension to operate at a loss and intends to record a charge of
$1.3 million during its fiscal fourth quarter of 2017. The base
contract performance period for this contract was awarded in
September 2016 and is discussed in the PSG segment
above.
On
February 13, 2017, Versar filed a Form 12b-25 with the SEC
indicating that the Company was delaying the filing of its
Quarterly Report on Form 10-Q for the six months ended December 30,
2016.
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 May 5, 2017 in
exchange for an amendment fee of $15,000. As a result of this
waiver, the warrants remain outstanding, but unxcercisable, and the
amendment fee may still be waived and forgiven subject to no
further Events of Default and repayment of all obligations under
the Loan Agreement prior to August 30, 2017.
On
April 4, 2017 the Company sold its PPS subsidiary for a cash value
of $214,042.50. The Company is entitled to additional cash payments
for PPS in a total of up to £400,000 contingent on PPS’
attainment of certain performance thresholds agreed with the buyer
of PPS.
On
April 6, 2017 the Company received a letter from the Exchange in
which the Exchange determined that the Company was is 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.
ITEM 2 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations
General Information
The
following discussion and analysis relates to the Company’s
financial condition and results of operations for the three month
periods ended September 30, 2016 and 2015. This discussion should
be read in conjunction with the condensed consolidated financial
statements and other information disclosed herein as well as the
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in our Annual
Report on Form 10-K for the fiscal year ended July 1, 2016,
including the critical accounting policies and estimates discussed
therein. Unless this Form 10-Q indicates otherwise or the
context otherwise requires, the terms “we,”
“our,” the “Company,” “us,” or
“Versar” as used in this Form 10-Q refer
collectively to Versar, Inc. and its subsidiaries.
This
quarterly report on Form 10-Q contains forward-looking
statements in accordance with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, which
are subject to risks and uncertainties. Forward-looking statements
typically include assumptions, estimates or descriptions of our
future plans, strategies and expectations, are generally
identifiable by the use of the words “anticipate,”
“will,” “believe,” “estimate,”
“expect,” “intend,” “seek,” or
other similar expressions. Examples of these include discussions
regarding our operations and financial growth strategy, projections
of revenue, income or loss and future operations.
These
forward-looking statements and our future financial performance,
may be affected by a number of factors, including, but not limited
to, the “Risk Factors” contained in Part I,
Item 1A., “Risk Factors” of our Annual Report on
Form 10-K for the fiscal year ended July 1, 2016. Actual
operations and results may differ materially from those
forward-looking statements expressed in this
Form 10-Q.
Overview
Versar,
Inc. is a global project management company providing
value-oriented solutions to government and commercial clients in
three business segments: (1) Engineering and Construction
Management (ECM); (2) Environmental Services Group (ESG); and (3)
Professional Services Group (PSG). We also provide tailored and
secure engineering solutions in extreme environments and offer
specialized abilities in construction management, security system
integration, performance-based remediation, and hazardous materials
management.
Business Segments
The
company is aligned into three reportable segments: ECM, ESG, and
PSG, all of which are described below.
ECM
ECM’s services include facility planning and
programming, engineering design, construction, construction
management and security systems installation and support. ECM
supports federal, state and local governments, as well as
commercial clients worldwide.
Our
global network of engineering and construction resources
facilitates the effective mobilization of highly skilled
construction teams and advanced methodologies around the
world.
The
primary markets for ECM’s services include a broad range of
infrastructure, master planning, and engineering design for
facilities, transportation, resource management, energy, and local,
regional and international development.
Our
services include:
●
Facility Condition Assessments and Space Utilization Analysis
providing Architect-Engineer studies, master planning and area
development plans, sustainability and energy audits, full
Sustainment, Restoration and Modernization (SRM) and Military
Construction (MILCON) design capabilities
●
Construction Management Services providing quality assurance
services in Title II or as owner’s representatives, providing
a legally defensible record of the construction, earned value
project management to objectively measure construction progress,
engineering and schedule analysis and negotiation of change
orders
●
Construction Services includes integrated design-build solutions
for construction, horizontal and vertical SRM projects,
construction of design-bid-build projects including all building
trades, equipment installation and furnishings as
specified
●
Security Systems planning and analysis that includes developing and
updating physical security plans, site surveys and physical
security risk assessments. Engineering and design turnkey solutions
integrating physical and electronic security systems, full
program/project documentation, and configuration management and
design control expertise.
ECM's
key projects that contributed to the revenue include integration
and maintenance of access control and security systems for the FAA,
construction management services for the U.S. Air Force (USAF) and
U.S. Army, construction management and personal services including
engineering, construction inspection, operations and maintenance
and administrative support to the U.S. Army Corps of Engineers
(USACE) and project and construction management services for the
District of Columbia Courts and commercial customers. The largest
ECM project during fiscal 2016 was the $109.5 million firm fixed
price Design/Bid/Build runway repair task order at Dover Air Force
Base (DAFB) awarded, on August 13, 2014 under Versar's S/R&M
Acquisition Task Order Contract (SATOC) indefinite
delivery/indefinite quantity (IDIQ) with the Air Force Civil
Engineer Center (AFCEC), held with our joint venture partner,
Johnson Controls Federal Systems. The SATOC IDIQ primarily services
Air Force customers, providing a fast track, efficient method for
execution of all types of facility repairs, renovations and
construction. During the months of December 2016 through February
2017, the work on the task order stopped due to the seasonal
weather related conditions. This contract is anticipated to be
completed by the end of June 2017.
ESG
ESG
supports federal, state and local governments, and commercial
clients worldwide. For over 40 years, our team of engineers,
scientists, archeologists, and unexploded ordnance staff has
performed thousands of investigations, assessments, and remediation
safely and effectively. Our client-focused approach, complemented
by our regulatory expertise, provides low risk with high value in
today’s complex regulatory climate.
Our
services include:
● Compliance
services include hazardous waste and hazardous materials management
from permitting support to compliance with applicable federal laws,
emergency response training, hazardous waste facility
decommissioning, energy planning, energy audit and assessment,
commission and metering, Energy Savings Performance Contract (ESPC)
support and Executive Order 13514/sustainability services. We are a
greenhouse gas verification body in California, one of the few
companies certified to review greenhouse gas emissions data in that
state.
● Cultural
Resources provides clients with reliable solutions from recognized
experts, quality products that are comprehensive yet focused on
client objectives, and large-business resources with small-business
responsiveness and flexibility. ESG’s staff has set the
standard for management, methodologies, and products. Our expertise
and experience in the design and management of innovative programs
that are responsive to client needs and satisfy regulatory
requirements.
● Natural
Resources services include protected species assessments and
management, wetland delineations and Section 404 permitting,
ecosystem and habitat restoration, and water quality monitoring,
ecological modeling, and environmental planning. Our team has
extensive expertise in developing innovative means for mitigation,
managing the complex regulatory environment, and providing our
clients with the knowledge and experience needed to meet or exceed
goals and objectives.
● Remediation
services provides on-going federal remediation and restoration
projects, including four Air Force Performance Based Remediation
(PBR) projects operating at more than ten different locations in
nine states. Our success is based in part on the understanding that
the goal of remedial action projects is to eliminate our
clients’ long-term liability and reduce the life cycle costs
of environmental restoration.
● UXO/MMRP
provides range sustainment services at two of the world’s
largest ranges. Our highly experience staff provide range
sustainment services, range permitting, monitoring, and
deconstruction, surface, subsurface, and underwater investigations
and removals, geophysical surveys, and anomaly avoidance and
construction support.
ESG’s key
projects that contributed to the revenue are our New England, Great
Lakes, Tinker and Front Range PBRs, Range Sustainment Services at
Nellis AFB, hydrodynamic flow modeling and sedimentation study at
Naval Submarine Base Kings Bay, shoreline stabilization projects at
Possum and Cedar Point for the Navy, an Environmental Impact
Statement (EIS) for housing privatization for the USAF, fence to
fence programs at Cannon, Holloman, Barksdale, Columbus AFBs and
Joint Base McGuire-Dix-Lakehurst, large cultural resources efforts
at Avon Park, Tyndall AFB, and Joint Base McGuire-Dix-Lakehurst,
and numerous remedial actions for the U.S. Environmental Protection
Agency (EPA).
PSG
PSG
provides onsite environmental, engineering, construction
management, and logistics services to the U. S. Air Force (USAF),
U.S. Army (USA), U.S. Army Reserve (USAR), National Guard Bureau
(NGB), Federal Aviation Administration (FAA), Bureau of Land
Management (BLM), and Department of Justice (DOJ) through the Drug
Enforcement Agency (DEA). Versar provides on-site services that
enhance a customer’s mission through the use of subject
matter experts who are fully dedicated to accomplish mission
objectives. These services are particularly attractive as the
federal agencies and Department of Defense (DOD) continue to be
impacted by budgetary pressures. This segment focuses on providing
onsite support to government clients to augment their capabilities
and capacities.
Our
services include:
●
Facilities and operational support by delivering comprehensive
facility maintenance, life cycle management plans minimizing
operating costs, space utilization, operational
planning/forecasting, and automated planning technical support
services ensuring operational readiness of reserve forces to the
U.S. Army Reserve.
●
Assisting
the U.S. Army Reserve with assessing, improving, obtaining,
maintaining, and sustaining environmental compliance, as well as
conservation requirements, performing hazardous waste management,
spill prevention and clean-up, biological assessments, wetland
sustainment, and environmental training.
●
Environmental
quality program services, to include facility and utilities
integration, National Environmental Policy Act (NEPA)
considerations, water program management, wildlife program
management, archaeological and historical preservation to DOD Joint
Base communities.
●
Microbiological
and chemical support to the U.S. Army’s designated Major
Range and Test Facility Base for Chemical and Biological Testing
and Training.
●
Biological,
archaeological, and GIS support to plan restoration projects for
wildlife habitat improvements and also field verification of
GIS-generated disturbances and related mapping data.
●
Engineering
expertise and program oversight for civil engineering activities
related to various facilities services performed at the Air
National Guard Readiness Center and National Guard
Bureau.
●
Engineering
and facilities planning support for the implementation and
completion of Sustainment, Restoration, and Modernization
projects.
Financial
Trends
Our
business performance is affected by the overall level of
U.S. Government spending and the alignment of our offerings
and capabilities with the budget priorities of the
U.S. Government. Adverse changes in fiscal and economic
conditions, such as the manner in which spending reductions are
implemented, including sequestration, future government shutdowns,
regulatory changes and issues related to the nation’s debt
ceiling, could have a material adverse effect on our
business
.
In this
challenging economic environment, our focus is on those
opportunities where the U.S. Government continues to place
substantial funding and which clearly align with Versar's
capabilities. Those opportunities include construction management,
security systems 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 beign targeted at small business companies eligible
for similar such set-aside programs. If we cannot expand our
relationships with such set-aside firms and increase our ability to
capture most of this work, this may result in a material impat 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 global economic issues we face and
that we are positioned in the coming year to address these
concerns. Our business is segregated throuogh the following three
segments: ECM, ESG, and PSG. These segments are segregated based on
the nature of the work, business processes, customer bases and the
business environment in which each of the segments
operates.
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.
In the
near term, Versar will become current with our financial reporting
requirements with the Exchange and SEC. While we continue to seek a
long-term financial solution, we are exploring all strategic
options. We are committed to conservatively managing our resources
to ensure 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
back-office staff will redouble 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 win rate. While we reduced back-office staff in our
Business Development division, 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 September 30, 2016, the Company operated at a
financial loss. We continue to experience delays in contract awards
as well as delays in funding values for work which has been
previously awarded. The Company made certain cost cutting measures
during fiscal 2016. The results of these cost savings will continue
into future periods. 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 May 5, 2017 in
exchange for an amendment fee of $15,000. As a result of this
waiver, the warrants remain outstanding, but unxcercisable, 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 months ended September 30, 2016 and September 25,
2015.
|
|
For the
Three Months Ended
|
|
|
|
|
|
|
|
|
GROSS
REVENUE
|
$
29,315
|
$
44,905
|
|
Purchased
services and materials, at cost
|
15,413
|
29,767
|
|
Direct
costs of services and overhead
|
12,146
|
12,826
|
|
GROSS
PROFIT
|
$
1,756
|
$
2,312
|
|
Gross
Profit percentage
|
6
%
|
5
%
|
|
Selling
general and administrative expenses
|
2,999
|
2,854
|
|
Goodwill
Impairment
|
-
|
-
|
|
Intangible
Impairment
|
-
|
-
|
|
OPERATING
LOSS
|
(1,243
)
|
(542
)
|
|
OTHER
EXPENSE
|
|
|
|
Interest
income
|
(4
)
|
-
|
|
Interest
expense
|
211
|
175
|
|
LOSS
BEFORE INCOME TAXES
|
$
(1,450
)
|
$
(717
)
|
Three Months Ended September 30, 2016 compared to the Three Months
Ended September 25, 2015
Gross
revenue for the first quarter of fiscal 2017 was
$29.3 million, a decrease of 35% compared to
$44.9 million during the first quarter of the last fiscal
year. VSS contributed revenues of $4.1 million. Our Blue Brick
Building project and our Ft Belvoir project contributed
$1.0 million and $1.4 million, respectively, off-set by
decreases of $12.9 million in revenue related to the DAFB project,
approximately $1.3 million related to the decrease of work at
Homestead Air Force Base and approximately $1.1 million in our
Andrews Air Force Base project within ECM segment. Within the ESG
segment, approximately $1.3 million in PBR project revenue, $0.7
million from the loss of the Ft Irwin Range contract and
$1.9 million due to contracts ending on numerous smaller size
projects offset by increases in the shoreline projects of $ 1.1
million. Additionally, a decrease of $0.4 million due to the
ending of numerous smaller size, a decrease in the U.S. Army Dugway
project work of $0.1 million and continued decreases of $0.2
million in revenue from PSG’s historical business line.as a
result of the loss of several task orders.
Purchased services
and materials for the first quarter of fiscal 2017 was
$15.4 million, a decrease of 48% compared to
$29.8 million during the first quarter of the last fiscal
year. As gross revenue declines on projects where Versar acts as
the general contractor, purchased services and materials decline as
well. Additionally, we experienced a one-time GAAP charge of $0.6
million for additional cost incurred to complete a fixed price
project with the 88
th
RSC project to
provide staff augmentation services for the base period performance
of nine months for a within our PSG segment.
Direct
costs of services and overhead for the first quarter of fiscal 2016
were $12.1 million, a decrease of 5% compared to
$12.8 million during the first quarter of the last fiscal
year. As gross revenue declines on projects where Versar acts as
the general contractor, our direct costs of services and overhead
do not decline as fast.
Gross
profit for the first quarter of fiscal 2017 was $1.8 million,
compared to a gross profit of $2.3 million during the first
quarter of the previous fiscal year. VSS contributed gross profit
of $0.3 million, off-set by the decline in our Title II work in
Iraq and Afghanistan within the ECM segment and reduced gross
profit from the decrease in gross revenue for the DAFB project of
$0.1 million. Overall gross profit margin increased from 5%
to 6%. The margins on the DAFB project are lower than on other
projects because it is a construction project and we are the prime
contractor. Versar sub-contracted much of the work, while earning a
fee on the overall project costs. However, as a result of the full
integration of VSS we expect to see increased margins from the
additional number of projects in that technical service line and
anticipate that such higher margins will off-set some of the
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. The one-time charge of $0.6 million for
additional cost incurred to complete a fixed price project within
our PSG segment discussed above contributed to the lower gross
profit.
Selling, general
and administrative expenses for the first quarter of fiscal 2017,
increased to 10% of gross revenue from 6% of gross revenue. When
compared to the first quarter of last fiscal year, SG&A
expenses increased $0.1 million or 5% in absolute dollars. The
Company spent $0.1 million in costs associated with the Bank of
America forbearance agreement requirements (see Note 10 - Debt).
Despite this additional expense, the Company continued to control
cost during the quarter related to rent savings from the now closed
Fairfax, Virginia office, relocation of the VSS offices from
Gaithersburg to Germantown and an internal re-alignment of ESG last
fiscal year.
Loss,
before income taxes, for the first quarter of fiscal 2017 was
$1.5 million, compared to loss, before income taxes, of
$0.7 million for the first quarter of the last fiscal year.
This decrease in performance is attributable to the decline in
revenue, gross profit, and relative increase as a percentage of
revenue of our selling, general and administrative expenses
discussed above.
Backlog
We
report “funded” backlog, which represents orders for
goods and services for which firm contractual commitments have been
received. As of September 30, 2016, funded backlog was
approximately $150.0 million, an increase of 10% compared to
approximately $136.0 million of backlog at the end of fiscal 2016.
The increase in backlog was attributable to U.S. Government
contract awards.
Results
of Operations by Reportable Segment
The
tables below set forth our operating results by reportable segment
for the three month periods ended September 30, 2016 and September
25, 2015. (Dollar amounts in following tables are in
thousands).
|
Engineering and Construction Management
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
GROSS
REVENUE
|
$
17,693
|
$
30,021
|
|
Purchased
services and materials, at cost
|
12,626
|
25,140
|
|
Direct
costs of services and overhead
|
4,150
|
3,614
|
|
GROSS
PROFIT
|
$
917
|
$
1,267
|
|
Gross
profit percentage
|
5
%
|
4
%
|
Three Months Ended September 30, 2016 compared to the Three Months
Ended September 25, 2015
Gross
revenue for the first quarter of fiscal 2017 was
$17.7 million, a decrease of 41% compared to
$30.0 million during the first quarter of the last fiscal
year. VSS contributed $4.1 million of revenue and we experienced
increases in our Blue Brick Building project of $1.0 million and
our Ft Belvoir project of $1.4 million. These increases were
off-set by decreases in revenue of $12.9 million for the DAFB
project and from international operations associated with declines
in the Company’s Title II work in Afghanistan,
approximately $1.3 million related to the decrease of work at
Homestead Air Force Base, of approximately $1.1 million in our
Andrews Air Force Base project and approximately $0.3 million in
work in the Company’s subsidiary, PPS.
Gross
profit for the first quarter of fiscal 2017 was $1.3 million,
compared to a gross profit of $1.2 million during the first
quarter of the last fiscal year. During the first quarter of fiscal
2017, overall profit margins increased from 4% to 5%. VSS
contributed $0.3 million to gross profit. We incurred costs related
to which will be recovered via negotiations for a Requests for
Equitable Adjustments (REA). Additionally, we experienced a decline
in gross profit for the DAFB project. ECM also experienced a
decrease in gross margin from the continued decrease in gross
profit from the continued decrease in our Title II work in Iraq and
Afghanistan.
|
Environmental Services Group
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
GROSS
REVENUE
|
$
7,445
|
$
10,039
|
|
Purchased
services and materials, at cost
|
2,454
|
4,136
|
|
Direct
costs of services and overhead
|
4,302
|
5,238
|
|
GROSS
PROFIT
|
$
689
|
$
665
|
|
Gross
profit percentage
|
9
%
|
7
%
|
Three Months Ended September 30, 2016 compared to the Three Months
Ended September 25, 2015
Gross
revenue for the first quarter of fiscal 2017 was
$7.4 million, a decrease of 26% compared to
$10.0 million during the first quarter of the last fiscal
year. This decrease in revenue was due to the completion of the
significant contract with Ft. Irwin, a decrease of
$1.9 million due to the ending of numerous smaller size
projects and the anticipated revenue decrease associated with the
PBR program as the program matures. The revenue decline was
partially offset by a contract awards for weather related services
for $0.3 million, $0.4 million for remediation services for the EPA
and AFCEC, and $0.7 million for natural resources
services.
Gross
profit for the first quarter of fiscal 2017 remained unchanged
at $0.7 million in the first quarter of fiscal 2017 and 2016,
although gross profit increased from 7% to 9%.
|
Professional Services Group
|
|
|
|
|
For the
Three Months Ended
|
|
|
|
|
|
GROSS
REVENUE
|
$
4,177
|
$
4,845
|
|
Purchased
services and materials, at cost
|
333
|
491
|
|
Direct
costs of services and overhead
|
3,694
|
3,974
|
|
GROSS
PROFIT
|
$
150
|
$
380
|
|
Gross
profit percentage
|
4
%
|
8
%
|
Three Months Ended September 30, 2016 compared to the Three Months
Ended September 25, 2015
Gross
revenue for the first quarter of fiscal 2017 was $4.2 million,
a decrease of 14% compared to $4.8 million during the
first quarter of the last fiscal year. The decrease of
$0.4 million due to the ending of numerous smaller size, a
decrease in the U.S. Army Dugway project work of $0.1 million and
continued decreases of $0.2 million in revenue from 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. As such,
the Company is focusing on ways to partner with these businesses.
To accomplish this goal the segment is transitioning from projects
with the Company as prime contractor to teaming arrangements with
small and similar set-aside businesses where the Company is a
sub-contractor positioned to win new task order work.
Gross
profit for the first quarter of fiscal 2017 was $0.2 million,
compared to gross profit of $0.4 million in the first quarter
of the last fiscal year. This decrease is a direct result of the
one-time charge of $0.6 million for additional cost incurred to
complete a fixed price project with the 88th RSC project to provide
staff augmentation services for the base period performance of nine
months. Management expects this contract to operate at a loss and
recorded the corresponding one-time charge.
Liquidity
and Capital Resources
On
September 30, 2015, the Company, together with the Guarantors,
entered into a loan with Bank of America, N.A. as the lender and
letter of credit issuer for a revolving credit facility in the
amount of $25.0 million and a term facility in the amount of $5.0
million.
The
maturity date of the revolving credit facility is
September 30, 2018 and the maturity date of the term facility
was originally March 31, 2017 (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 (which requires that the Company
maintain 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 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 engaged an advisor to review the
Company’s financial condition on the Lender’s behalf,
and also required the Company to pursue alternative sources of
funding for its ongoing business operations.
As of
September 30, 2016 the available balance on the Company’s
revolving credit facility was approximately $3.4
million.
On
December 9, 2016 (the Closing Date), Versar, together with the
Guarantors, entered into a First Amendment and Waiver to the Loan
Agreement.
Under
the Amendment, the Lender waived all existing events of default,
and reduced the revolving facility to $13,000,000 from $25,000,000.
The interest rate on borrowings under the revolving facility and
the term facility will accrue at the LIBOR Daily Floating Rate plus
5.00% from LIBOR plus 1.87%. The Amendment added a covenant
requiring Versar to maintain certain minimum quarterly consolidated
EBITDA amounts. The Amendment also eliminated the Loan Agreement
covenants requiring maintenance of a required consolidated total
leverage ratio, consolidated fixed charge coverage ratio,
consolidated senior leverage ratio and asset coverage
ratio.
In
addition to the foregoing, and subject to certain conditions
regarding the use of cash collateral and other cash received to
satisfy outstanding obligations under the Loan Agreement, the
Amendment suspended all amortization payments under the term
facility such that the entire amount of the term facility shall be
due and payable on September 30, 2017. The original maturity date
under the Loan Agreement was March 31, 2017. As consideration for
the Amendment and the waiver of the existing events of default,
Versar agreed to pay an amendment fee of .5% of the aggregate
principal amount of the term facility outstanding as of November
30, 2016 plus the commitments under the revolving facility in
effect as of the same date, which fee is due and payable on the
earlier of a subsequent event of default or August 30, 2017. The
Company paid $0.3 million in amendment fees in December
2016.
Finally,
the Amendment continued the requirement for Versar to retain a CRO
and recognized Versar’s ongoing efforts to work with the
Lender and continued the requirements to engage a strategic
financial advisor to assist with the structuring and consummation
of a transaction, the purpose of which is the replacement or
repayment in full of all obligations under the Loan
Agreement.
Our working capital as of September 30, 2016 was
negative $3.4 million compared to negative working capital at
July 1, 2016 of $2.2 million. Our current ratio at September
30, 2016 was 0.91 compared to 0.96 at July 1, 2016. Our
expected capital requirements for the full 2017 fiscal year
are approximately $0.5 million, which will be funded through
existing working capital. All payments related to the contingent
consideration related to the VSS purchase (See Note 3 –
Acquisition), over the next 2 years will also be funded through
existing working capital.
The
Company has 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 $1.2 million at the end of September 30, 2016, along
with anticipated cash flows from ongoing operations and the funds
available from our line of credit facility,
will be
sufficient to meet our working capital and liquidity needs during
fiscal 2017
. Going forward, the
Company will continue to aggressively manage our cash flows and
costs as needed based on the performance of the Company.
Additionally,
the 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
available bonding capacity 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
above.
Further, as of such
date, 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 September 30, 2016
that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.