UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended	Commission File
July 1, 2016	No. 1-9309
June 30, 2017	No. 1-9309

Versar, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE	54-0852979
(State or other jurisdiction of Incorporation or organization)	(I.R.S. employer identification no.)

6850 Versar Center, Springfield, Virginia	22151
(Address of principal executive offices)	(Zip code)

(703) 750-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value

(Title of Class)

NYSE ~~MKT~~American

(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☐ No ☑

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting ~~(as~~company, ~~defined~~or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☑☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

The aggregate market value of the voting stock held by non-affiliates of the registrant as of ~~March~~December 130, ~~2017~~2016 was ~~approximately~~ approximately $1013,~~348~~563,~~996~~911.

The number of shares of Common Stock outstanding as of ~~March~~September 1, 2017 was 9 10,~~950~~019,~~958~~409.

Portions of the registrant’s Definitive Proxy Statement to be filed subsequent to the date hereof with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the Registrant’s 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission, not later than 120 days after the conclusion of the Registrant’s fiscal year ended June 30, 2017.

PART I

Item 1. Business

Unless this report indicates otherwise the terms ”Versar,” the “Company,” “we,” “us,” and “our” refer to Versar, Inc. and consolidated subsidiaries. Versar’s fiscal year end is based upon a 52 or 53 week year ending on the last Friday of the fiscal period and therefore does not close on a calendar month end. The Company’s fiscal ~~year~~2017 ~~2016~~ included 5352 weeks and fiscal ~~years~~2016 ~~2015~~included ~~and~~53 ~~2014~~weeks. ~~included~~Therefore, 52for ~~weeks~~comparative purposes, the year to date numbers presented will include an additional week of results for fiscal 2016.

Cautionary Statement Regarding Forward-Looking Statements

This report contains certain forward-looking statements that are based on current expectations. Actual results may differ materially. The forward-looking ~~statements~~ statements include, without limitation, those regarding the continued award of future work or task orders from government and private clients, cost controls and reductions, the expected resolution of delays in billing of certain projects, and the possible impact of current and future claims against the Company based upon negligence and other theories of liability. Forward-looking statements involve numerous risks and uncertainties that could cause actual results to differ materially, including, but not limited to, the possibility that the demand for the Company's services may decline as a result of possible changes in general and industry specific economic conditions and the effects of competitive services and pricing; the possibility that the Company will not be able to perform work within budget or contractual limitations; one or more current or future claims made against the Company may result in substantial liabilities; the possibility that the Company will not be able to attract and retain key professional employees; failure to recover at-risk contract costs; changes to or failure of the Federal, ~~State~~ state, or local governments to fund certain programs in which the ~~Company~~ Company participates; changes in customer procurement policies and practices; delays in project funding; effects of U.S. ~~Government~~government conflict of interest policies; loss of anticipated new contract vehicles either due to funding changes or competitive factors, and such other risks and uncertainties set forth in this report and in other reports and other documents filed by the Company from time to time with the Securities and Exchange Commission.

Business Overview

Versar, Inc. is a Delaware corporation incorporated in 1969. We are 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~~onsite ~~management,~~staff ~~security system integration~~support, performance- based remediation, and hazardous materials ~~mangement~~ management.

Versar’s ~~Fiscal~~fiscal ~~2016~~2017 proved to be an eventful ~~year~~and ~~for Versar~~challenging. The year ~~began~~ began with ~~the~~a ~~successful~~string ~~completion~~ of new contract awards, including the Architect-Engineer ~~strategic~~2013 ~~acquisition~~Environmental Services (A-E13ES) ofmultiple-award acontract ~~federal~~with ~~security~~a ~~integration~~combined ~~business~~contract ~~from~~ceiling ~~Johnson~~of ~~Controls,~~$500 ~~formerly~~million, ~~known~~an asIndefinite ~~Johnson~~Delivery ~~Controls~~Indefinite ~~Security~~Quantity ~~Systems,~~(IDIQ) ~~which~~contract in issupport ~~now known~~of asthe ~~Versar~~Environmental ~~Security~~Protection ~~Systems~~Administration (~~VSS~~EPA). worth ~~VSS~~up isto $20 million, a ~~security~~$14.8 ~~systems integrator~~million ~~that~~task ~~designs,~~order ~~installs~~for engineering and ~~supports~~technical ~~complex~~support ~~physical security,~~in ~~network security~~Afghanistan, and ~~facilities~~a ~~management~~$15.5 ~~systems~~million task ~~primarily~~order ~~for~~to ~~Federal~~renovate ~~Government~~a ~~clients~~building ~~such~~at asHanscom ~~Federal~~Air ~~Aviation Administration~~Force ~~(FAA)~~Base. In December 2016, ~~the~~Versar ~~Food~~announced an amendment to its loan agreement with Bank of America and ~~Drug~~then ~~Administration~~early ~~(FDA)~~in January 2017, a change in its ~~Department~~Independent ofRegistered ~~Justice~~Accounting Firm from Grant Thornton to Urish Popeck. Versar continued to work with its Chief Restructuring Officer (~~DOJ~~CRO), ~~the~~who ~~Federal~~served ~~Bureau~~as a point of ~~Investigation~~contact for Bank of America ~~(FBI)~~to ~~and~~manage cash flow throughout the ~~Federal~~fiscal ~~Emergency~~year. ~~Management~~In ~~Agency~~April 2017, the Company sold its UK Subsidiary PPS, Ltd. (~~FEMA~~PPS) for a cash value of $214,042.50. The Company is ~~acquisition~~entitled to additional cash payments for PPS in a total of ~~VSS~~up ~~expanded~~to £400,000 ~~Versar~~contingent on PPS’s ~~client~~attainment ~~base,~~of ~~technical~~certain ~~capabilities,~~performance ~~and~~thresholds ~~geographic~~through ~~scope~~the end of calendar year 2017 agreed upon with the buyer of PPS.

AsNotwithstanding ~~the~~new ~~year~~contract ~~progressed~~awards, Versar ~~faced~~operated ~~significant~~at ~~challenges~~a asfinancial ~~revised~~loss ~~government~~for ~~procedures~~all ~~and~~four ~~other~~quarters ~~market factors resulted~~ in ~~longer~~, ~~timelines for contract awards~~ and ~~project~~therefore, ~~start~~for ~~dates~~all ~~than the~~of, ~~Company anticipated~~fiscal 2017. ~~This~~In resulting impact on the Company’s financial performance created constraints that initiated covenant defaults with our lender and a related inability to file our required securities filings in a timely mannerresponse, ~~resulting~~ ~~in additional oversight from~~ the ~~lender and the~~ Company’s ~~related~~continued ~~contracting~~and ofexpanded a ~~Chief~~wide ~~Restructuring~~range ~~Officer (CRO) and exploration~~ of ~~financial~~deliberate ~~and~~cost ~~strategic alternatives.~~cutting ~~The~~measures ~~Company~~initiated ~~operated~~during ~~at a financial loss for~~ fiscal 2016. which Incontinued ~~response,~~through the ~~Company~~first ~~initiated~~six amonths ~~wide range~~ of ~~deliberate cost cutting measures during~~ fiscal ~~2016~~2017, the benefits ~~results~~ of which will continue to be realized in future periods. We will continue to manage our costs based on financial performance. AsVersar wecontinues ~~adapted internally~~ to ~~longer~~maintain ~~cycles in both contract award and project start dates, we experienced~~ a ~~decrease~~strong ~~in our~~ backlog ~~as compared~~of ~~to fiscal 2015~~$136.0 Tomillion ~~address~~as ~~this,~~a weresult ~~adjusted~~of adjusting our bidding strategies ~~and~~ and teaming partnerships, ~~diversified~~refining our capabilities, and ~~made~~making strategic hires. As a service-based company, our revenue is primarily derived from the provision of labor-based services, rather than capital-intensive product offerings. Thus, our revenue is driven by our ability to retain existing clients, attract new clients, provide quality project and program management at competitive rates, and identify and retain qualified employees.

On September 22, 2017, the Company, KW Genesis Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Kingswood Genesis Fund I, LLC (the latter two “Purchaser”), entered into an Agreement and Plan of Merger (Merger Agreement). The Merger Agreement provides that, among other things, subject to the satisfaction or waiver of certain conditions, following completion of a tender offer for all outstanding common stock of the Company for a cash price of $0.15 per share, and in accordance with the General Corporation Law of the State of Delaware, as amended (the “DGCL”), Purchaser will be merged into and with the Company (the “Merger”). Any common stock not purchased in the tender offer will be exchanged for a cash price of $0.15 per share in the Merger. Following the consummation of the Merger, the Company will continue as the surviving corporation as a wholly owned subsidiary of Parent. The Merger will be effected under Section 251(h) of the DGCL, which provides that following consummation of a successful tender offer for a public corporation, and subject to certain statutory provisions, if the acquirer holds at least the amount of shares of each class of stock of the acquired corporation that would otherwise be required to approve a merger of the acquired corporation, and the stockholders that did not tender their shares in the tender offer receive the same consideration for their stock in the merger as was payable in the tender offer, the acquirer can effect a merger without the vote or written consent of the stockholders of the acquired corporation. Accordingly, if Purchaser consummates the tender offer, the Merger Agreement contemplates that the parties will effect the closing of the Merger without a vote of the stockholders of the Company in accordance with Section 251(h) of the DGCL.

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 of infrastructure, ~~master planning,~~ and engineering design for facilities, transportation, resource management, ~~energy,~~ and local, regional and international development.

Our services include:

●

~~Facility~~ Security Systems ~~Condition~~planning ~~Assessments~~ and ~~Space~~analysis ~~Utilization~~services ~~Analysis providing~~include ~~Architect-Engineer studies~~reviewing, developing ~~master~~and ~~planning~~updating ~~and~~physical ~~area development~~security plans, ~~sustainability~~site ~~and~~surveys ~~energy audits, full Sustainment, Restoration~~ and ~~Modernization (SRM) and Military~~ ~~Construction~~physical ~~(MILCON)~~security ~~design~~risk ~~capabilities~~assessments.

●

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.

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Construction Services ~~includes~~include integrated design-build solutions ~~for~~ for construction, horizontal and vertical SRM projects, construction of design-bid-build projects including all building trades, equipment installation and furnishings as specified.

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~~Security~~Fuel ~~Systems~~facility ~~planning~~repair and ~~analysis~~modernization ~~that~~services ~~includes developing and~~include ~~updating~~quality-focused ~~physical~~expertise ~~security~~in ~~plans~~petroleum, ~~site~~oil ~~surveys~~ and ~~physical~~lubricants (POL) ~~security~~Department ~~risk~~of ~~assessments.~~Defense ~~Engineering~~(DOD) ~~and~~facilities ~~design~~to ~~turnkey~~assist ~~solutions integrating~~the ~~physical~~DOD ~~and electronic security systems, full~~in ~~program/project~~providing ~~documentation,~~a ~~and~~worldwide ~~configuration~~robust ~~management~~ and ~~design~~ ~~control~~dependable ~~expertise~~refueling capability.

ECM’s ~~key~~ key projects that contributed to the revenue include integration ~~and~~ and maintenance of access control and security systems for the ~~FAA,~~ ~~construction~~Federal ~~management~~Aviation ~~services~~Administration ~~for the U.S. Air Force~~ (~~USAF~~FAA) ~~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~~2017 was the $109.5 million firm fixed price Design/Bid/Build runway repair task order at Dover Air Force Base (DAFB). This project was awarded, on August 13, 2014 under Versar’s Sustainment, Restoration and ~~S/R&M~~Modernization (SRM) 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~~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~~this task order ~~was~~stopped ~~suspended~~ due to ~~normal~~ seasonal weather related conditions. Work resumed in March 2017. The main runway (01/19) was turned over to the USAF in September 2016 and the final phase of the project was fully turned over to ~~contract~~the USAF on August 16, 2017. Versar is ~~anticipated~~awaiting toa bepending modification ~~completed~~with byadditional ~~the~~scope, ~~end~~which ofthe ~~June~~Company anticipates will be resolved by December 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:

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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.

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Cultural Resources services provides clients with reliable solutions from recognized experts, quality products that are comprehensive yet focused on ~~client~~ client objectives, and large-business resources with small-business responsiveness and flexibility. ESG’s staff has set the industry standard for management, methodologies, and products. Our ~~expertise~~ expertise and experience in the design and management of innovative ~~programs~~ programs that are responsive to client needs and satisfy regulatory requirements.

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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.

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Remediation services provides on-going federal remediation and restoration projects, including four ~~Air~~USAF ~~Force~~ Performance Based Remediation (PBR) projects operating at more than ten different locations in ~~nine~~ nine states. Our success is based in part on the understanding that ~~the~~ the goal of remedial action projects is to eliminate our clients’ long-term liability and reduce the life cycle costs of of environmental restoration.

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Unexploded Ordnance (UXO)/Military Munitions Response Program (MMRP) provides ~~range~~ 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~~ geophysical surveys, and anomaly avoidance and construction support.

ESG’s ~~key~~ key projects that contributed to ~~the~~ revenue in fiscal 2017 are ~~our~~the PBRs in New England, Great Lakes, Tinker and Front Range ~~PBRs~~, Range Sustainment Services at Nellis Air Force Base (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~~ 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, U.S. Army, U.S. Army Reserve, National Guard Bureau, 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)~~ 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:

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Facilities and operational support by delivering comprehensive facility maintenance, life cycle management plan 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.

●

Versar assists 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.

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Environmental quality program services, toincluding ~~include~~ facility and ~~utilities~~ utilities integration, National Environmental Policy Act considerations, water program management, wildlife program management, archaeological and historical preservation to DOD Joint ~~Base~~ Base communities.

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Microbiological and chemical support to the U.S. Army’s designated Major Range and Test Facility Base for Chemical and Biological Testing and Training.

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Biological, archaeological, and Geographic Information Systems (GIS) support to plan restoration projects for wildlife habitat improvements and also field verification of GIS-generated disturbances and related ~~mapping~~ mapping data.

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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.

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Provides the DOJ’s DEA engineering and facilities planning support for the implementation and completion of SRM projects.

Revenue Earned by Geographic Location

Our consolidated gross revenue for fiscal ~~2016~~2017 was $~~167~~111.98 million, of which approximately $~~165~~109.78 million was funded with U.S. currency and approximately $2.20 million was derived from our former subsidiary PPS, and funded in Pounds ~~sterling~~Sterling. Approximately 1116% of our fiscal ~~2016~~2017 revenue was generated in international locations.

Our consolidated gross revenue for fiscal ~~2015~~2016 was $~~159~~167.9 million, of which approximately $~~154~~165.87 million was funded with U.S. currency and approximately $52.12 million was derived from PPS, and funded in Pounds ~~sterling~~Sterling. Approximately 1811% of our fiscal ~~2015~~2016 revenue was generated in international locations.

Our consolidated gross revenue for fiscal 2014 was $110.3 million, of which approximately $107.6 million was funded with U.S. currency and approximately $2.7 million of the remainder was derived from PPS, and funded in Pounds sterling. Approximately 30% of our fiscal 2014 business was conducted in international locations.

Our Strategy

In addressing fiscal ~~2016~~2017’s challenges, Versar ~~remains~~has remained committed to our customers, shareholders, employees and partners. Going forward, 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. ToThe ~~reiterate our long-term strategy to reflect our new reality, the~~ following elements are driving our strategy:

Manage ~~Re-Establish Financial Stability and Grow Shareholder Value. In the near term, Versar will become current with~~ our ~~financial~~business ~~reporting requirements~~to ~~with~~ the ~~NYSE~~bottom ~~MKT LLC (the Exchange) and Securities and Exchange Commission (SEC)~~line. ~~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~~achieve positive net income, ensure shareholder value, and ~~re-establish~~transform ~~our~~processes ~~financial~~and ~~stability~~procedures.

Profitably execute current backlog. Our front-line project managers ~~and~~ and employees will continue to control costs and streamline ~~processes~~ processes to profitably execute our current backlog. In addition, our ~~back-office~~ support staff will redouble efforts to support our front-line employees efficiently and effectively serve our customers. We are committed to innovatively ~~transform~~transforming our business processes to be as efficient and cost-effective as possible.

Grow our pipeline. We are aggressively mining existing ~~Indefinite Delivery Indefinite Quantity (~~IDIQ) contract vehicles to increase win ~~rates~~rate. While we reduced ~~back-office~~support staff in our Business Development ~~division~~function, we remain committed to growing our pipeline and backlog by carefully managing our proposal efforts ~~from~~ from identification through award to maximize our business ~~development~~ development investments.

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.

Competition

Government ~~Contracting~~contracting is a highly competitive industry, ~~where~~one in which price is often the deciding factor. In ~~that~~such an environment, ~~it is~~ ~~critical for~~ Versar tomust differentiate our capabilities and offerings to ensure that our customers understand the value of our offerings. ~~Versar~~ Versar carefully targets ~~our~~ business development and sales efforts and develops ~~has developed~~ strategic partnerships to enhance our competitive advantage.

The acquisition of Versar Security Systems (VSS) in fiscal 2016 expanded our customer base to include the FAA and the Federal Emergency Management Agency (FEMA), among others, asand ~~well as~~ increased our service offerings into higher margin classified construction. During fiscal 2017, we ~~will~~positioned ~~position~~ the ~~company~~Company to expand these ~~new~~ new capabilities to existing customers and existing capabilities to ~~new~~ new customers.

Backlog

We report “funded” backlog, which represents orders for goods and services for which we have received firm contractual commitments. Based on its history, ~~the~~Versar ~~Company~~ believes that approximately 90% of funded backlog will be performed in the succeeding twelve- to eighteen-month period following the execution of the relevant contract. However, there can be no assurance that we will ultimately realize our full backlog. Additionally, other companies with similar types of contracts may not calculate backlog in the same manner we do, as their calculations may be based on different subjective factors or because they use a different methodology. Therefore, information presented by us regarding funded backlog may not necessarily be comparable to similar presentations by others.

As of ~~July~~June 130, ~~2016~~2017, funded backlog was approximately $136 .0 million, a ~~decrease~~which ofwas ~~approximately~~consistent ~~24%~~with ~~compared~~the ~~to approximately $179 million of~~ funded backlog at the end of ~~the fiscal year 2015.~~ ~~Backlog for~~ the ~~DAFB project at the end of~~ fiscal ~~2015 was $55.1 million compared to $8.6 million at the end of fiscal~~ 2016. During fiscal 2016, the DAFB revenue recognized was $50.2 million as compared to $43.2 million in fiscal 2015. The Company’s funded backlog value at fiscal 2015 was the largest in the Company’s history primarily driven by the August 13, 2014 award of DAFB contract of $98.3 million.

Employees

At ~~July~~June 130, ~~2016~~2017, we had ~~529~~412 employees, of which 7576% are engineers, scientists, and other professionals. 5839% of our professional employees have a bachelor’s degree, 3826% have a master’s degree, and 43% have a doctorate degree as their highest level of education earned.

Item 1A. Risk Factors

~~Our line of credit contains, and our future~~Risks ~~debt~~Related ~~agreements may contain, covenants that may restrict our ability~~ to ~~engage~~the inAcquisition ~~activities~~of ~~that~~the ~~may~~Company ~~be in our long-term best~~by ~~interest, including financing future operations or capital needs or engaging in other business activities, and that require us to maintain specific financial ratios or levels.~~Kingswood

~~Our~~ ~~line~~The announcement and pendency of ~~credit~~the ~~restricts,~~acquisition ~~among~~of ~~other~~the ~~things,~~Company ~~our~~by Kingswood ~~ability~~may have a material adverse effect on our ~~to:~~business.

Uncertainty about the effect of the acquisition on our employees, suppliers, customers and other parties may have a material adverse effect on our business. Although we intend to take steps designed to reduce any adverse effects, these uncertainties could impair our ability to retain and motivate key personnel and could cause customers, suppliers and others that deal with us to defer entering into contracts, or making other decisions, concerning doing business with us or seek to change existing business relationships with us. The pursuit of the acquisition may place a significant burden on our management and internal resources. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the acquisition. The diversion of management’s attention away from day-to-day business concerns could adversely affect our financial results. In addition, the Merger Agreement restricts us from taking certain actions without the consent of Kingswood. These uncertainties and restrictions could disrupt or adversely affect our business and prevent us from pursuing otherwise attractive business opportunities that may arise prior to the completion of the acquisition or termination of the Merger Agreement.

There may be unexpected delays in the completion of the acquisition, or the acquisition may not be completed at all.

Certain events may delay the completion of the acquisition or result in a termination of the Merger Agreement. Some of these events are outside the control of either party. In particular, completion of the Offer requires the tender of a stated minimum percentage of the Company’s common stock. We may incur significant additional costs in connection with any delay in completing the acquisition or the termination of the Merger Agreement, in addition to significant transaction costs, including legal, financial advisory, accounting and other costs we have already incurred.

We can neither assure you that the conditions to the completion of the acquisition will be satisfied or waived or that any adverse change, effect, event, circumstance, occurrence or state of facts that could give rise to the termination of the Merger Agreement will not occur, and we cannot provide any assurances as to whether or when the acquisition will be completed.

Failure to complete the acquisition in a timely manner or at all could negatively affect our stock price and future business and financial results.

Delays in completing the acquisition or the failure to complete the acquisition at all could negatively affect our future business and financial results, and, in that event, the market price of our common stock may decline significantly. If the acquisition is not completed for any reason, we will be subject to several risks, including the diversion of management focus and resources from operational matters and other strategic opportunities while working to implement the acquisition, any of which could materially adversely affect our business, financial condition, results of operations and the value of our stock price. A failed transaction may result in negative publicity and a negative impression of us in the investment community. Further, any disruptions to our business resulting from the announcement and pendency of the acquisition, including any adverse changes in our relationships with our customers, suppliers and employees, could continue or accelerate in the event of a failed transaction. In addition, if we do not complete the acquisition, we may be required to pay a termination fee under certain circumstances set forth in the Merger Agreement.

In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transition costs in connection with the acquisition. We will be required to pay such costs relating to the transaction whether or not the acquisition is consummated.

If a sufficient number of shares are not tendered pursuant to the Offer, the merger may not be completed and our business could be impaired.

If the shares Kingswood acquires pursuant to the Offer together with any shares Kingswood otherwise owns in Versar equal at least a majority of Versar’s issued and outstanding shares, the proposed merger can be effected without a shareholder vote under Delaware law. Therefore Kingswood will set a minimum tender condition to the consummation of the Offer and may terminate the Offer if the minimum tender condition is not met. If less than the required number of shares are tendered, then neither the Offer nor the merger may be completed, which could also cause significant uncertainty for Versar and its business could be severely and adversely affected.

Risks Related to our Business

Our line of credit contains, and our future debt agreements may contain, covenants that may constrain our ability to engage in activities that may be in our long-term best interest, including financing future operations or capital needs or engaging in other business activities, and that require us to maintain specific financial ratios or levels.

Our line of credit constrains, among other things, our ability to:

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incur additional debt;

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pay dividends or distributions on our capital stock;

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purchase, redeem or retire capital stock;

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make acquisitions ~~and~~or other investments;

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create liens on our assets;

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enter into certain transactions with affiliates;

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merge or consolidate with another company;

●

obtain or maintain the appropriate bonding necessary to perform our work; or

●

transfer or sell assets outside the ordinary course of business.

In addition, our line of credit requires that we comply with certain consolidated Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) financial ratios and levels,. These covenants may adversely impact our ability to finance our future operations or ~~utilize~~use the capital required to pursue available business opportunities.

During fiscal 2016 and 2017, weVersar ~~were~~was in default under certain ~~of our~~ financial ~~maintenance~~ covenants under our loan agreement~~, which defaults were addressed by amendment of the loan agreement subsequent to the end of the fiscal year; however, we are required to repay or replace the existing facility~~. ~~In the future, our ability to fund our operations could be jeopardized if we cannot obtain alternative sources of funding.~~ If in the future we ~~again~~ again default under any future credit agreement, or if we are unable to obtain a new facility or refinance our existing indebtedness, it would have a material adverse impact on our financial position and operations.

On December 9, 2016, Versar, together with certain of its domestic subsidiaries acting as guarantors, entered into aan ~~First~~amendment ~~Amendment and Waiver (the Amendment)~~ to ~~the~~ its loan agreement ~~(the Loan Agreement) dated September 30, 2015~~ with Bank of America, N.A. ~~(the Lender)~~, as ~~the~~ lender ~~and letter of credit issuer for a revolving credit facility in the amount of $25,000,000 and a term facility in the amount $5,000,000~~. Under the ~~Amendment~~ amendment, the ~~Lender~~lender waived all existing events of default, and reduced the revolving facility to $13~~,000,000~~.0 million from $25~~,000,000~~.0 million. The ~~Amendment~~amendment ~~amends~~further amended the ~~Loan Agreement~~loan agreement to remove the consolidated Total Leverage Ratio covenant, consolidated Senior Leverage Ratio covenant, consolidated ~~Fixed~~ Fixed Charge Coverage Ratio covenant, and the consolidated ~~Asset~~ Asset Coverage Ratio covenant. Additionally, ~~and~~it ~~adds~~added a covenant requiring Versar to maintain certain minimum quarterly consolidated EBITDA amounts and a requirement that we pursue one or more ~~requires~~transactions to repay or replace Bank of America. Lastly, the amendment ~~Company~~required Versar to ~~pursue~~repay ~~alternative~~or ~~sources~~replace ofthe ~~funding~~existing facility by September 30, 2018. Subsequent to the amendment, Versar experienced additional covenant defaults. We have entered into an agreement for the ~~its~~acquisition ~~ongoing~~of ~~business~~the ~~operations~~Company ~~and~~pursuant to ~~repay~~a tender offer and merger. If consummated, the proposed acquisition would result in the replacement of the loan agreement. If the transaction is not consummated, the Company must seek an alternative transaction to replace or refinance the loan agreement. Failure to refinance or replace the ~~Loan~~loan agreement would have a material adverse effect on ~~Agreement~~us and our financial condition.

~~If the~~We ~~Company~~are istaking ~~not~~affirmative ~~able~~steps to ~~repay~~modify oroperational ~~refinance~~plans ~~the obligations under the~~and ~~Loan~~internal ~~Agreement~~organization into ~~accordance~~ensure ~~with~~that ~~the~~we ~~Loan~~can ~~Agreement~~continue ~~requirements or~~to ~~meet certain other conditions, the Lender may exercise its~~operate ~~rights and remedies~~ with ~~respect~~our toexisting ~~such~~cash ~~defaults~~resources. InThe ~~such~~actual ~~event, the~~amount ~~Lender could demand immediate repayment~~ of ~~the~~funds ~~outstanding~~that ~~borrowings~~we ~~and~~will ~~terminate~~need ~~the~~will ~~facility.~~be ~~The~~determined ~~Lender~~by ~~could~~many ~~also~~factors, ~~seek to~~some ~~foreclose on its security interests in our assets and those~~ of ~~our~~ ~~subsidiaries,~~ which ~~would materially and negatively impact our ability to fund our business operations. We~~ are ~~currently seeking~~ ~~alternative~~beyond ~~sources of funding for~~ our ~~ongoing~~control, ~~business~~and ~~operations as needed. There can be no assurance that~~ we ~~will~~may beneed ~~able~~funds tosooner ~~obtain alternative~~than ~~financing on terms acceptable to the Company, or at~~currently ~~all~~anticipated. ~~Failure to secure alternative financing would have a material adverse effect on the Company and its financial condition.~~

The ~~Company~~accompanying isFinancial ~~taking~~Statements ~~affirmative~~have ~~steps~~been toprepared ~~modify~~assuming Versar ~~operational~~will ~~plans and~~continue ~~its~~as ~~internal~~a ~~organization~~going concern. If we are unable to identify ~~ensure~~alternative ~~that~~sources itof ~~can~~funding ~~continue~~and toraise additional ~~operate~~capital ~~with~~as ~~its~~needed ~~existing~~to ~~cash~~fund ~~resources.~~operations, ~~The~~due ~~actual~~to ~~amount~~our ofnegative cash flow ~~funds~~from ~~that~~operations ~~the~~and ~~Company~~accumulated ~~will~~deficit, ~~need~~there ~~will~~would be ~~determined~~substantial doubt byabout ~~many factors,~~our ~~some~~ability ofto ~~which~~continue ~~are~~as ~~beyond~~a ~~its~~going ~~control,~~concern. ~~and~~The Financial ~~the~~Statements ~~Company~~do ~~may~~not include any adjustments that might ~~need~~result ~~funds~~from ~~sooner~~the ~~than~~outcome ~~currently~~of ~~anticipated~~this uncertainty.

The accompanying Financial Statements have been prepared assuming the Company will continue as a going concern. If the Company is unable to identify alternative sources of funding and raise additional capital as needed to fund operations, due to the Company’s negative cash flow from operations and accumulated deficit, there would be substantial doubt about its ability to continue as a going concern. The Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.

We are dependent on government contracts for the majority of our revenue, and a reduction or delay in spending by government agencies could adversely affect our business and operating results.

Contracts with agencies of the ~~United~~U.S. ~~States~~ government and various ~~state~~ state and local governments represented approximately 9097% of our ~~revenue~~ revenue in fiscal ~~2016~~2017, with the remaining 103% of our revenue coming from commercial sources. Therefore, the success of our business is materially dependent on contracts with governmental agencies. Companies engaged in government contracting are subject to certain unique business risks not shared by those serving the ~~general~~ general commercial sector. Among these risks are:

●

a competitive procurement process with no firm schedule or guarantee of contracts being awarded;

●

~~competitive~~ pricing pressure that may require cost reductions in order to realize revenue under contracts;

●

award of work to competitors due primarily to policy reasons;

●

dependence on congressional and state appropriations and administrative allotment of funds;

●

policies and regulations that can be readily changed by governing bodies;

●

competing political priorities and changes in the political climate regarding funding and operations of the services;

●

shifts in buying practices and policy changes regarding the use of contractors;

●

changes in and delays or cancellations of government programs or requirements;

●

government contracts that are usually awarded for relatively short periods of time and are subject to renewal options in favor of the government; and

●

many contracts with U.S. government agencies require annual funding and may be terminated in the agency’s sole discretion.

The U.S. government’s contracting laws and regulations provide that the U.S. government can do business only with responsible contractors. Accordingly, U.S. government agencies have the authority under certain circumstances to suspend or debar a contractor from bidding on government contracts.

A reduction or shift in spending priorities by U.S. government agencies could limit or eliminate the continued funding of our existing government contracts or awards of new contracts or new task orders under existing contracts. Any such reductions or shifts in spending, if significant, could have a material adverse effect on our business.

Inability of the legislative and executive branches of the federal government to agree on a budget for key agencies or to enact appropriations in a timely manner has in the past delayed, and may in the future delay, the award of contracts. These delays, if significant, could have a material adverse effect on our business.

Our government contracts are subject to audit and potential reduction of costs and fees.

Contracts with the U.S. government and many other state and local governmental agencies are subject to auditing by governmental agencies, which could result in the disallowance of certain costs and expenses. These audits can result in the disallowance of significant costs and expenses if the auditing agency determines, in its discretion, that certain costs and expenses were unwarranted, allowable, or were excessive. Disallowance of costs and expenses, if pervasive or significant, could have a material adverse effect on our business.

As a government contractor, we are subject to a number of procurement laws and regulations, violation of which could result in sanctions, contract termination, forfeiture of profit, harm to our reputation or loss of our status as an eligible government contractor.

We must comply with all federal, state and local laws and ~~regulations~~ regulations regarding the formation, administration and performance of of government contracts. These laws and regulations govern how we transact business with our government clients and, in some instances, impose additional costs and related obligations on our business operations. Even though we take significant precautions to identify, prevent and deter fraud, misconduct and non-compliance, we face the risk that our personnel or outside partners may engage in misconduct, fraud or improper activities. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit and/or suspension of payment, any of which could make us lose our status as an eligible government contractor and could cause our reputation to suffer serious harm. Loss of our status as an eligible government contractor would have a material adverse effect on our business.

Actual or perceived conflicts of interest may prevent us from being able to bid on or perform contracts.

U.S. government agencies have conflict of interest policies that may prevent us from bidding on or performing on certain contracts. When dealing with U.S. government agencies that have such policies, we must decide, at times with incomplete information, whether to participate in a particular business opportunity when doing so could preclude us from participating in a related procurement at a future date. We have, on occasion, declined to bid on certain projects because of actual or perceived conflicts of interest. We will continue to encounter such conflicts of interest in the future, which could cause us to be unable to secure key contracts with U.S. government ~~customers~~agencies.

Robust enforcement of environmental regulations is important to our financial success.

Our business is materially dependent on the continued enforcement by ~~local~~federal, state and ~~federal~~local governments of various environmental regulations. From time to time, depending on ~~changed~~changing enforcement priorities, local, state and federal agencies modify environmental clean-up standards to promote economic growth and to discourage industrial businesses from relocating. Any relaxation in environmental and compliance standards could impact our ability to secure additional contracting work with such agencies or with other federal agencies that operate or manage contaminated property.

Many of our U.S. government customers procure goods and services through IDIQ, government wide acquisition contract (GWAC) or General Services Administration (GSA ) Schedule contracts under which we must compete for post-award orders.

Budgetary pressures and reforms in the procurement process have caused many U.S. government customers to purchase goods and services through ~~ID/IQ~~IDIQ, GSA Schedule contracts and other multiple award and/or GWAC contract vehicles. These contract vehicles increase competition and pricing pressures, requiring us to make sustained efforts following the initial contract award to obtain ongoing awards and realize revenue. There can be no assurance that we will increase revenue or otherwise sell successfully under these contract vehicles. Any failure by ~~the~~Versar ~~Company~~ to compete effectively in this procurement environment could harm our business, financial condition, operating results and cash flows, ~~and~~ as well as our ability to meet our financial obligations.

If we fail to recover at-risk contract costs, we may have reduced fees or losses.

We are at risk for any costs incurred before a contract is executed, modified or renewed. A customer may choose not to pay us for these costs. While such costs are typically associated with specific anticipated contracts and funding modifications, we cannot be certain that our customers will execute these contracts or contract renewals, or that they will pay us for all our related at-risk costs. If any such unrecovered at-risk costs are significant, we may experience a decline in contract margins or experience losses on certain contracts or in certain periods, resulting in reduced profitability. We face increased pressure on profit margins and may need to lower margins to price projects at a more competitive rate to win awards.

We could face potential liability for failure to properly design or implement remediation efforts.

Part of our business involves the design and implementation of remediation at environmental clean-up sites. If we fail to properly design, ~~and~~ build, or implement a remediation system, or if a ~~person~~ customer claims that we did, we could face expensive litigation or ~~regulatory~~ regulatory enforcement efforts and potential settlement costs. If we fail to successfully defend against such a lawsuit, it could have a material adverse effect on our business.

Environmental laws and regulations and our use of hazardous materials may subject us to significant liabilities.

Our operations are subject to U.S. federal, state and local environmental laws and regulations, as well as environmental laws and regulations in the various countries in which we operate. We are also subject to environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of regulated substances and waste products, such as radioactive, biochemical or other hazardous materials and explosives. We may incur substantial costs in the future because of modifications to current laws and regulations, new laws and regulations, new guidance or new interpretation of existing laws or regulations, violations of environmental laws or required operating permits, or discovery of previously unknown contamination. Incurring such additional costs could have a material adverse effect on our business.

Our failure to properly manage projects may result in additional costs or claims.

Our engagements regularly involve complex and lengthy projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our clients, and to effectively manage the projects and deploy appropriate resources in a timely manner. If we miscalculate the resources or time required to complete those projects with capped or fixed fees, our operating results could be adversely affected. Further, any defects or errors, or failures to meet our client’s expectations, could result in claims for damages against us.

Our services expose us to significant risks of liability and it may be difficult to obtain or maintain adequate insurance coverage.

Our services involve significant risks of professional and other liabilities that may exceed the fees we derive from performance. Our business activities could expose us to potential liability under various laws and regulations and under federal and state workplace health and safety regulations. In addition, we sometimes may assume liability by contract under indemnification agreements. Given the varied nature of our many agreements, we are not able to predict the magnitude of any such liabilities.

We obtain insurance from third party carriers to cover our potential risks and liabilities. However, it is possible that we may not be able to obtain adequate insurance to meet our needs, may have to pay an excessive amount for the insurance coverage we require, or may not be able to acquire any insurance for certain types of business risks.

We are exposed to risks associated with operating internationally.

A certain portion of our business is conducted internationally. Consequently, we are subject to a variety of risks that are specific to international operations, including the following:

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export regulations that could erode profit margins or restrict exports;

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compliance with the U.S. Foreign Corrupt Practices Act;

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compliance with the U.K Anti Bribery Act;

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compliance with the anti-corruption laws of other jurisdictions in which we operate;

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the burden and cost of compliance with foreign laws, treaties and technical standards and changes in those regulations;

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contract award and funding delays;

●

potential restrictions on transfers of funds;

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foreign currency fluctuations;

●

import and export duties and value added taxes;

●

transportation delays and interruptions;

●

uncertainties arising from foreign local business practices and cultural considerations; and

●

potential military conflicts, civil strife and political risks.

While we have and will continue to adopt and implement aggressive measures to reduce the potential impact of losses resulting from the risks of our foreign business, we cannot ensure that such measures will be adequate.

Political destabilization or insurgency in the regions in which we operate may have a material adverse effect on our business.

Certain regions in which we operate are highly politically unstable. Insurgent activities in the areas in which we operate may cause further destabilization in these regions. There can be no assurance that the regions in which we operate will continue to be stable enough to allow us to operate profitably or at all. We ~~are~~must ~~required~~significantly to increase compensation to our personnel as an ~~incentive~~ incentive to deploy them to many of these regions. To date, we have been able to recover such costs under our contracts, but we may not be able to do so in the future. To the extent that we are unable to transfer such increased costs to our customers, our operating margins would be adversely impacted, which could adversely affect our operating performance. In addition, increased insurgent activities or destabilization, including civil unrest or a civil war in ~~Iraq~~countries orin ~~Afghanistan~~which we operate, may lead to a determination by the U.S. government to halt our operations in a particular location, country or region and to perform the services that we provide using military personnel.

If our partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation or reduced profits.

From time to time, we enter into joint venture and other contractual arrangements with partners to jointly bid on and execute certain projects. The success of ~~these~~such joint projects depends in part on the satisfactory performance of the contractual obligations by our partners. If any of our partners fail to satisfy their contractual obligations, we may be required to make additional investments and provide additional services to complete projects, increasing our cost on such projects. If we are unable to adequately address a partner’s performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation or reduced profits.

We operate in highly competitive industries.

The markets for many of our services are highly competitive. There are numerous professional architectural, engineering, construction management, and environmental consulting firms, and other organizations that offer many of the same services ~~offered~~we ~~by us~~do. We We compete with many companies that have greater resources than us ~~and~~ and we cannot provide assurance that such competitors will not substantially increase the resources they devote to those businesses that compete directly with our services. Competitive factors considered by clients include reputation, performance, price, geographic location and availability of technically skilled personnel. In addition, we face competition from the use by our clients of in-house environmental, engineering and other staff.

Our long-term growth strategy includes acquisitions of other businesses, which may require us to incur costs and liabilities or have other unexpected consequences which may adversely affect our operating results and financial condition.

Like other companies with similar growth strategies, we may be unable to successfully implement our growth strategy, as we may be unable to identify suitable acquisition candidates, obtain acceptable financing, or consummate any future acquisitions. We frequently engage in evaluations of potential acquisitions and negotiations for possible acquisitions, certain of which, if consummated, could significantly enhance the Company’s competitive position. Although it is our general objective only to acquire those companies which will be accretive to both earnings and cash flow, any potential acquisitions may result in material transaction expenses, increased interest and amortization expense, increased depreciation expense and increased operating expense, any of which could have a material adverse effect on our operating results. Acquisitions will require integration and management of the acquired businesses to realize economies of scale and control costs. In addition, acquisitions may involve other risks, including diversion of management resources otherwise available for ongoing development of our business and risks associated with entering new markets. Future acquisitions may also result in potential dilution of the Company’s securities. Consummation of acquisitions may subject the Company to unanticipated business uncertainties or legal liabilities relating to those acquired businesses for which the sellers of the acquired businesses may not fully indemnify us. We may not realize the full anticipated benefit of any acquired business that has operated as a small business (as determined by the Small Business Administration based upon the North American Industry Classification Systems) if following their acquisition by us certain of their contracts are revoked or not renewed because they fail to continue to maintain small business status.

An economic downturn may have a material adverse effect on our business.

In an economic recession, or under other adverse macroeconomic conditions that may arise from natural or man-made events, customers and vendors may be less likely to meet contractual terms and payment or delivery obligations. In particular, if the U.S. government changes its operational priorities in ~~Iraq~~countries ~~and/or~~in which ~~Afghanistan~~we operate, reduces the DOD Operations and Maintenance budget, or reduces funding for Department of State initiatives in which we participate, our business, financial condition and results of operations could be severely affected.

Our quarterly and annual revenue, expenses and operating results may fluctuate significantly, which could have a negative effect on the price of our common stock.

Our quarterly and annual revenues, expenses and operating results have and may continue to fluctuate significantly because of a number of factors, including:

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the seasonality of the spending cycle of our public sector clients, notably the U.S. government, and the spending patterns of our private sector clients;

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the hiring and utilization rates of employees in the United States and internationally;

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the number and significance of client engagements commenced and completed during the period;

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the delays incurred in connection with an engagement because of weather or other factors;

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the ability to work within foreign countries’ regulations, tax requirements and obligations;

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the business, financial, and security risks related to working in foreign countries;

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the ability of clients to terminate engagements without penalties;

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the creditworthiness and solvency of clients;

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the size and scope of engagements;

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the delay in federal, state and local government procurements;

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the ability to perform contracts within budget or contractual limitations;

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the timing of expenses incurred for corporate initiatives;

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any threatened or pending litigation or other regulatory enforcement matters;

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periodic reductions in the prices of services offered by our competitors;

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the likelihood of winning the re-bids of our existing large government contracts;

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the general economic and political conditions;

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the loss of a major contract or the shutdown of a major program;

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the volatility of currencies in foreign countries; and

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our ability to integrate any acquisition or the ability of an acquired business to continue to perform as expected.

Variations in any of these factors could cause significant fluctuations in our operating results from quarter to quarter and could result in net losses and have a material adverse effect on our stock price.

We are highly dependent on key personnel and our business could suffer if we ~~fail~~cannot to continue to attract, train and retain skilled employees.

Our business is managed by a number of key management and operating professional personnel. The loss of key personnel could have a material adverse effect on our business.

Availability of highly trained and skilled professional, administrative and technical personnel is critical to our future growth and profitability. Even in the current economic climate, competition in our industry for scientists, engineers, technicians, management and professional personnel is intense and competitors aggressively recruit key employees. Competition for experienced personnel, particularly in highly specialized areas, has occasionally made it more difficult for us to timely meet all our staffing needs. We cannot be certain that we will be able to continue to attract and retain required staff. Any failure to do so could have a material adverse effect on our business, financial condition, operating results and our ability to meet our financial obligations. Failure to recruit and retain a sufficient number of such employees could adversely affect our ability to maintain or grow our business. Some of our contracts require us to staff a program with personnel that the customer considers key to successful performance. If we cannot provide such personnel or acceptable substitutes, the customer may terminate the contract, and we may be unable to recover our costs.

In order to succeed, we will have to keep up with a variety of rapidly changing technologies. Various factors could affect our ability to keep pace with these changes.

Our success will largely depend on our ability to keep pace with changing technologies that can occur rapidly in our core business segments. We may incur significant expenses updating our technologies, which could in turn have a material adverse effect on ~~our~~ our margins and results of operations. Even if we keep up with the latest developments and available technology, newer services or technologies could negatively affect our business.

Our employees may engage in misconduct or other improper activities, which could harm our business.

Like all companies, we face the risk of employee fraud or other misconduct. Employee misconduct could include intentional failures to comply with U.S. government procurement regulations, unauthorized activities, attempts to obtain reimbursement for improper expenses, or submission of falsified time records. Employee misconduct could also involve improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions against us. Negative press reports regarding employee misconduct could harm our reputation with the U.S. government agencies for which we work. If our reputation with ~~these~~ these agencies is negatively affected, or if we are suspended or ~~debarred~~ debarred from contracting with government agencies for any reason, ~~our~~ our future revenues and growth prospects would be adversely affected. It Despite an active compliance program, it is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could harm our business, financial condition, operating results and our ability to meet our financial obligations.

Internal system or service failures could disrupt our business and impair our ability to effectively provide our services and products to our customers, which could damage our reputation and adversely affect our revenue, profitability and operating results.

Our information technology systems are subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, cyber intruders or hackers, computer viruses, attacks on our computers systems, phishing attacks, natural disasters, power shortages or terrorist attacks. Any such failures or cyber-~~threat~~ threats could cause loss of data and interruptions or delays in our business processes, cause us to incur remediation costs, subject us to claims and damage our reputation. Failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Any system or service disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our customers for work performed on our contracts, collect the ~~amounts~~ amounts that have been billed and produce accurate financial statements in a timely manner. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our results of operations could be materially and adversely affected. Versar has invested in and implemented systems that will allow it to achieve and remain in compliance with the regulations governing its business; however, there can be no assurance that such systems will be effective at achieving and maintaining compliance or that we will not incur additional costs in order to make such systems effective.

We have submitted claims to clients for work we performed beyond the initial scope of some of our contracts. If these clients do not approve these claims, our results of operations could be adversely impacted.

We typically have pending claims submitted under some of our contracts for payment of work performed beyond the initial contractual requirements for which we have already recorded revenue. In general, we cannot guarantee that such claims will be approved in whole, in part, or at all. If these claims are not approved, our revenue may be reduced in future periods.

An impairment charge of ~~goodwill~~intangible assets could have a material ~~adverse~~ adverse impact on our financial condition and results of operations.

Because we have grown in part through acquisitions, ~~goodwill and~~ intangible assets-net represent a substantial portion of our assets. Intangible ~~Goodwill and intangible~~ assets-, net, were $76.21 million as of ~~July~~ 1June 30, ~~2016~~2017. Under accounting principles generally accepted in the ~~United~~ United States, we are required to test ~~goodwill~~intangible assets carried in our Consolidated Balance Sheets for possible impairment on an annual basis based upon a fair value approach and whenever events occur that indicate impairment could exist. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting unit's market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our business, a significant sustained decline in our market capitalization and other factors. In connection with our annual goodwill impairment testing for fiscal 2016, we recorded impairment charges of $20.3 million related to goodwill and $3.8 million related to intangible assets due to market conditions and business trends within the ECM, ESG, and PSG reporting units.

Maintaining adequate bonding capacity is necessary for us to successfully bid on and win certain fixed-price contracts. Failing to to maintain adequate bonding capacity could have a material adverse impact on our ability to pursue new construction services contracts.

In line with industry practice, we are often required to provide bid, performance and/or payment bonds to clients under certain fixed-price contracts. These bonds indemnify the customer should we fail to perform our obligations under the relevant contract. If a bond is required for a particular project and we are unable to obtain ansuch ~~appropriate~~a bond, we we cannot pursue that project. We have bonding capacity but, as is typically the case, the issuance of a bond is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significantly higher costs. There can be no assurance that our bonding capacity will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new fixed-price contracts could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our operating margins may decline under our fixed-price contracts if we fail to estimate accurately the time and resources necessary to satisfy our obligations.

Some of our contracts are fixed-price contracts, under which we bear the risk of any cost overruns. Our profits are adversely affected if our costs under these contracts exceed the assumptions that we used in bidding for the contract. Often, we are required to fix the price for a contract before we finalize the project specifications, increasing the risk that we may misprice these contracts. The complexity of many of our engagements makes accurately estimating our time and resources more difficult. In the event we fail to estimate our time and resources accurately, our expenses will increase and our profitability, if any, under such contracts will decrease.

Item 2. Properties

Our corporate executive office is located in Springfield, Virginia, which is a suburb of Washington, D.C. Versar currently leases 4022,~~507~~260 square feet from Springfield Realty Investors, LLC. The rent is subject to a two percent escalation per year through December 31, ~~2021~~2024.

As of ~~July~~June 130, ~~2016~~2017, we had under lease an aggregate of approximately ~~213~~147,000 square feet of office and manufacturing space in the following locations (parenthetical reference of business segments using space): Dulles (ECM and G&A), Springfield (all segments), Hampton, VA (ESG); Chandler, AZ (ESG); Westminster, CO (all segments); Atlanta, GA (ESG and PSG); Aiea, HI (ECM); Boise, ID (ESG); Columbia (ESG), and Germantown, MD (ECM and ESG); Charleston, SC (ESG); San Antonio and El Paso, TX (ESG); Clark ~~Air Force~~Special ~~Base~~Economic Zone, the Republic of Philippines (ECM); ~~Milton~~and ~~Keynes, U.K. (ECM~~G&A); and Abu Dhabi (ECM and ESG), United Arab Emirates. The lease terms primarily range from two to ~~six~~ seven years.

Item 3. Legal Proceedings

Versar and its subsidiaries are parties from time to time to various legal actions arising in the normal course of business. We believe that any ultimate unfavorable resolution of any current ongoing legal actions will not have a material adverse effect on its consolidated financial condition and results of operations.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity ~~Securities~~ ~~Common Stock~~Securities

Our common stock is traded on the NYSE ~~MKT~~American under the symbol VSR. At ~~March~~ 1June 30, 2017, ~~the~~there ~~Company~~were ~~had~~988 ~~825~~ stockholders of record, excluding stockholders whose shares were held in nominee name. The quarterly high and low sales prices as reported on the NYSE ~~MKT~~ American during fiscal ~~years~~2017 ~~2016~~ and ~~2015~~2016 are presented below.

Fiscal Year 2017	High	Low
4th Quarter	1.71	1.21
3rd Quarter	2.14	0.90
2nd Quarter	1.56	1.19
1st Quarter	1.87	1.15
Fiscal Year 2016	High	Low
4th Quarter	3.25	1.01
3rd Quarter	3.07	1.93
2nd Quarter	3.55	2.67
1st Quarter	4.38	2.86
Fiscal Year 2015	High	Low
4th Quarter	4.45	3.06
3rd Quarter	3.60	2.96
2nd Quarter	7.84	2.69
1st Quarter	4.10	3.06

No cash dividends have been paid by Versar since it began public trading of its stock in 1986. The Board of Directors intends to ~~retain~~ retain any future earnings for use in our business and does not ~~anticipate~~ anticipate paying cash dividends in the foreseeable future. Under the terms of our revolving line of credit, approval would be required from our lender ~~Lender~~ for the payment of any dividends. We have established equity compensation plans to attract, motivate and reward good performance of high caliber employees, directors and service providers serving Versar and its affiliates. Currently, there is one stock incentive plan, which was previously approved by the stockholders: the 2010 Stock Incentive Plan. We do not maintain any equity compensation plans not approved by our stockholders. Through July 1, 2016, 551,369 restricted stock units have been granted under this plan.

We have established equity compensation plans to attract, motivate and reward performance of employees and directors. Currently, there is one stock incentive plan, which was previously approved by the stockholders: the 2010 Stock Incentive Plan. We do not maintain any equity compensation plans not approved by our stockholders. Through June 30, 2017, 562,994 restricted stock units have been granted under this plan.

Equity Compensation Plan Information

			Number of securities
			remaining available for
	Number of Securities		future issuance under
	to be issued upon	Weighted-average	equity compensation
	exercise of	exercise price of	plans, excluding
	outstanding options,	outstanding options,	securities reflected in
	warrants and rights	warrants and rights	column (a)
Plan Category	(a)	(b)	(c)
Equity compensation plans approved by security holders	-	-	539,935

The graph below matches Versar, Inc.'s cumulative 5-Year total shareholder return on common stock with the cumulative total returns of (i) the S&P 500 index and (ii) a customized peer group of five companies comprised of AECOM Technology Corp., Arcadis, NV, Ecology & Environment Inc., TRC Companies Inc. and URS Corp. The graph tracks the performance of a $100 investment in our common stock, in each of the peer groups, and the index (with the reinvestment of all dividends) from 6/30/~~2011~~2012 to 6/30/~~2016~~2017.

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations is provided to enhance the understanding of, and should be read together with, our consolidated financial statements and the notes to those statements that appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Unless otherwise specifically noted, all years refer to our fiscal years which ended on ~~July~~June 130, ~~2016~~2017, ~~June 26, 2015~~ and ~~June~~July 271, ~~2014~~ 2016.

Financial Trends

Our business performance is affected by the overall level of U.S. ~~Government~~government spending and the alignment of our offerings and capabilities with the budget priorities of the U.S. ~~Government~~government. Adverse changes in fiscal and economic conditions, such as the manner in which spending reductions are implemented, including sequestration, future government shutdowns, 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~~government continues funding and which clearly align with Versar’s capabilities. These opportunities include construction management services, security ~~system~~ systems integration, ~~performance-based~~ ~~remediation~~shoreline stabilization, sustainable range management and ~~hazardous~~UXO, ~~materials~~and ~~management~~PBR. We also continue to focus on those 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 to small business and similar such programs. If we are unable to seek new ways to develop our relationships with firms qualified for these programs to increase our ability to capture more of this work and maintain current projects this may result in a material impact of 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 and then to 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 ingoing ~~the~~forward ~~coming year~~ to address these ~~concerns~~challenges. Our ~~business~~ ~~operates through the following~~ three business 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.

The ~~initial~~DAFB ~~award~~project contributed $15.2 million of revenue for ~~the~~fiscal 2017, ~~DAFB~~as ~~project~~compared ~~was~~to $9850.32 million for fiscal 2016, a decrease of $35.0 ~~Seven~~million. During fiscal 2015 and 2016, the DAFB project ~~modifications~~completed ~~have~~the ~~raised~~concept, planning and the ~~contract~~major ~~ceiling~~execution tophases ~~$109~~of construction.5 ~~million.~~During fiscal 2017, we continued performing the ~~DAFB~~remaining execution phases according to our project ~~contributed~~plans ~~$50.2~~resulting in ~~million~~the ofexpected ~~revenue~~reduction in revenues for ~~fiscal~~the ~~2016~~current year. The asrunway ~~compared~~was fully turned over to ~~$43.2~~the ~~million~~Air ~~for~~Force ~~fiscal~~on ~~2015~~August 16, an2017 and ~~increase~~Versar ofis ~~$6.9~~awaiting a pending modification with additional scope ~~million~~with completion expected by November 2017. Versar is the prime contractor on the DAFB project, with a significant portion of the work performed by sub-contractors, resulting in ~~positive~~ smaller positive gross margin on the project than our other self-performing projects. During January 2017, the DAFB customer, issued the Company a Notice of Forbearance stating we had not met our contractual obligation to complete the DAFB project by December 31, 2016. We submitted several change order requests to the DAFB customer during fiscal 2016 and 2017, a number of which are still pending resolution. The requested change orders impacted our timeline for completion of the project, and were outside the original scope of services to be performed, ~~but~~and ~~did~~as ~~not~~a result, did impact the project’s profitability. We ~~continue~~ toexpect ~~work and perform tasks on~~ the DAFB project, ~~while~~to ~~under~~be ~~the~~profitable ~~Notice~~pending ofsuccessful ~~Forbearance,~~outcomes inof ~~order to deliver~~ the ~~completed~~Request ~~runway~~for Equitable ~~project~~Adjustment as(REA) ~~soon~~negotiations asand ~~possible. We~~ anticipate the acceptance of ~~the~~ additional change orders and resolution of the construction related issues by the DAFB customer that will resolve the current Notice of Forbearance and allow the Company to complete the construction project by ~~June~~December ~~28,~~ 2017.

There are risk factors or uncertainties that could significantly impact our future financial performance. A sample of these risks is listed below. For a complete discussion of these risk factors and uncertainties, refer to Item 1A. Risk Factors, herein.

●

We operate in highly competitive industries;

●

A reduction or delay in pending awards by government agencies could adversely affect us;

●

Our inability to win or renew government contracts could adversely affect us;

●

We are exposed to risks associated with operating internationally;

●

Our failure to properly manage projects may result in additional costs or claims;

●

Our failure to maintain compliance with our banking loan covenants;

●

An economic downturn may adversely affect our business;

●

In order to succeed, we must stay current with a variety of rapidly changing technologies;

●

We are highly dependent on key personnel; and

●

The government may adopt new contract laws or regulations, increasing the cost and difficulty of performance.

Factors Affecting Fiscal 2017 Performance

During fiscal 2017, Versar recognized a number of project losses and charges to our Income Statement and Balance Sheet as follows:

Loss Contingency Accruals in the ECM Segment

During fiscal 2017, an infrastructure repair project with USACE required the installation of two General Electric (GE) transformers purchased as part of our contract for services. After installation, the transformers malfunctioned and required replacement. GE determined that the failure of both transformers was caused by a manufacturer's defect and GE would repair both transformers at no cost to Versar or the customer, but the emergency power services required to deliver power to the customer during the malfunctioning period was outside the scope of their warranty. On May 9, 2017, the customer issued a Notice to Proceed for the repair of the transformers and further directed Versar to complete several studies before allowing the reinstallation of the repaired transformers. Versar believes this is a Statement of Work sequencing change and has submitted a notice of change and pending REA to the customer. The customer has denied the REA and directed Versar to file a claim under the Disputes clause of the contract. GE was prepared to deliver the repaired transformers in mid-June but because of this customer direction, the actual reinstallation of the transformers cannot take place until the end of October 2017 or once Versar has completed the studies, anticipated to be completed at the end of September 2017. In the meantime, Versar must continue to provide the emergency power services and store the repaired transformers from mid-June through the end of October, at an estimated cost of $0.3 million. To date, no decision on the REA has been made.

During the fourth quarter of fiscal 2017, Versar encountered differing site conditions than what the client originally indicated for the following three projects (i) INOVA Loudoun Hospital, (ii) INOVA Heart & Vascular, and (iii) Sabey access controls. Due to the differing site conditions, installation for these sites will not be achieved within the contractual value. Versar is in contract negotiations with the clients in the aggregate amount of $0.1 million. To date no decision on the contract negotiations has been made. Versar continues to install the equipment to provide a complete solution to the customers. All three projects are estimated to be completed in December 2017.

Loss Contingency Accruals in the PSG Segment

In September 2016, Versar entered into a contract with the U.S. Army Reserve 88th Regional Support Command (RSC) to provide staff augmentation services. Management expects this contract to operate at a loss. During September 2016, we recorded a loss of $0.6 million related to this contract for the base period of nine months. The base contract performance period for this contract was awarded in September 2016 and ended April 15, 2017. In April 2017, the RSC executed the first option period for an additional 12 months. We expect this contract to continue to operate at a loss and have recorded a charge of $1.3 million during the fourth quarter of fiscal 2017.

Other Nonrecurring Expenses

On December 9, 2016, Versar, together with certain of its domestic subsidiaries acting as guarantors, entered into an amendment to the loan agreement with Bank of America N. A., as lender. Under the amendment, the lender waived all existing events of default, and reduced the revolving facility to $13.0 million from $25.0 million. The interest rate on borrowings under the revolving facility and the term facility were also amended. Under the initial loan agreement, interest accrued at the LIBOR Daily Floating Rate plus 1.87%. Under the amendment, interest now accrues at the LIBOR Daily Floating Rate plus 5.00%. During fiscal 2017, we paid $1.2 million in forbearance fees, and expenses related to the lender’s advisor and the CRO required by the amendment.

Additionally, during the fourth quarter of fiscal 2017, Versar recorded a $1.2 million charge to write-down the related historical cumulative translation adjustment for PPS, as a result of the sale of PPS in April 2017. This amount is recorded as Other Expense in the Consolidated Financial Statements.

In August 2017, we received a decision from an impartial referee that was retained to address the purchase price adjustment for the fiscal 2014 acquisition of Geo-Marine, Inc. (GMI) between Versar and ARA. Per the agreement, Versar was to calculate the net working capital adjustment and then make a payment to, or receive a payment from, ARA for the adjusted amount. The decision of the referee requires a payment by Versar to ARA in the amount of $1.4 million. We recorded a loss contingency accrual of $1.2 million in fiscal 2016. As a result of this decision, we recorded an additional $0.5 million of costs in fiscal 2017, including legal expenses related to the settlement process. The contracts acquired related to this acquisition are reported within the ECM and ESG segments on a 58.6% and 41.4% allocation with the segments receiving their proportional share of the loss contingency accrual.

Versar failed to meet its fourth quarter fiscal 2017 banking loan covenant and has recorded $0.1 million in anticipated fees to the lender related to the anticipated forbearance agreement. (Note 21 – Subsequent Events).

On July 28, 2017, Versar and two J.M. Waller & Associates (JMWA) note holders entered into a full and final settlement of issues related to the payment of the notes in the litigation arising from Versar’s payments under the relevant notes. This litigation did not involve the third JMWA note holder, who was not a party to the action. We have recorded $0.1 million related to the note holders’ attorney’s fees and $0.2 million related to quarterly interest payments from October 2016 through September 2017. (Note 21 – Subsequent Events).

Factors Affecting Fiscal 2016 Performance

During fiscal 2016, the Company recognized many onetime project losses and charges to our Income Statement and Balance Sheet as follows:

Loss Contingency Accruals in the ESG Segment

In June 2016, a class action lawsuit was filed against ~~the~~Versar ~~Company~~ by former employees alleging violations of several provisions of California’s labor law relating to paid lunch time and breaks for the years 2012 through 2015. ~~The~~We ~~Company has~~ reviewed the supporting files and documentation regarding this notice and ~~has~~ engaged outside counsel with experience with these matters to assist ~~the~~us ~~Company~~ in the defense of this matter. ~~Given~~We that this matter is in a very early stage it is difficult to predict the likely outcome; however, management has determined a reasonably possible loss in a range of $0.5 to $1.0 million, including the expenses of outside counsel. The Company performed an initial financial review of the number of employees, days worked, and hours per day worked by employees on this project over the course of the years noted in the lawsuit. As a result of this analysis, ~~the Company~~we ~~has~~ recorded a loss contingency accrual of $0.5 million related to this event for fiscal 2016. On October 11, 2016, the mediation resulted in a Confidential Memorandum Of Understanding (MOU) for settlement of this claim. The estimated contingency accrual of $0.5 million ~~remains~~ remained consistent with this MOU and was paid in August, 2017.

In May 2016, during a routine audit by the ~~General Services Administration (“~~GSA”) concerning authorized GSA schedule rates compared to the invoicing of a federal customer, the GSA discovered that ~~the~~Versar ~~Company~~ had been charging its customer several billing rates that were not supported by the ~~contractual~~ contractual listed billing rates for ~~the~~ fiscal 2015 and 2016. ~~The outcome of~~We ~~this audit finding has not yet been resolved. The Company has~~ performed a preliminary financial analysis of the number of employees working, labor categories billed to the customer, the contractual billing rates that should have been billed, days worked, and hours per day worked on this project over the course of the years noted in the audit finding. ~~This~~As the audit had not been resolved at the end of fiscal 2016, this preliminary analysis iswas the basis for the ~~Company’s~~our probable loss and provided the basis for the accrual ~~made.~~during ~~Therefore,~~fiscal ~~the~~2016 ~~Company determined the audit finding to be estimateable and recorded a loss contingency accrual~~ of $0.3 million ~~related to this event during the fiscal year ended July 1, 2016~~. Subsequently, the outstanding audit issues were resolved and ~~the~~Versar ~~Company~~ made a payment of $0.3 million to the GSA in November 2016.

During April 2016, a project under one of ~~the~~ ~~Company’s~~our PBR Task Orders involving a ground water extraction well system at a site in Ohio failing to meet minimum ~~performance~~ performance requirements required rehabilitation/replacement. This work was completed under ~~the Company~~Versar’s 2009 ~~United~~USAF ~~States Air Force~~ Worldwide Environmental Restoration and Construction (WERC) contract with ~~the Air Force Civil Engineer Center (“~~AFCEC”). This extraction well system failure was not included in ~~the~~our ~~Company’s~~ original budget for the performance of this work. In accordance with the performance basis of our contract with the customer, ~~the~~we ~~Company~~ must repair and or replace all equipment located on the site that fails to meet performance requirements. ~~The~~We ~~Company has~~ performed a review of the materials and labor required to rehabilitate or replace the extraction well system and used this review as the basis of the estimate for the accrual. ~~The~~We ~~Company~~ recorded a loss contingency accrual of $0.3 million in fiscal 2016 to rehabilitate or replace the extraction well system. The corrective action occurred ~~will~~during ~~occur~~fiscal ~~during~~2017 ~~the~~and ~~first~~will ~~three~~continue ~~quarters~~into of fiscal ~~2017~~ 2018.

Lease Loss Accruals

In March 2016, ~~the~~Versar ~~Company~~ abandoned its field office facilities in Charleston, SC and Lynchburg, VA, both within the ESG segment. Although ~~the~~we ~~Company~~remain ~~remains~~ obligated under the terms of these leases for the rent and other costs associated with these leases, ~~the~~ ~~Company~~we decided to cease using these spaces effective April 1, 2016, and ~~does~~do not plan to occupy them in the future. Therefore, ~~the~~ ~~Company~~we recorded a charge to selling, general and administrative expenses of approximately $0.4 million in fiscal 2016 to recognize the costs of exiting these spaces. This liability iswas equal to the total amount of rent and other direct costs for the period of time that the space is expected to remain unoccupied. In addition, this liability ~~includes,~~ included the present value of the amount by which the rent paid by ~~the~~Versar ~~Company~~ to the landlord exceeds any rent paid to ~~the~~ ~~Company~~us by a tenant under a sublease over the remainder of the lease terms, which expire in April 2019 for Charleston, SC, and June 2020 for Lynchburg, VA. Versar ~~The Company~~ also recognized $0.1 million of costs in fiscal 2016 for the associated leasehold improvements related to the Lynchburg, VA office.

In June 2016, ~~the~~Versar ~~Company~~ abandoned an office in San Antonio, TX, ~~which~~ which is within the ECM segment. ~~The~~We ~~Company~~have ~~will,~~continued ~~however, continue~~ to use a smaller office in San Antonio. Although ~~the Company~~we ~~remains~~remain obligated under the terms of this lease for the rent and other costs associated with this lease, ~~the~~we ~~Company~~ made the decision to cease using this space on July 1, 2016, and ~~has~~have no foreseeable plans to occupy it in the future. Therefore, ~~the Company~~we recorded a charge to selling, general and ~~administrative~~ administrative expenses of approximately $0.2 million in fiscal 2016 to recognize the costs of exiting this space. This liability is equal to the total amount of rent and other direct costs for the period of time that the space is expected to remain unoccupied. In addition, this liability includes the present value of the amount by which the rent paid by ~~the~~ ~~Company~~Versar to the landlord exceeds any rent paid to ~~the~~us ~~Company~~ by a tenant under a sublease over the remainder of the lease term, which expires in February 2019. ~~The~~Versar ~~Company~~ also recognized $0.2 million of costs in fiscal 2016 for the associated leasehold improvements related to the San Antonio, TX office.

Other Nonrecurring Expenses

OnDuring ~~September 30~~the third and fourth quarters of fiscal 2016, ~~2015~~following discussion with its lender, Versar determined that it was not in compliance with the ~~Company~~covenants regarding its Consolidated Total Leverage Ratio, ~~together~~Consolidated ~~with~~Senior ~~certain~~Leverage ofRatio and Asset Coverage Ratio under its ~~domestic~~loan ~~subsidiaries~~agreement. ~~acting~~Each asfailure ~~guarantors,~~to ~~entered~~comply with ~~into~~these covenants constituted a default under the loan agreement. ~~with~~On ~~the~~May ~~Lender~~12, ~~and~~2016, ~~letter~~Versar, certain of ~~credit~~its ~~issuer~~subsidiaries, and ~~for~~the lender entered into a ~~revolving~~ ~~credit~~forbearance ~~facility~~agreement inpursuant to which the ~~amount~~lender ofagreed ~~$25.0~~to ~~million~~forbear from exercising any and aall rights ~~term~~or remedies available to it under the loan agreement and ~~facility~~applicable inlaw related to these defaults for a period ending on the earliest ~~amount~~to occur of: ~~$5.0~~(a) ~~million.~~a ~~The~~breach ~~proceeds~~by Versar of any obligation or covenant under the ~~term~~forbearance agreement, (b) any other default or ~~facility~~event ~~and~~of ~~borrowings~~default under the ~~revolving~~loan ~~credit~~agreement ~~facility~~or ~~were~~(c) June 1, 2016 (the ~~used~~Forbearance toPeriod), ~~repay~~which ~~amounts~~was ~~outstanding~~subsequently ~~under~~extended ~~the~~through additional ~~Company~~forbearance agreements. The lender engaged an advisor to review Versar’s ~~Third Amended~~financial ~~and~~condition ~~Restated~~on ~~Loan~~the ~~and~~lender’s behalf. ~~Security~~Versar ~~Agreement~~accrued ~~with~~$0.1 ~~United~~million ~~Bank and~~at toJuly ~~pay~~1, a2016 ~~portion~~related ofto the costs ~~purchase~~of ~~price~~services ~~for~~provided by the ~~acquisition of~~lenders’ ~~VSS~~advisor.

During ~~the third and fourth quarters of~~ fiscal 2016, asVersar ~~has previously~~and ~~been disclosed, following discussion with~~ the ~~Lender, the~~lender ~~Company~~entered ~~determined~~into ~~that it was not in compliance with the~~additional ~~covenants~~forbearance ~~regarding its Consolidated Total Leverage Ratio~~agreements, ~~Consolidated~~ ~~Senior~~which ~~Leverage~~allowed ~~Ratio~~us ~~and~~to ~~Asset~~borrow ~~Coverage~~funds ~~Ratio under~~pursuant to the loan agreement., ~~Each~~consistent ~~failure~~with tocurrent ~~comply~~operating ~~with~~needs ~~these covenants~~as ~~constitutes~~set aforth ~~default~~in ~~under~~a ~~the~~13-week ~~Loan~~cash ~~Agreement.~~flow Onforecast ~~May~~subject ~~12,~~to ~~2016,~~certain caps ~~the~~on ~~Company,~~revolving ~~certain~~borrowings ofinitially ~~its~~sit ~~subsidiaries,~~at ~~and~~$15.5 ~~the~~million ~~Lender entered~~and ~~into~~subsequently areduced ~~Forbearance~~to ~~Agreement~~$13.0 ~~pursuant~~million tothrough ~~which~~December ~~the~~9, ~~Lender~~2016. ~~agreed to~~In ~~forbear~~addition, from ~~exercising any~~ and ~~all~~after ~~rights~~June or30, ~~remedies~~2016 ~~available~~outstanding ~~to it~~amounts under the ~~Loan~~credit ~~Agreement~~facility ~~and~~bore ~~applicable~~interest ~~law~~at ~~related to these defaults for a period ending on~~ the ~~earliest~~default tointerest ~~occur~~rate ~~of: (a) a~~set ~~breach~~forth byin the ~~Company~~credit offacility ~~any~~equal ~~obligation~~to orthe ~~covenant~~LIBOR ~~under~~Daily ~~the Forbearance~~Floating ~~Agreement,~~ Rate (b)as ~~any~~defined ~~other~~in ~~default or event of default under~~ the ~~Loan~~credit ~~Agreement or (c~~facility) ~~June~~plus 1,3.95%. ~~2016~~In ~~(the~~connection ~~Forbearance~~with ~~Period).~~these ~~During~~forbearance ~~the Forbearance Period~~agreements, ~~the~~we ~~Company~~recorded ~~continued~~a ~~to have~~charge ~~the right~~ to ~~borrow~~selling, general ~~funds~~and ~~pursuant~~administrative toexpenses ~~the terms~~ of ~~the~~approximately ~~Loan Agreement. The Lender engaged an advisor to review the Company’s financial condition on the Lender’s behalf. The Company accrued~~ $0.12 million for atfiscal ~~July 1,~~ 2016 related to the ~~costs~~ ofremaining ~~services~~deferred ~~provided~~expenses associated bywith the ~~Lenders’ advisor~~loan agreement.

Versar ~~Subsequent~~entered tointo ~~the~~negotiations ~~end~~with ofARA ~~fiscal~~regarding ~~year 2016,~~ the ~~Company,~~fiscal ~~certain~~2014 acquisition of ~~its~~ ~~subsidiaries~~GMI, and the ~~Lender~~related ~~entered~~price ~~into~~agreement ~~forbearance~~dated September ~~agreements~~2, ~~which~~2013 ~~allowed~~between ~~the~~Versar ~~Company~~and toARA. ~~borrow~~Per ~~funds pursuant to~~ the ~~Loan~~price ~~Agreement~~agreement, ~~consistent~~after ~~with current Company needs as set~~the ~~forth~~closing indate aof ~~13-week~~the ~~cash~~acquisition, ~~flow~~Versar ~~forecast~~was ~~subject~~ to ~~certain~~calculate ~~caps~~the onnet ~~revolving~~working ~~borrowings~~capital ~~initially~~adjustment ~~of $15.5 million~~ and ~~reducing~~then ~~to $13.5~~make ~~million~~a ~~through~~payment ~~December 9~~to, ~~2016.~~or Inreceive ~~addition, from and after~~a ~~June~~payment 30from, ~~2016~~ARA ~~outstanding~~for ~~amounts under~~ the ~~credit~~adjusted ~~facility~~amount. ~~bear interest~~We atrecorded ~~the~~a ~~default~~loss contingency ~~interest~~accrual ~~rate~~of ~~set~~$1.2 ~~forth~~million in ~~the~~fiscal ~~credit facility~~2016 ~~equal~~that torepresented management’s ~~the~~best ~~LIBOR~~estimate ~~Daily~~at ~~Floating~~the ~~Rate~~time ~~(as~~of ~~defined~~the inultimate ~~the~~cost ~~credit~~to ~~facility)~~resolve ~~plus~~this 3matter.~~95%.~~ ~~The~~During ~~Company~~fiscal ~~was~~2017, ~~required~~as ~~to provide~~ a 13 ~~week~~result ~~cash~~of ~~flow forecast updated on~~ a ~~weekly basis to the Lender~~ ~~and~~subsequent ~~the~~settlement, ~~Lender~~we ~~waived~~recorded ~~any~~an ~~provisions~~additional ~~prohibiting~~$0.5 ~~the~~million ~~financing~~ of ~~insurance~~costs, ~~premiums~~including ~~for~~legal ~~policies~~expenses. ~~covering~~The ~~the~~contracts ~~period~~acquired ofrelated ~~July 1, 2016~~ to this ~~June~~acquisition ~~30,~~are ~~2017~~reported inwithin the ~~ordinary~~ECM ~~course of the Company’s business~~ and inESG ~~amounts~~segments ~~consistent~~on ~~with past practices~~a 58.6% ~~The forbearance~~and ~~agreement also required the Company to pursue alternative sources of funding for its ongoing business operations~~41. In4% ~~connection~~allocation with the ~~forbearance~~segments ~~agreement,~~receiving ~~the Company recorded~~their aproportional ~~charge~~share ~~to selling, general and administrative expenses~~ of ~~approximately~~ ~~$0.2 million for fiscal year 2016 related to~~ the ~~remaining~~ ~~deferred~~loss ~~expenses~~contingency ~~associated with the loan agreement entered into in September 2015~~accrual.

During Onthe ~~December~~fourth 9,quarter of fiscal 2016, Versar, ~~together~~recorded ~~with~~a ~~certain~~$9.5 ofmillion charge to record a full valuation allowance against its ~~domestic~~deferred ~~subsidiaries~~tax ~~acting~~assets. asASC ~~guarantors~~740-10-30-4 ~~(collectively~~requires deferred taxes to be determined separately for each taxpaying component in each tax jurisdiction. Furthermore, the ~~Guarantors), entered~~deferred ~~into~~tax assets must be reduced by a ~~First~~valuation ~~Amendment~~allowance if, based on the weight of available positive and ~~Waiver~~negative (evidence, it is “more likely than not” that some portion or all of the ~~Amendment)~~deferred tax assets will not be realized. We have determined to reduce the deferred tax ~~loan~~asset ~~agreement~~to (the ~~Loan~~amount ~~Agreement)~~that ~~dated~~is ~~September~~more ~~30,~~likely ~~2015~~than ~~with the~~not ~~Lender~~to be realized.

Additionally, ~~Under~~during the ~~Amendment,~~fourth ~~the~~quarter ~~Lender waived all existing events~~ of ~~default,~~ ~~and~~fiscal ~~reduced the revolving facility to $13~~2016,~~000,000~~ ~~from $25,000,000.~~Versar ~~The~~recorded ~~interest~~a ~~rate on borrowings under the revolving facility and the term facility accrue at the LIBOR Daily Floating Rate plus 5.00% from LIBOR plus~~ $1.~~87%. The Amendment amended the~~9 ~~Loan~~million ~~Agreement~~charge to ~~add~~write-down ~~a covenant requiring Versar to maintain~~ certain ~~minimum~~PPS ~~quarterly~~assets, ~~consolidated EBITDA amounts. The~~primarily ~~Amendment~~inventory, ~~also~~to ~~eliminated~~their ~~the~~estimated ~~Loan~~net ~~Agreement~~realizable ~~covenants~~value ~~requiring maintenance~~as of aJuly ~~required consolidated total leverage ratio~~1, ~~consolidated~~2016. ~~fixed~~This ~~charge~~amount ~~coverage~~is ~~ratio,~~recorded ~~consolidated~~as ~~senior leverage~~Other ~~ratio~~Expense ~~and~~(Income) ~~consolidated~~in ~~asset~~the financial ~~coverage ratio~~statements.

The Company, entered into negotiations with Applied Research Associates (ARA) regarding the fiscal 2014 acquisition of GMI, and the related price agreement dated September 2, 2013 between Versar and ARA. Per the price agreement, after the closing date of the acquisition, Versar was to calculate the net working capital adjustment and then make a payment to, or receive a payment from, ARA for the adjusted amount. As the Company continues to negotiate a payment settlement to ARA, a reasonably possible payment calculation is within a range of $0.7 million to $2.2 million. The Company has recorded a loss contingency accrual of $1.2 million which represents management’s best estimate of the ultimate cost to resolve this matter. The contracts acquired related to this acquisition are reported within the ECM and ESG segments on a 58.6% and 41.4% allocation with the segments receiving their proportional share of the loss contingency accrual.

During the fourth quarter of fiscal 2016, the Company recorded a $9.5 million charge to record a full valuation allowance against its deferred tax assets. ASC 740-10-30-4 requires deferred taxes to be determined separately for each taxpaying component in each tax jurisdiction. Furthermore, the deferred tax assets must be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The Company has determined to reduce the deferred tax asset to the amount that is more likely than not to be realized.

Additionally, during the fourth quarter of fiscal 2016, the Company recorded a $1.9 million charge to recognize a loss on the sale of PPS, which is scheduled to be sold in March 2017. This amount is recorded as Other Expense (Income) in the financial statements.

Goodwill and Intangible Expense Impairments

During ~~the third quarter of~~ fiscal 2016, ~~sustained~~continued delays in contract awards and contract funding and the direct impact on ~~the Company~~Versar’s results of operations, coupled with the continued decrease in ~~the~~our ~~Company’s~~ stock price, ~~and~~ were deemed to be triggering events that led to ana ~~interim period~~ test for goodwill impairment. As a result of our analysis, we recorded an impairment charge of $1520.93 million. The carrying value of goodwill after impairment at ~~April~~July 1, 2016 was $4.4 million. The Company’s remaining goodwill balance, after impairment, was derived from the acquisition of JMWA in fiscal 2015. Based on the results of the impairment testing, the Company concluded that the value of definite-lived intangible assets with a carrying value of $2.9 million was not recoverable. The Company has recorded a charge of $1.5 million for the partial impairment of definite-lived intangible assets acquired from JMWA, a charge of $0.8 million for the impairment of definite-lived intangible assets acquired from GMI, and a charge of $0.7 million for the impairment of definite-lived intangible assets of PPS, acquired in fiscal 2010, and Charon Consulting, acquired in fiscal 2012. As a result of these charges, the carrying amount of intangible assets acquired from Charon and PPS has been reduced to zero~~, and the carrying amount of intangible assets in the Company’s PSG segment have been reduced to zero~~.

~~During the fourth quarter of fiscal 2016~~Further, ~~continued~~based ~~delays in contract awards and contract funding and the direct impact~~ on the ~~Company’s~~ results of ~~operations, coupled with~~ the ~~continued decrease in the Company’s stock price, and were deemed to be triggering events that led to an updated test for goodwill~~ impairment. ~~As a result of our analysis~~testing, we ~~recorded an additional~~ ~~impairment charge of $4.4 million. The carrying value of goodwill after impairment at July 1, 2016 was zero. Based on the results of the impairment testing, the Company~~ concluded that the value of definite-lived assets with a carrying value of $03.98 million was not recoverable. ~~The~~We ~~Company has~~ recorded a charge of $0.3.8 million in fiscal 2016 for the full impairment of definite-lived intangible assets acquired from JMWA, aGMI, ~~charge of $0.6 million for the impairment of definite-lived~~Charron ~~intangible~~and ~~assets~~PPS ~~acquired~~and ~~from~~as ~~GMI. As~~ a result of these charges, the carrying amount of intangible assets ~~acquired from JMWA and GMI~~ has been reduced to zero.

Consolidated Results of Operations

The table below sets forth our consolidated results of continuing operations for the fiscal years ended ~~July 1, 2016,~~ June 2630, ~~2015,~~ 2017 and ~~June~~July 271, ~~2014~~ 2016.

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
	(dollars in thousands)
GROSS REVENUE	$~~167~~111,~~917~~821	$~~159~~167,~~877~~917	~~$110,280~~
Purchased services and materials, at cost	~~107~~60,~~199~~860	90107,~~289~~199	~~55,108~~
Direct costs of services and overhead	5745,~~544~~061	5557,~~797~~544	~~46,653~~
GROSS PROFIT	$35,~~174~~900	$133,~~791~~174	~~$8,519~~
Gross Profit percentage	25%	92%	8%
Selling general and administrative expenses	1312,~~031~~873	1113,~~003~~031	~~10,175~~
Other operating expense (income)	1,937	-	(1,596)
Other operating expense	1,243	1,937
Goodwill Impairment	~~20,332~~-	-20,331	~~1,381~~
Intangible impairment	~~3,812~~-	-3,812	-
OPERATING (LOSS) INCOME	(35,937)	2,788	(1,441)
OPERATING (LOSS)	(8,216)	(35,937)
OTHER (INCOME) EXPENSE
Interest income	(1914)	(219)	~~(15)~~
Interest expense	~~702~~1,446	~~447~~702	~~133~~
(LOSS) INCOME BEFORE INCOME TAXES, FROM CONTINUING OPERATIONS	$(36,619)	$2,343	$(1,559)
(LOSS) BEFORE INCOME TAXES	$(9,648)	$(36,620)

Fiscal Year ~~2016~~2017 Compared to Fiscal Year ~~2015~~2016

Gross revenue for fiscal ~~2016~~2017 was $~~167~~111.98 million, ana ~~increase~~decrease of 533% compared to $~~159~~167.9 million during fiscal ~~2015~~2016. ~~VSS~~The ~~contributed~~decrease in revenue resulted from declines in revenue of (i) $1735.60 million related to the ~~increase~~DAFB ~~and~~project, ~~our~~which ~~DAFB~~was ~~project~~substantially ~~contributed~~completed anin ~~additional~~fiscal 2017 and will be fully completed during fiscal 2018, (ii) $61.94 million ~~off-set~~for byVSS, ~~decreases~~acquired induring ~~revenue~~fiscal of2016, (iii) $4.0 ~~approximately~~million from our Laughlin AFB project, (iiv) $3.0 million related to PPS ~~reduced~~which ~~sales~~was ~~from~~sold ~~PPS~~in April 2017, (iiv) $12.94 million related to decreased levels of Title II work in Iraq and Afghanistan within ECM, (~~iii~~vi) $24.31 million related to PBR projects, within ESG, (ivvii) $~~4.0~~6 million ~~related~~from todecline in EPA during the change ~~expiration~~of Administration and lack of ~~the~~funding ~~Ft. Irwin~~available ~~contract~~at ~~within~~the government ~~ESG~~year-end, and a (vviii) when the prime small business did not renew Versar's subcontract, $31.81 million from PSG’s ~~historical~~ ~~business~~Joint ~~line~~Base asLewis aMcChord ~~result~~(JBLM) project. ofAdditionally, ~~the~~PSG continued to experience a shift of contract solicitations to businesses that qualify for ~~small~~ small business and often set-aside programs.

Purchased services and materials for fiscal ~~2016~~2017 were $~~107~~60.29 million, ana ~~increase~~decrease of 1943% compared to $90107.32 million during fiscal ~~2015~~2016. The purchased services and materials decrease was comprised of; (i) $32.6 million for the DAFB project, (ii) $4.3 million decrease at VSS, ~~acquired~~(iii) ~~during~~$3.1 ~~fiscal~~million ~~2016~~for the Cedar Point Shoreline project, ~~contributed~~(iv) $104.05 million from decline in EPA projects, (v) RSC project loss reserves of $0.6 million related to this contract for the ~~increase~~base period of nine months and $1.3 million for the ~~DAFB~~RSC project related ~~contributed~~to the exercise of an additional option year, twelve month, performance period, (vi) $6.0 ~~million~~.3 Wemillion ~~are~~for ~~the~~ an ~~prime~~infrastructure ~~contractor~~repair atproject ~~DAFB~~with USACE, and as(vii) ~~such, a~~$0.1 ~~significant~~million ~~portion~~related ofto ~~the~~three ~~work~~projects. is(see ~~performed~~“Factors byAffecting ~~sub~~Fiscal 2017 Performance-~~contractors~~-Loss Contingency Accruals” above for more information).

Direct costs of services and overhead for fiscal ~~2016~~2017 were $5745.50 million, ana ~~increase~~decrease of 322% compared to $5557.85 million during ~~the~~fiscal 2016. The decrease is related to a cost savings plan we initiated during fiscal 2017 as well the full year impact of the costs savings ~~2015~~reductions we made in fiscal 2016.

Gross profit from operations for fiscal ~~2016~~2017 was $35.29 million, aan ~~decrease~~increase of 7786% compared to gross profit of $133.82 million for ~~fiscal~~ ~~2015~~fiscal 2016. Gross profit ~~contributions~~increase ~~from~~was ~~VSS~~comprised ~~were~~of $2.1.4 million from VSS, which was offset by areduced ~~project~~gross ~~mix~~profit ~~shift,~~of ~~such~~$2.1 asmillion from the DAFB ~~decline~~project inwhich ~~our~~is ~~Title~~scheduled ~~II work~~for incompletion ~~Iraq~~during ~~and~~fiscal ~~Afghanistan~~2018, $0.4 ~~ncreased~~million ~~costs~~for ~~associated~~project ~~with~~loss ~~the DAFB~~contingency ~~project~~accruals, and aan additional ~~loss~~charge offor $20.15 million infor ~~our~~the ~~PPS~~ARA ~~subsidiary,~~net working capital ~~which~~settlement we(see ~~are~~“Factors inAffecting ~~the~~Fiscal ~~process~~2017 Performance” ofabove ~~divesting.~~for Inmore ~~addition,~~information). weCosts ~~incurred~~savings ~~losses~~actions ofmade ~~$900,000~~ to ~~complete~~improve aoverhead ~~firm-fixed~~structure ~~price~~during ~~project~~fiscal at2017 and ~~Homestead~~fiscal ~~AFB~~2016 wecontributed ~~obtained~~to asthe aincreased ~~result~~gross ofprofit ~~the~~for ~~GMI acquisition~~fiscal 2017. ~~This decrease~~During ~~was~~fiscal ~~magnified~~2016, bywe ~~the~~recorded ~~expiration~~several oflosses ~~the~~including ~~Ft. Irwin contract~~a Intotal ~~addition,~~of ~~the Company recognized~~ $1.3 million of loss contingency accruals in connection with (i) a class action lawsuit from a group of former employees at Ft. Irwin, (ii) a probable loss ~~relate~~ ~~within~~related ~~our ESG segment due~~ to the audit finding by GSA within the ESG segment, and (iii) the loss accrual for the removal and installation of the new well pump for the PBR task orders ~~(see “Factors Affecting Fiscal 2016 Performance--Loss Contingency Accruals” above for more information)~~. Primarily because we are the prime contractor on the DAFB project, with a significant portion of the work performed by sub-contractors, our consolidated gross margin decreased from 9% to 3%. As the DAFB project becomes a smaller percentage of our overall revenue mix we expect to see margins improve. However, our higher margin Title II work in Iraq and Afghanistan has declined during fiscal 2016, so to sustain improved margins we will need to continue to secure additional higher margin work under new contracts. A charge for $1.2 million for the ARA net working capital adjustments also contributed to the decline in the gross profit (see “Factors ~~Non~~Affecting ~~Recurring~~Fiscal ~~Expenses~~ 2016 Performance” above for more information).

Selling, general and administrative expenses for fiscal ~~2016~~2017 were $1312.09 million, or 812% of gross revenue, compared to $1113.0 million, or 78% of gross revenue, during fiscal ~~2015~~2016. ~~The~~While ~~increase~~overall selling, general and administrative expenses were down only slightly from fiscal 2016, there were a number of line item increases in fiscal ~~2016~~2017 ~~included~~including approximately $1.0 million for the costs associated with the CRO services, $0.67 million in ~~integration~~additional ~~costs~~banking fees related to forbearance agreements and an amendment to the loan ~~approximately~~agreement, $1.1 million in additional legal expenses related to one time issues, $0.652 million for retention bonuses to key employees, and $0.2 million in ~~transaction~~severance costs ~~associated~~for ~~with~~the former Chief Financial Officer. The Company also recorded $0.1 million related to the ~~acquisition~~JMWA note ofholders’ ~~VSS,~~attorney’s ~~approximately~~fees and $0.62 million related to ~~record~~quarterly interest payments from October 2016 through September 2017. (see “Factors Affecting Fiscal 2017 Performance—Other Nonrecurring Expenses” above for more information).These additional costs were more than offset by the costs ofsavings ~~impairing~~actions ~~exiting~~made ~~lease~~by ~~spaces,~~the Company during fiscal 2017 and fiscal 2016. During fiscal 2016 we recorded approximately $01.1525 million inof ~~restructuring~~acquisition ~~costs~~ and ~~fees~~integration costs associated with ~~our~~the ~~forbearance~~acquisition ~~agreements~~of ~~with~~VSS, ~~Bank~~approximately $0.6 million to record the costs of ~~America~~exiting lease spaces, ~~including~~as ~~legal~~well ~~fees~~as approximately $0.2 million in ~~arising~~fees ~~from~~associated ~~our~~with ~~efforts~~borrowings tofrom ~~obtain~~Bank ~~alternative financing~~of America.

WeDuring fiscal 2016, we recorded a Goodwill and Intangible impairments charge of $ 24.1 million due to a decline in operations and the estimated fair value in the ECM, ESG, and PSG reporting units, attributable to goodwill and intangibles acquired in ~~certain~~ certain acquisitions. (For additional information on these goodwill ~~and~~ and intangible impairments, see Note 7 to our Consolidated ~~Financial~~ Financial Statements included herein).

Other operating expense for fiscal ~~2016~~2017 was $1.2 million representing the charge to write-down the related historical cumulative translation adjustment for PPS, as a result of the sale in April 2017. During fiscal 2016, Versar recorded a $1.9 million charge for the loss on sale ~~the~~of PPS. PPS had been classified as held for sale, and as such, the carrying amount of ~~PPS~~the ~~subsidiary~~long-lived assets has been reduced to the estimated fair market value as of July 1, 2016.

~~Operating~~Loss ~~loss,~~ before income taxes, for fiscal ~~2016~~2017, was $369.6 ~~million~~ million compared to ~~operating~~a loss before income taxes of $236.36 million during ~~fiscal~~ ~~2015~~fiscal 2016. The ~~decline~~improvement in operating ~~income~~loss was the result of the items discussed above.

Fiscal Year 2015 Compared to Fiscal Year 2014

Gross revenue for fiscal 2015 was $159.9 million, an increase of 45% compared to $110.3 million during fiscal 2014. JMWA, acquired in fiscal 2015, contributed $29.2 million to the increase and the DAFB project contributed an additional $32.0 million. These increases were off-set by a $6.2 million decrease in revenue related to PBR projects within ESG and a $5.5 million decrease in revenue from PSG’s historical business line as a result of the continued shift of contract solicitations to businesses that qualify for small business programs. Additionally, we continue to see declines in revenue from our international operations in Afghanistan and Iraq as the Title II work in that region winds down.

Purchased services and materials for fiscal 2015 was $90.3 million, an increase of 64% compared to $55.1 million during fiscal 2014. We are the prime contractor on the DAFB project, and, as such, a significant portion of the work is performed by sub-contractors.

Direct costs of services and overhead for fiscal 2015 were $55.8 million, an increase of 20% compared to $46.7 million during fiscal 2014. Additional costs associated with JMWA were partially offset by the cost savings associated with our internal re-alignment within ESG.

Gross profit from continuing operations for fiscal 2015 was $13.8 million, an increase of 62% compared to $8.5 million for fiscal 2014. Gross profit contributions from JMWA were $7.1 million. Although we are the prime contractor on the DAFB project, with a significant portion of the work performed by sub-contractors, we were still able to improve our gross margin from 8% to 9%. Additionally, we saw margin improvement in our ESG group due to the reduction in contract related overhead expenses as a result of our internal realignment of the ESG organization.

Selling, general and administrative expenses for fiscal 2015 were $11.0 million, or 7% of gross revenue, compared to $10.2 million, or 9% of gross revenue, during fiscal 2014. Fiscal 2015 included approximately $1.0 million related to integration costs associated with the acquisition of JMWA. Management was able to realize cost savings as the result of internal re-organizations within our business segments.

Operating income from continuing operations for fiscal 2015 was $2.8 million compared to operating loss of $1.4 million during fiscal 2014. The improvement in operating income was the result of the items discussed above.

Results of Operations by Business Segment

The tables below set forth the operating results for our three business segments for the fiscal years ended ~~July~~June 130, ~~2016,~~2017 ~~June~~and ~~26,~~July ~~2015~~1, ~~and June 27, 2014~~2016.

ECM

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
GROSS REVENUE	$~~110~~61,~~533~~294	$91110,~~111~~533	~~$52,012~~
Purchased services and materials, at cost	8643,~~927~~715	6886,~~159~~927	~~32,991~~
Direct costs of services and overhead	2013,~~498~~158	1420,~~922~~498	~~13,733~~
GROSS PROFIT, from continuing operations	3,108	8,030	5,288
GROSS PROFIT	$4,421	$3,108
Income (Loss) from discontinued operations	-	-	317
Gross profit percentage	7%	3%
GROSS PROFIT	$3,108	$8,030	$5,605
Gross profit (loss) percentage	3%	9%	10%

Fiscal ~~2016~~2017 Compared to Fiscal ~~2015~~2016

Gross revenue for fiscal ~~2016~~2017 was $~~110~~61.53 million, ana ~~increase~~decrease of ~~21%~~ 45% compared to $91110.15 million during fiscal ~~2015~~2016. ~~VSS,~~The decrease in ~~acquired~~revenue ~~during~~were ~~fiscal~~a ~~2016,~~result ~~contributed~~of $1735.60 million toless revenue from the DAFB ~~increase~~project, ~~and~~reduced revenue from ~~the~~PPS ~~DAFB~~of ~~project contributed approximately~~ $63.90 million ~~to the increase~~, ~~offset~~completion byin 2016 of a ~~decrease~~repair ~~in revenue~~project ~~from~~at ~~PPS~~Laughlin AFB of ~~approximately~~ $34.0 million, and $2.4 million ~~Our~~less revenue from our Title II work in Iraq and Afghanistan, which continued to wind down during fiscal ~~2016,~~2017. soAdditionally, toVersar ~~sustain~~saw ~~improved~~lower ~~margins~~revenue weof ~~will~~$1.4 ~~need~~million ~~to continue to secure~~from ~~additional higher margin work under new contracts~~VSS.

~~Gross~~In ~~profit~~April ~~from~~2017, ~~continuing~~Versar ~~operations~~sold ~~for~~its ~~fiscal~~PPS ~~2016~~subsidiary ~~was~~for ~~$3.1 million,~~ a ~~decrease~~cash ofvalue ~~61% compared to~~ of $8214,042.~~0 million during the fiscal 2015~~50. ~~Gross~~We ~~profit~~are ~~margin~~entitled ~~decreased~~to ~~from~~additional 9%cash topayments 3% for ~~fiscal~~PPS in ~~2016.~~a ~~VSS~~total ~~contributed~~of ~~$2.1~~up ~~million~~ to ~~gross~~£400,000 ~~profit~~contingent ~~offset~~on byPPS’ ~~the~~attainment ~~decline~~ of ~~our~~certain ~~higher~~performance ~~margin~~thresholds ~~Title~~during ~~II,~~the abalance ~~$0.9~~of ~~million loss on our~~calendar ~~Homestead~~year ~~AFB project~~2017, ~~and~~as aagreed ~~$2.1~~upon ~~million loss associated~~ with ~~PPS. A charge for $0.7 million for~~ the ~~ARA~~buyer ~~net~~of ~~working capital adjustments also contributed to the decline in the gross profit (see Non Recurring Expenses above)~~PPS.

~~Fiscal~~Gross ~~2015~~profit ~~Compared~~for fiscal 2017 was $4.4 million, an increase of 42% compared to gross profit of $3.1 million for fiscal 2016. Our gross profit percentage increased to 7% from 3% for fiscal 2017. VSS contributed $1.4 million to gross profit offset by the decline of our higher margin Title II work and a $2.2 million project loss on our DAFB project resulting from costs we incurred that we expect will be recovered via negotiations for REAs and $0.4 million for project loss contingency accruals (see “Factors Affecting Fiscal ~~2014~~2017 Performance--Loss Contingency Accruals” above for more information). An additional charge was recorded of $0.3 million for the ARA net working capital adjustments (see “Factors Affecting Fiscal 2017 Performance—Other Nonrecurring Expenses” above for more information). As prime contractor on the DAFB project, a significant portion of the work is performed by sub-contractors, resulting in lower gross profit for Versar. This was offset by costs savings actions made to improve overhead structure during fiscal 2017 and fiscal 2016. As we continue to sub-contract a greater percentage of our services to expand our ability to offer a broader set of capabilities to market, we continue to see pressure on our gross profits. During fiscal 2016, we recorded a charge for $0.7 million for the ARA net working capital adjustments (see Non Recurring Expenses above).

Gross revenue for fiscal 2015 was $91.1 million, an increase of 75% compared to $52.0 million during fiscal 2014. JMWA contributed $7.0 million, revenue from the DAFB project contributed approximately $28.0 million, and revenue from PPS contributed approximately $2.0 million to this increase.

Gross profit from continuing operations for fiscal 2015 was $8.0 million, an increase of 52% compared to $5.3 million during fiscal 2014. JMWA contributed $2.3 million to this increase and the remaining increase is directly attributable to DAFB project. Although we are the prime contractor on the DAFB project, with a significant portion of the work performed by sub-contractors, we were able to achieve a gross margin of 9% as the result of efficient project management compared to 10% for fiscal 2014. Lastly, during the first quarter of fiscal 2015, we recognized a loss of approximately $0.7 million related to a project managed out of our Knoxville office that was inherited through the acquisition of GMI in fiscal 2014.

ESG

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
GROSS REVENUE	$3833,~~688~~320	$4638,~~620~~688	~~$46,848~~
Purchased services and materials, at cost	1714,~~628~~057	1917,~~666~~628	~~21,438~~
Direct costs of services and overhead	2017,~~170~~133	2320,~~287~~170	~~23,294~~
GROSS (LOSS) PROFIT	$890	$3,667	$2,116
GROSS PROFIT	$2,130	$890
Gross (loss) profit percentage	2%	8%	5%
Gross profit percentage	6%	2%

Fiscal ~~2016~~2017 Compared to Fiscal ~~2015~~2016

Gross revenue for fiscal ~~2016~~2017 was $3833.73 million, a decrease of 1714% compared to $4638.67 million during fiscal ~~2015~~2016. The decrease in revenue was due to the ~~expiration~~lack of funding available at the ~~significant~~government year-end ~~contract~~coupled with delays within the EPA during the change of ~~Ft.~~Administration, ~~Irwin~~both ~~and~~of which resulted in the delay of over $6 million in anticipated revenue. This ~~decreases~~was ~~associated~~partially ~~with~~offset ~~the~~by ~~maturing~~the increase in revenue of ~~the~~$1.0 ~~PBR~~million ~~program~~for cultural resources work for the USAF.

Gross profit for fiscal ~~2016~~2017 was $02.91 million, aan ~~decrease~~increase of 76139% compared to $30.79 million during fiscal ~~2015~~2016. ~~This~~Our ~~decrease~~gross isprofit percentage increased to 6% from 2% for fiscal 2017. This increase was due to the continued insourcing of work previously performed by subcontractors and increased efficiencies within the ESG organization. This was further supported by costs savings actions made to improve overhead structure during fiscal 2017 and 2016. An additional charge of $0.2 million was recorded for the ARA net working capital adjustments (see “Factors Affecting Fiscal 2017 Performance—Other Nonrecurring Expenses” above for more information). During fiscal 2016, we recorded several onetime charges which impacted the results of operations such as a total of $1.3 million of project loss contingency accruals in ~~connection~~ connection with (i) Ft. Irwin class action lawsuit brought by a number of former employees, (ii) a probable loss from the audit finding by GSA, and (iii) the loss accrual for the removal and installation of the new well pump for the PBR task orders, as described above. Additionally, several projects experienced decreased gross profit related to no cost work extensions due to demobilization expenses and higher overtime requirements to finish projects within the required period of performance. ~~These~~Further ~~decreases were offset by costs savings in the reduction of the amount of work performed by subcontractors, and by~~ a ~~reduction in contract related overhead expenses following the internal realignment of ESG’s organization in early fiscal 2016. A~~ charge for $0.5 million ~~for~~ for the ARA net working capital adjustments ~~also contributed to the decline in the gross profit~~ (see Non Recurring ~~Expenses~~ Expenses above).

Fiscal 2015 Compared to Fiscal 2014

Gross revenue for fiscal 2015 was $46.6 million, a slight decrease compared to $46.8 million during fiscal 2014. JMWA contributed $6.0 million in revenue, however this increase was off-set by decreases in revenue due to the timing of our PBR projects.

Gross profit for fiscal 2015 was $3.7 million, an increase of 76% compared to $2.1 million during fiscal 2014. Although revenue was slightly down from the prior fiscal year, we were able to realize a 3% increase in gross margins to 8%, compared to 5% in the prior fiscal year. We were able to achieve higher margins as the result of a decrease in the amount of work that was performed by subcontractors, 42% compared to 46% in the prior fiscal year, and by a reduction in contract related overhead expenses.

PSG

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
GROSS REVENUE	$1817,~~696~~207	$2218,~~146~~696	~~$11,420~~
Purchased services and materials, at cost	23,~~644~~088	2,~~464~~644	~~679~~
Direct costs of services and overhead	1614,~~876~~770	1716,~~588~~876	~~9,626~~
GROSS (LOSS) PROFIT	$(824)	$2,094	$1,115
GROSS PROFIT (LOSS)	$(651)	$(824)
Gross (loss) profit percentage	-4%	9%	10%
Gross profit (loss) percentage	-4%	-4%

Fiscal ~~2016~~2017 Compared to Fiscal ~~2015~~2016

Gross revenue for fiscal ~~2016~~2017 was $1817.72 million, a decrease of 168 % compared to $2218.17 million during fiscal ~~2015~~2016. WeThe decrease in revenue was due to a decline of $1.1 million from the JBML project when the prime small business did not renew Versar's subcontract. We continue to see a decline in our contract positions largely due to the continued shift to more contract solicitations being targeted to small business and similar such set aside programs. Consequently, Wewe continue to seek new ways to ~~develop~~ ~~our~~deepen our relationships with firms qualified for these programs to increase our ability to capture more of this work and maintain ~~current~~ current projects. ~~We continue to experience profit pressures in this segment.~~

Gross loss for fiscal ~~2016~~2017 was $0.87 million, ~~a decrease of 139%~~ compared to gross ~~profit~~loss of $20.18 million during fiscal ~~2015~~2016. ~~This~~In ~~decrease is~~fiscal a2017 ~~direct~~we ~~result~~recognized ofproject ~~the~~loss ~~decline~~reserves inof ~~revenue~~$0.6 million ~~due~~related to the ~~loss~~RSC contract for the base period of nine ~~task~~months ~~orders~~ and a $1.3 million project loss reserve for the ~~allocation~~RSC project related to the exercise of ~~significant~~an ~~indirect~~additional option year, twelve month performance period. This was offset in part by costs ~~due~~savings actions made to ~~their~~ ~~high~~improve ~~level~~our ofCompany ~~direct~~overhead ~~labor~~structure during fiscal 2017 and 2016.

Fiscal 2015 Compared to Fiscal 2014

Gross revenue for fiscal 2015 was $22.1 million, an increase of 94% compared to $11.4 million during fiscal 2014. This increase was directly attributable to the $16.2 million contributed by JMWA, off-set by a $5.5 million decrease in revenue from historical business lines. We continued to experience a decline in our contract positions largely due to the continued shift to more contract solicitations being targeted to small business and similar such programs.

Gross profit for fiscal 2015 was $2.1 million, an increase of 88% compared to $1.1 million during fiscal 2014. This increase was the direct result of the contribution of JMWA.

Gross Revenue by Client Base

Our business segments provide services to various industries, serving government and commercial clients. A summary of gross revenue from continuing operations generated from our client base is as follows:

	Years Ended
	July 1, 2016		June 26, 2015		June 27, 2014
	June 30, 2017		July 1, 2016
	(in thousands)	~~(in thousands)~~
Government
DoD	~~116~~$82,~~062~~491	6974%	~~129~~$116,~~305~~062	8169%	~~86,039~~	~~78%~~
State and Local	64,~~899~~827	4%	76,~~249~~899	54%	~~8,573~~	8%
EPA	43,~~583~~321	3%	64,~~457~~583	43%	~~1,593~~	1%
Other	3817,~~416~~588	2316%	1138,~~552~~415	723%	~~6,314~~	6%
Commercial	13,~~957~~594	13%	51,~~314~~958	31%	~~7,761~~	7%
Gross Revenue	~~167~~$111,~~917~~821	100%	~~159~~$167,~~877~~917	100%	~~110,280~~	~~100%~~

Liquidity and Capital Resources

Our working capital as of ~~July~~June 130, ~~2016~~2017 was approximately a negative $211.25 million, compared to ~~positive~~negative working capital at ~~June~~July 261, ~~2015~~2016 of $232.12 million. A significant factor contributing to this change in working capital is the $1415.9 million ~~increase~~decrease in the ~~outstanding~~ending ~~line~~accounts ofreceivable ~~credit~~ balance ~~with~~offset ~~Bank~~by ~~of America,~~ the $97.58 million ~~decrease~~ improvement in the ~~ending~~outstanding ~~accounts~~line ~~receivable~~of credit balance, ~~the~~with ~~$1.9 million~~Bank ~~for the loss on the sale~~ of ~~PPS~~America, ~~and $1.4 million decrease in deferred income taxes~~ as compared to fiscal ~~2015~~2016. Our current ratio at ~~July~~June 130, ~~2016~~2017 was 0.9676 compared to 10.5496 from the prior fiscal year.

On July 1, 2014, we acquired JMWA. The acquisition price of $13.0 million was paid in cash and with seller notes in the principal amount of $6.0 million. On ~~July~~June 130, ~~2016~~2017, the outstanding aggregate principal balance of the notes was $3.95 million. On September 30, 2015, the Company successfully completed the acquisition of ~~JCSS, now known as~~ VSS. Versar ~~The Company~~ paid a cash purchase price of $10.5 million and agreed to pay contingent consideration of up to a maximum of $9.5 million based on the occurrence of certain events within the earn-out period of 3three years from September 30, 2015. As of ~~July~~June 130, ~~2016~~2017, management believes the amount of the contingent consideration that will be earned within the earn-out period is $3.2.7 million, including probability weighing of future cash flows. All payment related to the VSS contingent consideration over the next 21.53 years will also be funded through existing working capital (See Note 3 – Acquisitions).

On September 30, 2015, ~~the Company~~Versar, together with certain of ~~its~~ its domestic subsidiaries acting as guarantors, entered into a loan agreement with Bank of America, N.A. as the lender and letter of ~~credit~~ 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~~ The proceeds of the term facility and borrowings under the ~~revolving~~ revolving credit facility were used to repay amounts outstanding under the ~~Company’s~~ Third Amended and Restated Loan and Security ~~Agreement~~ Agreement with United Bank and to pay a portion of the purchase price for the acquisition of VSS.

The maturity date of the revolving credit facility is currently September 30, 2018 and the maturity date of the term facility is ~~March 31~~September 30, 2017. 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~~loan ~~Agreement~~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 ~~year~~ 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, as defined, of not greater than 3.25:1.0), Consolidated Senior Leverage Ratio (which requires the Company to maintain a Consolidated Senior Leverage Ratio, as defined, of not greater than 2.75:1.0), Consolidated Fixed Charge Coverage Ratio(which requires the Company maintain an Fixed Charge Coverage Ration greater than 1.25:1.0 and Consolidated Asset Coverage Ratio (which requires the Company maintain an Asset Coverage Ratio, as defined, of greater than 1.25:1.0).

During the third and fourth quarters of fiscal 2016, following discussion with the ~~Lender~~lender, ~~the~~Versar ~~Company~~ determined that it was not in in compliance with the Consolidated Total Leverage Ratio, ~~Consolidated~~ 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 ~~constitutes~~ aconstituted a default under the loan agreement. OnDuring ~~May~~fiscal ~~12,~~ 2016, and the ~~Company~~first half of fiscal 2017, ~~with~~Versar, certain of its subsidiaries and the ~~Lender~~ lender entered into acertain forbearance ~~agreement~~agreements pursuant to which the ~~Lender~~ 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~~last ~~to occur~~ of: ~~(a)~~which aextended 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~~ Versar to borrow funds pursuant to the terms of the loan agreement, consistent with current ~~Company~~operating 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 $13.5 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~~loan ~~Agreement~~agreement) plus 3.95%. ~~The Company~~Versar iswas required to provide a 13-week cash flow forecast updated on a weekly basis to the ~~Lender~~lender, and the ~~Lender~~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~~lender ~~has~~ engaged an advisor to to review ~~the Company~~Versar’s financial condition on the ~~Lender~~ lender’s behalf, and also required ~~the~~us ~~Company~~ to pursue ~~alternative~~ ~~sources~~a oftransaction ~~funding~~to refinance ~~for~~or ~~its~~replace ~~ongoing~~the ~~business operations~~loan agreement.

~~As of~~On ~~July~~December 19, 2016 Versar, ~~the~~together ~~available~~with ~~balance~~certain onof ~~the~~its ~~Company’s~~domestic ~~revolving~~subsidiaries ~~credit~~acting ~~facility~~as ~~was~~guarantors, ~~approximately~~entered ~~$9.7~~into ~~million.~~a AsFirst ofAmendment ~~December~~and ~~30,~~Waiver ~~2016~~to the ~~available~~loan ~~balance on the Company’s revolving credit facility was approximately $2~~agreement.~~7 million.~~

Under Onthe ~~December~~amendment, 9the lender waived all existing events of default, and ~~2016~~reduced (the ~~Closing~~revolving ~~Date),~~facility ~~Versar,~~to ~~Inc~~$13.0 ~~(Versar),~~million from $25.0 ~~together~~million. ~~with~~The ~~certain~~interest ofrate ~~its~~on ~~domestic~~borrowings ~~subsidiaries~~under ~~acting~~the asrevolving ~~guarantors~~facility ~~(collectively,~~and the ~~Guarantors),~~term ~~entered~~facility ~~into~~accrue aat ~~First~~the LIBOR Daily Floating ~~Amendment~~Rate ~~and~~plus ~~Waiver~~5.00% ~~(the~~from ~~Amendment)~~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 ~~(the~~covenants requiring maintenance of a required ~~Loan~~consolidated ~~Agreement)~~total ~~dated~~leverage ~~September~~ratio, 30consolidated fixed charge coverage ratio, ~~2015~~consolidated ~~with~~senior ~~Bank~~leverage ofratio ~~America,~~and ~~N.A.~~asset ~~(the~~coverage ~~Lender)~~ratio.

In ~~Under~~addition to the ~~Amendment~~foregoing, ~~the~~and ~~Lender~~subject ~~waived~~to ~~all~~certain ~~existing~~conditions regarding ~~events~~the use of ~~default,~~ ~~and~~cash ~~reduced~~collateral ~~the~~and ~~revolving~~other ~~facility~~cash received to satisfy ~~$13~~outstanding obligations under the loan agreement,~~000,000~~ ~~from~~the ~~$25,000,000.~~amendment ~~The~~suspended ~~interest~~all ~~rate~~amortization onpayments ~~borrowings~~ under the ~~revolving~~term facility ~~and~~such that the entire amount of the term facility ~~will~~shall ~~accrue~~be due atand ~~the~~payable ~~LIBOR~~on ~~Daily~~September 30, 2017. The original maturity date ~~Floating~~of ~~Rate~~the ~~plus~~term ~~5.00%~~facility ~~from~~under ~~LIBOR~~the ~~plus~~loan 1agreement was March 31, 2017.~~87%.~~ As ~~The~~consideration ~~Amendment~~for ~~added~~the amendment and the waiver of the existing aevents ~~covenant~~of ~~requiring~~default, Versar agreed to ~~maintain~~pay ~~certain~~an ~~minimum~~amendment ~~quarterly consolidated~~fee ~~EBITDA~~of ~~amounts~~.5% ~~The~~of the ~~Amendment~~aggregate ~~also~~principal ~~eliminated~~amount of the ~~Loan~~term facility outstanding as ~~Agreement~~of ~~covenants~~November ~~requiring~~30, ~~maintenance~~2016 ofplus athe ~~required~~commitments under the revolving ~~consolidated~~facility ~~total~~in ~~leverage~~effect ~~ratio~~as of the same date (totaling $73,333.54), ~~consolidated~~which fee ~~fixed~~was ~~charge~~due and payable on the earlier of a subsequent event of ~~coverage~~default ~~ratio~~or August 30, ~~consolidated~~2017. ~~senior~~The ~~leverage~~fee ~~ratio~~was ~~and~~paid ~~asset~~August 7, 2017. ~~coverage~~Versar ~~ratio~~paid $0.3 million in amendment fees in December 2016.

In connection ~~addition~~with tothis ~~the~~amendment, ~~foregoing~~among other things, ~~and~~Versar ~~subject~~agreed to continue to ~~certain~~engage ~~conditions regarding~~with ~~the~~a ~~use~~strategic offinancial ~~cash~~advisor ~~collateral~~to assist with the structuring and ~~other~~consummation ~~cash~~of ~~received~~a totransaction the purpose ~~satisfy~~of ~~outstanding~~which ~~obligations~~would ~~under~~be the ~~Loan~~replacement ~~Agreement,~~or ~~the Amendment~~repayment ~~suspended~~in ~~all~~full ~~amortization~~of ~~payments~~the obligations under the ~~term facility~~loan ~~such~~agreement, ~~that~~agreed ~~the~~to ~~entire~~a ~~amount~~timeline offor the consummation ~~term~~of ~~facility~~such ~~shall~~a ~~be due~~transaction, and ~~payable~~agreed onto ~~September~~the 30issuance of certain warrants to the lender, ~~2017.~~which ~~The~~would ~~original~~become ~~maturity~~exercisable ~~date~~on ~~under~~ the ~~Loan~~earlier ~~Agreement~~of ~~was~~a ~~September~~subsequent ~~30,~~event ~~2018.~~of Asdefault ~~consideration~~or August 30, ~~for~~2017. ~~the~~Subsequent ~~Amendment~~to ~~and~~ the ~~waiver~~end of ~~the~~fiscal ~~existing~~2017, ~~events~~the oflender ~~default,~~provided Versar ~~agrees~~with tonotice ~~pay~~of ancertain ~~amendment~~events ~~fee~~ of ~~.5%~~default ofunder the ~~aggregate~~loan ~~principal~~agreement ~~amount~~as a result of ~~the~~our ~~term~~failure ~~facility~~to ~~outstanding~~meet asthe oftimeline ~~November~~for ~~30,~~consummating ~~2016~~the ~~plus~~transaction ~~the~~noted ~~commitments~~above and under ~~the~~a ~~revolving~~financial covenant. ~~facility~~As ~~in effect~~a asresult of ~~the~~these ~~same~~events ~~date~~of default, ~~which~~the amendment fee discussed isabove ~~due~~became ~~and~~ payable onto the lender. The Lender, by letter ~~earlier~~dated ofAugust 1, a2017 ~~subsequent~~terminated ~~event~~the ofautomatic ~~default~~advance orfeature under the loan agreement, effective August 8, 302017, and on August 9, 2017., ~~The~~Versar issued warrants (the ~~Company~~“Warrants”) ~~paid~~to $0purchase 9.39% ~~million~~of inthe ~~amendment~~outstanding ~~fees~~common stock into ~~December 2016~~the lender.

~~Finally,~~Our ~~the~~capital ~~Amendment~~requirements ~~continued~~for ~~the~~fiscal ~~requirement~~2017 ~~for~~were ~~Versar~~approximately to$0.1 ~~retain~~million, aused ~~CRO~~primarily ~~and~~for ~~recognized~~annual ~~Versar’s~~hardware ~~ongoing~~and ~~efforts~~software purchases to ~~work with~~maintain ~~the~~our ~~Lender~~existing ~~and~~information ~~continues~~technology ~~the~~systems. We anticipate that our discretionary capital requirements tofor ~~engage~~fiscal 2018 ~~with~~will abe approximately $0.5 million. Versar has made ~~strategic~~certain ~~financial~~cost ~~advisor~~cutting measures during fiscal 2016 so that we could continue to ~~assist~~operate ~~with~~within ~~the~~existing ~~structuring~~cash ~~and~~resources. We believe that our cash balance of $1.0 million ~~consummation~~at the end of afiscal ~~transaction~~2017, along with anticipated cash flows from ongoing operations and the ~~purpose~~funds available from our line of ~~which~~credit facility, will be ~~the~~sufficient to meet our working capital and ~~replacement~~liquidity orneeds ~~repayment~~during infiscal ~~full~~2018. Going offorward, ~~all~~we ~~obligations~~will ~~under~~continue ~~the~~to ~~Loan~~aggressively manage cash flows ~~Agreement~~and costs as needed based on performance.

~~Our capital requirements for fiscal 2016~~ were approximately $0.7 million, used primarily for annual hardware and software purchases to maintain our existing information technology systems. We anticipate that our discretionary capital requirements for fiscal 2017 will be approximately $0.5 million. Also, the Company has made certain cost cutting measures during fiscal 2016 so that we can continue to operate within existing cash resources. We believe that our cash balance of $1.1 million at the end of fiscal 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~~Versar ~~Company~~ that bonding for new work may be limited due to our accumulated deficit. ~~The surety broker has~~ and 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~~our ~~contractor’s~~ name, oversees all of the payment disbursements from ~~the Company~~Versar, and delivers checks from each payment for ~~the~~us ~~Company~~ to distribute to ~~their~~ vendors working on the project. The surety essentially becomes ~~the~~our ~~contractor’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.~~

Contractual Obligations

At ~~July~~June 130, ~~2016~~2017, we had total contractual obligations of approximately $2116.65 million, including short-term obligations of approximately $68.91 million. The short-term obligations will become due over the next twelve months ~~(fiscal 2017)~~. Our contractual obligations are primarily related to lease commitments. Additionally, we have principal and interest obligations related to the notes payable from our acquisition of JMWA. The table below specifies the total contractual payment obligations as of ~~July~~June 130, ~~2016~~ 2017.

Contractual Obligations	Total	Within 1 Year	2-3 Years	4-5 Years	After 5 Years
		Within
Lease obligations	$13,986	$2,948	$5,668	$3,816	$1,554
Contractual Obligations	TOTAL	1 Year	2 - 3 Years	4 - 5 Years	After 5 Years
Notes Payable to sellers	3,825	1,331	2,494	-	-
Lease Obligations	$11,123	$2,790	$3,844	$2,464	$2,025
Notes Payable to Bank of America	2,500	2,500	-	-	-
Notes Payable to sellers	3,498	3,498	-	-	-
Deferred Compensation obligations	1,019	107	214	201	497
Note Payable to Bank of America	957	957	-	-	-
Estimated interest obligations	293	167	126	-	-
Deferred Compensation obligations	678	678	-	-	-
Total contractual obligations	$21,623	$7,053	$8,502	$4,017	$2,051
Estimated interest obligations	195	195	-	-	-
Total contractual obligations	$16,451	$8,118	$3,844	$2,464	$2,025

On October 3, 2016 ~~the~~Versar ~~Company~~ did not make the quarterly principal payments to three individuals who were the former owners of JMWA. However, ~~the~~we ~~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~~ November 21, 2016, two of the former JMWA shareholders filed an ~~action~~ action against ~~the~~us ~~Company~~ in Fairfax County District Court, VA for failure to make such payments and to enforce their rights to such payments. Consequently, in the second quarter of fiscal 2017, ~~the Company~~we ~~has~~ moved the long-term portion of the debt to short term notes payable for a total of $3.85 million. Starting in January 2017 ~~the~~, ~~Company~~we stopped making the interest-only payments to two of the former owners and continued ~~continues~~ to make the monthly interest only payment at seven percent per annum to one ~~owner~~noteholder. ~~The~~On ~~discovery~~July 28, 2017, Versar and ~~process~~the istwo ~~currently~~JMWA ~~underway~~note holders who brought this action entered into a full and final settlement of issues related to the payment of the notes. AThis ~~trial~~litigation ~~date~~did isnot ~~set~~involve ~~for~~the third JMWA note holder, who was not a party to the action. Versar will pay the settling note holders’ attorney’s fees of $80,000 and the parties will continue to discuss resolution of any additional legal fees and costs. Additionally, we will pay during fiscal 2018, $194,766.89 representing quarterly interest payments from October 2016 to July 2017. This resolution will become effective on October 20, 2017.

On January 1, 2017 ~~the~~Versar ~~Company~~ did not make $0.1 million in ~~periodic~~ periodic payment to three individuals who participate in a Deferred Compensation Agreement plan established ~~by the Company~~ in 1988. ~~The Company~~Versar continues to negotiate with the individuals to reschedule the payments ~~for~~ during a future period.

Critical Accounting Policies and Related Estimates That Could Have a Material Effect on Our Consolidated Financial Statements

Critical Accounting Policies and Estimates

Below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial position and results of operations which require management judgments and estimates, or involve uncertainties. Information regarding our other accounting policies is included in the notes to our consolidated financial statements included elsewhere in this annual report on Form 10-K.

Revenue recognition: On cost-plus fee contracts, revenue is recognized to the extent of costs incurred plus a proportionate amount of fee earned, and on time-and-material contracts, revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred. We record income from fixed-price contracts, extending over more than one accounting period, using the percentage-of-completion method. During the performance of such contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required. Fixed price contracts can be significantly impacted by changes in contract performance, contract delays, liquidated damages and penalty provisions, and contract change orders, which may affect the revenue recognition on a project. Revisions to such ~~estimates~~ estimates are made when they become known. Detailed quarterly project reviews are conducted with project managers to review all project progress accruals and revenue recognition. ~~There~~It is ~~the possibility that~~possible that there will be future and currently unforeseeable adjustments to our estimated contract revenues, costs and margins for fixed ~~price~~ price contracts, particularly in the later stages of these contracts. Such adjustments are common in the construction industry given the nature of the contracts. These adjustments could either ~~positively~~ positively or negatively impact our estimates due to the ~~circumstances~~ circumstances surrounding the negotiations of change orders, the impact of schedule slippage, subcontractor claims and contract disputes which are normally resolved at the end of the contract.

Allowance for doubtful accounts: Disputes arise in the normal course of our business on projects where we are contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability and collectability. Such disputes, whether claims or unapproved change orders in process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred and only when realization is probable and can be reliably estimated. Management reviews outstanding receivables on a quarterly basis and assesses the need for reserves, taking into consideration past collection history and other events that bear on the collectability of such receivables. All receivables over 60 days old are reviewed as part of this process.

Share-based compensation: Share-based compensation is measured at the grant date, based on the fair value of the award. All of the Company's equity awards granted to employees in fiscal ~~2016,~~2017 ~~2015,~~ and ~~2014~~2016 were restricted stock unit awards. Share-based compensation cost for restricted stock unit awards is based on the fair market value of the Company’s stock on the date of grant. Stock-based compensation cost for stock options is calculated on the date of grant using the fair value of stock options, as calculated using the Black-Scholes pricing model.

Net deferred tax asset: The Company established a full valuation allowance against its U.S net deferred tax assets during the year and maintained the full valuation allowance ~~from~~for our Philippine branch. Therefore, the net balance of deferred taxes as of ~~July~~June 130, ~~2016~~2017 is zero.

Long-lived assets: We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. We review the cash flows of the operating units to ensure the carrying values do not exceed the cash flows that they support. Any write-downs are treated as permanent reductions. We believe the carrying value of our long-lived assets as of ~~July~~June 130, 2017 ~~2016~~ are fully recoverable.

~~Goodwill~~Intangible assets: ~~During~~The ~~fiscal~~net ~~2015,~~carrying ~~the~~value ~~Company~~of our ~~changed~~intangible ~~the~~assets ~~annual~~at ~~goodwill~~June ~~impairment~~30, ~~assessment~~2017 ~~date~~and ~~from~~July ~~the last~~1, ~~day~~2016 ofwas ~~the~~$6.1 million ~~fiscal~~and ~~year~~$7.2 tomillion, ~~the~~respectively. ~~first~~The ~~day~~intangible ~~of the fourth quarter~~assets ofinclude ~~the~~customer ~~fiscal~~related ~~year.~~assets, ~~Management~~marketing ~~determined~~related ~~that~~assets, ~~performing the~~and ~~assessment~~technology-based ~~prior~~assets. toThese ~~the~~intangible ~~close~~assets ofare ~~the~~amortized ~~fiscal~~over a ~~year~~1.75 ~~provided~~- ~~the external~~15 ~~valuation~~year ~~firm,~~useful ~~the~~life. ~~independent~~We ~~external~~review ~~auditors,~~our ~~and~~intangible ~~the~~assets for ~~Company~~impairment ~~with~~whenever ~~sufficient~~events ~~time~~or tochanges ~~generate,~~in ~~review,~~circumstances ~~and conclude on~~indicate that the ~~valuation~~carrying ~~analysis~~value ~~results.~~of At the ~~close~~asset ofmight ~~fiscal~~not ~~year~~be ~~2015,~~recoverable. An ~~management~~impairment ~~assessed~~loss ~~whether~~is ~~there~~recognized ~~were~~if ~~any conditions present during~~ the ~~fourth~~carrying ~~quarter~~value ~~that~~exceeds ~~would indicate impairment subsequent~~the tofair ~~the~~value. ~~initial~~Any ~~assessment~~impairments ~~date~~of ~~and~~the ~~concluded~~asset ~~that~~are notreated ~~such conditions~~as ~~were present~~permanent reductions.

During the fourth quarter of fiscal 2016, sustained delays in contract awards and contract funding and the direct impact on the Company’s results of operations, coupled with the continued decrease in the Company’s stock price, and were deemed to be triggering events that led to an interim period test for goodwill impairment. As a result of our analysis, we recorded an impairment charge of $4.4 million. The carrying value of goodwill after impairment atJuly 1, 2016 was zero. . Based on the results of the impairment testing, the Company concluded that the value of definite-lived intangible assets with a carrying value of $2.9 million was not recoverable. The Company has recorded a charge of $1.8 million for the impairment of definite-lived intangible assets acquired from JMWA, a charge of $1.1 million for the impairment of definite-lived intangible assets acquired from GMI, and a charge of $0.7 million for the impairment of definite-lived intangible assets of PPS, acquired in fiscal 2010, and Charron Consulting, acquired in fiscal 2012. As a result of these charges, the carrying amount of intangible assets acquired from Charron and PPS has been reduced to zero, and the carrying amount of intangible assets in the Company’s PSG and ESG segments have been reduced to zero. The carrying value of goodwill at July 1, 2016 and June 26, 2015 was zero million and $16.1 million, respectively. The goodwill balances were principally generated from our acquisition of JMWA during fiscal 2015, GMI during fiscal 2014, Charron during fiscal 2012, and the acquisitions of PPS and Advent Environmental, Inc. (Advent) during fiscal 2010. To conduct the annual goodwill impairment analysis, management, with the assistance of an external valuation firm, estimated the fair value of each reporting unit using a market-based valuation approach based on guideline public company data.

The first step of the goodwill impairment analysis identifies potential impairment and the second step measures the amount of impairment loss to be recognized, if any. Step 2 is only performed if Step 1 indicates potential impairment. Potential impairment is identified by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The carrying amount of a reporting unit equals assets (including goodwill) less liabilities assigned to that reporting unit. The fair value of a reporting unit is the price that would be received if the reporting unit was sold. Value is based on the assumptions of market participants. Market participants may be strategic acquirers, financial buyers, or both. The assumptions of market participants do not include assumed synergies which are unique to the parent company. Our external valuation firm has estimated the fair value of each reporting unit using both a discounted cash flow analysis and the Guideline Public Company (GPC) method under the market approach. Each of the GPC’s is assumed to be a market participant. The valuation analysis methodology adjusted the value of the reporting units by including a premium for control, or market participant acquisition premium (MPAP). The MPAP reflects the capitalized benefit of reducing a company’s operating costs. These costs are associated with a company’s public reporting requirements. The adjustment assumes an acquirer could take the company private and eliminate these costs.

For the year ended July 1, 2016, we concluded that there was an indication of impairment to the Company’s recorded remaining goodwill balance which are now zero.

Intangible assets: The net carrying value of our intangible assets at July 1, 2016 and June 26, 2015 was $7.2 million and $4.6 million, respectively. The intangible assets include customer related assets, marketing related assets, and technology-based assets. These intangible assets are amortized over a 5 - 15 year useful life. We review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset might not be recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. Any impairments of the asset are treated as permanent reductions. In connection with our annual goodwill impairment testing for fiscal 2016, we recorded an intangible impairment charge of $3.7 million due to market conditions and business trends within the ECM, ESG, and PSG reporting units.

Impact of Inflation

We protect ourselves from the effects of inflation. The majority of contracts we perform are for a period of a year or less and are firm fixed price contracts. Multi-year contracts provide for projected increases in labor and other costs.

Business Segments

We have the following three business segments: ECM, ESG, and PSG. Additional details regarding these segments are contained in Note 2 - Business Segments, of the Notes to the Consolidated Financial Statements included elsewhere in this annual report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to interest rate risk and other relevant market risk is not material.

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders Versar, Inc.

We have audited the accompanying consolidated balance ~~sheet~~sheets of Versar, Inc. (a Delaware corporation) and its subsidiaries (the “Company”) as of June 30, 2017 and July 1, 2016, and the related consolidated statements of operations, comprehensive (loss) ~~income~~, changes in stockholders’ equity (deficit), and cash flows for each of the ~~year~~two years in the period ended. ~~Our~~June 30, 2017. ~~audit~~Our audits also included the financial statement schedule listed in ~~the~~ the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements ~~based on our audit. The financial statements~~ and ~~financial~~schedules ~~statement~~based schedule of Versar, Inc. and subsidiaries as of June 26, 2015 and June 27, 2014 and for each of the two years then ended were audited by other auditors whose report dated September 15, 2015, expressed an unqualified opinion on ~~those~~our ~~statements~~audits.

We conducted our ~~audit~~audits in accordance with the standards of the ~~Public~~ Public Company Accounting Oversight Board (United States). Those ~~standards~~ standards require that we plan and perform the audit to obtain ~~reasonable~~ reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits ~~audit~~provide ~~provides~~ a reasonable basis for our opinion.

In our opinion, the ~~fiscal year 2016~~ consolidated financial statements referred to above present fairly, in all material respects, the financial position of Versar, Inc. and its subsidiaries as of June 30, 2017 and July 1, 2016, and the results of its operations and its cash flows for each of the ~~year~~two years in the period ended ~~July~~June 130, ~~2016~~2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been ~~prepared~~ prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company generated a net loss of $~~37.~~9.6 million for the fiscal year ended ~~July~~June 130, ~~2016~~2017, expects losses to continue in the future and had an accumulated deficit of $2737.40 million at that date. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to ~~these~~ these matters are also described in Note 2. The consolidated ~~financial~~ financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Urish Popeck & Co., LLC

Pittsburgh, PA

~~March~~September 2725, 2017

VERSAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
	As of
	July 1,2016	June 26,2015
	June 30,2017	July 1,2016
ASSETS
Current assets
Cash and cash equivalents	$1,~~549~~039	$21,~~109~~549
Accounts receivable, net	4731,~~675~~753	5747,~~171~~675
Inventory, net	~~221~~-	~~1,188~~221
Prepaid expenses and other current assets	1,~~007~~645	1,~~540~~007
Deferred income taxes	-	1,366
Income tax receivable	1,352	1,513
Income tax receivable	1,513	2,373
Total current assets	35,789	51,965
Total current assets	51,965	65,747
Property and equipment, net	839	1,328
Property and equipment, net	1,328	2,084
Deferred income taxes, non-current	-	-
Deferred income taxes, non-current	-	414
Goodwill	-	-
Goodwill	-	16,066
Intangible assets, net	6,072	7,248
Intangible assets, net	7,248	4,643
Other assets	1,647	775
Other assets	775	252
Total assets	$44,347	$61,316
Total assets	$61,316	$89,206
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$1815,~~156~~601	$3518,~~852~~156
Billings in excess of revenue	79,~~156~~378	-7,156
Accrued salaries and vacation	2,~~478~~272	32,~~332~~478
Bank line of credit	147,~~854~~083	-14,854
Notes payable, current	34,~~831~~407	23,~~313~~831
Other current liabilities	78,~~724~~563	17,~~114~~724
Total current liabilities	5447,~~199~~304	4254,~~611~~199
Notes payable, non-current	~~2,494~~-	52,~~835~~494
Other long-term liabilities	32,~~555~~824	13,~~390~~555
Total liabilities	6050,~~248~~128	4960,~~836~~248
COMMITMENTS AND CONTINGENCIES
Commitments and contingencies
Stockholders' equity
Stockholders' equity (deficit)
Common stock $.01 par value; 30,000,000 shares authorized;10,217,227 shares issued and 9,982,778 shares outstanding as of July 1 2016; 10,128,923 shares issued and 9,805,082 shares outstanding as of June 26, 2015 (10,217,277 shares issued and 9,950,958 shares outstanding as of March 1, 2017)	102	101
Common stock $.01 par value; 30,000,000 shares authorized;10,266,027 shares issued and 9,923,710 shares outstanding as of June 30, 2017; 10,217,227 shares issued and 9,982,778 shares outstanding as of July 1, 2016.	103	102
Capital in excess of par value	3132,~~128~~857	3031,~~798~~128
(Accumulated deficit) Retained earnings	(27,448)	10,439
Accumulated deficit	(37,021)	(27,448)
Treasury stock, at cost	(1,~~480~~494)	(1,~~460~~480)
Accumulated other comprehensive loss; foreign currency translation	(~~1,234~~226)	(~~508~~1,234)
Total stockholders' equity	1,068	39,370
Total stockholders' equity (deficit)	(5,781)	1,068
Total liabilities and stockholders' equity	$6144,~~316~~347	$8961,~~206~~316

The accompanying notes are an integral part of these consolidated financial statements.

VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
GROSS REVENUE	$~~167~~111,~~917~~821	$~~159~~167,~~877~~917	~~$110,280~~
Purchased services and materials, at cost	~~107~~60,~~199~~860	90107,~~289~~199	~~55,108~~
Direct costs of services and overhead	5745,~~544~~061	5557,~~797~~544	~~46,653~~
GROSS (LOSS) PROFIT	3,174	13,791	8,519
GROSS PROFIT	5,900	3,174
Selling, general and administrative expenses	1312,~~031~~873	1113,~~003~~031	~~10,175~~
Other operating expense ( income)	1,937	-	(1,596)
Other operating expense	1,243	1,937
Goodwill impairment	~~20,331~~-	-20,331	~~1,381~~
Intangible impairment	~~3,812~~-	-3,812	-
OPERATING (LOSS) INCOME	(35,937)	2,788	(1,441)
LOSS FROM OPERATIONS	(8,216)	(35,937)
OTHER (INCOME) EXPENSE
Interest income	(1914)	(219)	~~(15)~~
Interest expense	~~702~~1,446	~~447~~702	~~133~~
(LOSS) INCOME BEFORE INCOME TAXES, FROM CONTINUING OPERATIONS	(36,620)	2,343	(1,559)
LOSS BEFORE INCOME TAXES	(9,648)	(36,620)
Income tax expense (benefit)	1,267	936	(1,043)
Income tax (benefit) expense	(75)	1,267
NET (LOSS) INCOME FROM CONTINUING OPERATIONS	(37,887)	1,407	(516)
NET LOSS	$(9,573)	$(37,887)
Income (Loss) from discontinued operations, net of tax	-	-	182
NET LOSS PER SHARE-BASIC and DILUTED	$(0.96)	$(3.84)
NET (LOSS) INCOME	$(37,887)	$1,407	$(334)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC AND DILUTED	10,002	9,857
NET (LOSS) INCOME PER SHARE-BASIC and DILUTED
Continuing operations	$(3.84)	0.14	$(0.05)
Discontinued operations	-	-	0.02
NET (LOSS) INCOME PER SHARE-BASIC and DILUTED	$(3.84)	$0.14	$(0.03)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC	9,857	9,771	9,663
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-DILUTED	9,857	9,771	9,663

The accompanying notes are an integral part of these consolidated financial statements.

VERSAR, INC. AND SUBSIDIARIES

VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss)
(In thousands)

	For the Fiscal Year Ended
	June 30, 2017	July 1, 2016
COMPREHENSIVE (LOSS)
Net (loss)	$(9,573)	$(37,887)
Reclassification of cumulative translation adjustments due to disposal of PPS	1,041	--
Foreign currency translation adjustments	(33)	(726)
TOTAL COMPREHENSIVE (LOSS)	$(8,565)	$(38,613)

Consolidated Statements of Comprehensive (Loss) Income

Fiscal Years Ended July 1, 2016, June 26, 2015, and June 27, 2014

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
COMPREHENSIVE (LOSS) INCOME
Net (loss) income	$(37,887)	$1,407	$(334)
Foreign currency translation adjustments	(726)	(164)	31
TOTAL COMPREHENSIVE (LOSS) INCOME	$(38,613)	$1,243	$(303)

The accompanying notes are an integral part of these consolidated financial statements.

VERSAR, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

Fiscal Years Ended ~~July 1, 2016,~~ June 2630, ~~2015,~~2017 and ~~June~~July 271, ~~2014~~ 2016 (in thousands)

				Retained			~~Other~~
			Capital	Earnings /			~~Comprehensive~~Other	~~Stockholders'~~Total
	Common Stock		in Excess of	(Accumulated)	Treasury		~~Loss~~Comprehensive	~~Equity~~Stockholders'
	Shares	Amount	Par Value	Deficit)	Shares	Amount	Loss	Equity (Deficit)
Balance at June 27, 2014	10,013	$100	$30,393	$9,032	(305)	$(1,396)	$(344)	$37,785
Balance at June 26, 2015	10,129	$101	$30,798	$10,439	(324)	(1,460)	$(508)	$39,370
Restricted stock units	116	1	405	-	-	-	-	406
Treasury stock	-	-	-	-	(19)	(64)	-	(64)
Net income	-	-	-	1,407	-	-	-	1,407
Foreign Currency Translation Adjustment	-	-	-	-	-	-	(164)	(164)
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	49	1	185	-	-	-	-	186
Treasury stock	-	-	-	-	(33)	(14)	-	(14)
Warrants	-	-	1,544	-	-	-	-	1,544
Net loss	-	-	-	(9,573)	-	-	-	(9,573)
Foreign Currency Translation Adjustment and reclassifications from other comprehensive loss to net loss	-	-	-	-	-	-	1,008	1,008
Balance at June 30, 2017	10,266	$103	$32,857	$(37,021)	(364)	$(1,494)	$(226)	$(5,781)

The accompanying notes are an integral part of these consolidated financial statements.

VERSAR, INC. AND SUBSIDIARIES

VERSAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
	For the Fiscal Year Ended
	June 30, 2017	July 1, 2016
Cash flows from operating activities:
Net income (loss)	$(9,573)	$(37,887)

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization	1,860	5,756
(Gain) loss on sale of property and equipment	-	(79)
Change in contingent notes	(371)	-
Provision for (recovery of) doubtful accounts receivable	(845)	1,001
Provision for non-cash interest expense	611	-
Provision (benefit) for income taxes expense	-	1,779
Share based compensation	185	329
Goodwill impairment	-	20,331
Intangible impairment	-	3,812
Loss on disposal of PPS	1,243	-
Changes in assets and liabilities:
Decrease (increase) in accounts receivable	15,555	15,192
Decrease (increase) in prepaid and other assets	(741)	1,148
(Increase) decrease in inventories	-	(96)
(Decrease) increase in accounts payable	(2,323)	(19,635)
Decrease in accrued salaries and vacation	(208)	(1,055)
Decrease in income tax payable	161	829
(Decrease) Increase in billings in excess of revenue	(2,222)	-
Decrease (increase) in other assets and liabilities	4,621	6,503
Net cash (used in) provided by operating activities	7,953	(2,072)

Cash flows from investing activities:
Purchase of property and equipment	(184)	(686)
Payment for VSS acquisition, net of cash acquired	-	(11,080)
Proceeds from sale of office equipment	-	270
Proceeds from sale of PPS	214	-
Net cash used in investing activities	30	(11,496)

Cash flows from financing activities:
Borrowings on line of credit	66,913	73,464
Repayments on line of credit	(73,799)	(58,611)
Repayment of Loan for JMWA Purchase	(1,543)	(1,266)
Loan for VSS Purchase	-	5,000
Repayment of Loan for VSS Purchase	-	(2,500)
Repayments of notes payable	-	(3,058)
Purchase of treasury stock	(15)	(20)
Net cash provided by (used in) financing activities	(8,444)	13,009
Effect of exchange rate changes on cash and cash equivalents	(49)	(1)
Net decrease in cash and cash equivalents	(510)	(560)
Cash and cash equivalents at the beginning of the period	1,549	2,109
Cash and cash equivalents at the end of the period	$1,039	$1,549
Supplemental disclosure of cash and non-cash activities:
Contingent consideration payable related to VSS acquisition	$2,728	$3,154
Cash paid for interest	$683	$133
Cash paid for income taxes	$28	$254

Consolidated Statements of Cash Flows

(in thousands)

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
Cash flows from operating activities:
Net income (loss)	$(37,887)	$1,407	$(334)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization	5,756	2,566	1,973
(Gain) loss on sale of property and equipment	(79)	59	34
Change in contingent notes	-	-	(1,590)
Provision for (recovery of) doubtful accounts receivable	1,001	(27)	(886)
Loss on life insurance policy cash surrender value	-	(35)	(63)
Provision (benefit) for income taxes expense	1,779	1,008	(913)
Share based compensation	329	405	502
Goodwill impairment	20,331	-	1,381
Intangible impairment	3,812	-	-
Changes in assets and liabilities:
Decrease (increase) in accounts receivable	15,191	(26,239)	10,682
Decrease (increase) in prepaid and other assets	1,148	(344)	356
(Increase) decrease in inventories	(96)	7	64
(Decrease) increase in accounts payable	(19,635)	23,013	(2,190)
Decrease in accrued salaries and vacation	(1,055)	(938)	(130)
Decrease in income tax payable	829	(15)	(141)
Decrease (increase) in other assets and liabilities	6,503	(705)	(1,998)
Net cash provided by operating activities	(2,072)	162	6,747
Cash flows from investing activities:
Purchase of property and equipment	(686)	(839)	(971)
Payment for VSS acquisition, net of cash acquired	(11,080)	-	-
Payment for JMWA acquisition, net of cash acquired	-	(7,164)	-
Payment for GMI acquisiton, net of cash acquired	-	-	(2,788)
Proceeds from sale of office equipment	270	-	-
Premiums paid on life insurance policies	-	(23)	(23)
Proceeds received on life insurance policies	-	835	-
Net cash used in investing activities	(11,496)	(7,191)	(3,782)
Cash flows from financing activities:
Borrowings on line of credit	73,464	19,943	-
Repayments on line of credit	(58,611)	(19,943)	-
Loan for JMWA Purchase	-	4,000	-
Repayment of Loan for JMWA Purchase	(1,266)	(1,189)	-
Loan for VSS Purchase	5,000	-	-
Repayment of Loan for VSS Purchase	(2,500)	-	-
Proceeds from exercise of stock options	-	-	99
Repayments of notes payable	(3,058)	(3,559)	(2,045)
Purchase of treasury stock	(20)	(64)	(171)
Net cash provided by financing activities	13,009	(812)	(2,117)
Effect of exchange rate changes on cash and cash equivalents	(1)	276	98
Net decrease in cash and cash equivalents	(560)	(7,565)	946
Cash and cash equivalents at the beginning of the period	2,109	9,674	8,728
Cash and cash equivalents at the end of the period	$1,549	$2,109	$9,674
Supplemental disclosure of cash and non-cash activities:
Promissory notes-payable issued in connection with JMWA acquisition	$-	$6,000	$-
Promissory notes-payable issued in connection with GMI acquisition	$-	$-	$1,250
Contingent consideration payable related to VSS acquisition	$3,154	$-	$-
Cash paid for interest	$133	$429	$133
Cash paid for income taxes	$254	$48	$254

The accompanying notes are an integral part of these consolidated financial statements.

VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES~~

NOTE 1 - ~~Significant~~SIGNIFICANT ~~Accounting~~ACCOUNTING ~~Policies~~POLICIES

Principles of consolidation and business operations: The accompanying consolidated financial statements include the accounts of Versar, Inc., a Delaware corporation organized in 1969, and its wholly-owned subsidiaries (“Versar” or the “Company”). Versar, Inc., Versar is a global project management firm that provides value oriented solutions to government and commercial clients. WeIt also ~~provide~~provides tailored and secure engineering solutions in extreme environments and offers specialized abilities in ~~construction~~ ~~management~~staff augmentation, ~~security system integration,~~ performance- based remediation, and hazardous ~~materials~~ material management. ~~The~~ ~~accompanying consolidated financial statements include the accounts of Versar, Inc. and its wholly-owned subsidiaries (“Versar” or the “Company”).~~ All intercompany balances and transactions have been eliminated in consolidation. ~~The Company operates within three business segments ECM, ESG and PSG.~~ Refer to Note 3 - Business Segments ~~for~~ for additional information. The Company’s fiscal year end is based upon 52 or 53 weeks per year ending on the last Friday of the fiscal period and therefore does not close on a calendar month end. ~~The~~Fiscal ~~Company’s~~2017 ~~fiscal~~included ~~year~~52 weeks and fiscal 2016 included 53 weeks. The ~~and~~extra ~~its~~week occurred in the period ended December 30, 2016. Therefore, for comparative purposes, the fiscal ~~years~~year ~~2015~~numbers presented ~~and~~will ~~2014~~include ~~included~~an 52additional ~~weeks~~week of results for fiscal 2016.

Accounting estimates: The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Contract accounting and revenue recognition: Contracts in process are stated at the lower of of actual cost incurred plus accrued profits or incurred costs ~~reduced~~ reduced by progress billings. ~~The~~Versar ~~Company~~ records income from major fixed-price contracts, extending over more than one accounting period, using the percentage-of-completion method. During performance of such contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required. ~~The~~ The effects of these revisions are included in the periods in which ~~the~~ the revisions are made. On cost-plus-fee type contracts, revenue is recognized to the extent of costs incurred plus a proportionate amount of fee earned, and on time-and material contracts, revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred. Losses on contracts are recognized when they become known.

Direct costs of services and overhead: These expenses represent the cost to Versar of direct and overhead staff, including recoverable overhead costs and unallowable costs that are directly attributable to contracts performed by the Company.

Pre-contract costs: Costs incurred by ~~the~~ ~~Company~~Versar prior to the execution of a contract, including bid and proposal costs, are expensed when incurred regardless of ~~whether~~ whether the bid is successful.

Depreciation and amortization: Property and equipment are carried at cost net of accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. Repairs and maintenance that do not add significant value or significantly lengthen an asset’s useful life are charged to current operations.

Allowance for doubtful accounts receivable: Disputes arise in the normal course of our business on projects where we are contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability and collectability. Such disputes, whether claims or unapproved change orders in process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred and only when realization is probable and can be reliably estimated. Management reviews outstanding receivables on a quarterly basis and assesses the need for reserves, taking into consideration past collection history and other events that bear on the collectability of such receivables. All receivables over 60 days old are reviewed as part of this process.

Share-based compensation: Share-based compensation expense is measured at the grant date, based on the fair value of the award. ~~The Company'~~Versar’s recent equity awards have been restricted stock unit awards. Share-based compensation cost for restricted stock unit awards is based on the fair market value of the ~~Company’s~~ stock on the date of grant. Share-based compensation expense for stock options is calculated on the date of grant using the Black-Scholes pricing model to determine the fair value of stock options. Compensation expense is then recognized ratably over the requisite service period of the grants.

Net income (loss) per share: Basic net income (loss) per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share also includes common equivalent shares outstanding during the period, if dilutive. ~~The Company~~Versar’s common equivalent shares consist of shares to be issued under outstanding stock options and shares to be issued upon vesting of unvested restricted stock units.

The following is a reconciliation of weighted average outstanding shares for purposes of calculating basic net (loss) income per share compared to diluted net (loss) income per share:

	For the Fiscal Year End
	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27,2014
	June 30, 2017		July 1, 2016
	(in thousands)
Weighted average common shares outstanding-basic	910,~~857~~002	~~9,771~~	9,~~663~~857
Effect of assumed exercise of options and vesting of restricted stock unit awards, using the treasury stock method	-	-	-
Weighted average common shares outstanding-diluted	910,~~857~~002	~~9,771~~	9,~~663~~857

~~For~~Cash ~~fiscal~~and ~~2014,~~cash ~~there~~equivalents: ~~were~~All investments ~~outstanding~~with ~~options~~an tooriginal ~~purchase approximately~~maturity ~~43,000~~of ~~shares~~three ofmonths ~~common~~or ~~stock,~~less ~~however,~~when purchased ~~due~~are considered to ~~the~~be cash equivalents. Cash and cash ~~net~~equivalents ~~loss~~are maintained at financial institutions and, ~~there~~at ~~was~~times, balances nomay ~~impact~~exceed tofederally ~~dilution~~insured limits. WeVersar ~~had~~has ~~no outstanding~~never ~~options~~experienced inany ~~fiscal~~losses ~~years~~related ~~2015~~to ~~and 2016~~these balances.

~~Cash and cash~~ ~~equivalents~~Inventory: ~~All~~Versar’s ~~investments~~inventory ~~with~~is anvalued ~~original~~at ~~maturity~~the lower of ~~three~~cost ~~months~~ or ~~less~~market ~~when purchased are considered to be cash equivalents. Cash~~ and ~~cash equivalents~~is ~~are maintained at financial institutions and, at times,~~accounted ~~balances~~for ~~may~~on ~~exceed~~a ~~federally~~first-in ~~insured~~first-out ~~limits~~basis. ~~The Company has never experienced any losses related to these balances.~~

~~Inventory:~~ ~~The~~Long-lived ~~Company’s~~assets: ~~inventory~~Versar is required ~~valued~~to atreview long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the ~~lower~~carrying value of ~~cost~~an orasset might ~~market~~not ~~and~~be recoverable. An impairment loss is ~~accounted~~recognized ~~for~~if onthe carrying avalue ~~first~~exceeds the fair value. Any write-indowns ~~first~~are treated as permanent reductions. We believe the long-~~out~~lived assets as of ~~basis~~June 30, 2017 are fully recoverable.

~~Long-lived~~ ~~assets~~Income taxes: ~~The~~Versar ~~Company is~~recognizes ~~required~~deferred totax ~~review~~liabilities ~~long-lived~~and assets ~~and~~for ~~certain~~the ~~identifiable~~expected future tax ~~intangibles~~consequences ~~for~~of ~~impairment~~temporary ~~whenever~~differences ~~events~~between orthe ~~changes~~carrying inamounts ~~circumstances~~and ~~indicate that~~ the ~~carrying~~tax ~~value~~bases of ancertain ~~asset~~assets ~~might not~~and ~~be recoverable~~liabilities. AnA ~~impairment~~valuation allowance ~~loss~~ is ~~recognized~~established, ifas ~~the carrying~~necessary, ~~value~~to ~~exceeds~~reduce ~~the~~deferred ~~fair value. Any write-downs are treated~~income astax ~~permanent~~assets ~~reductions.~~to ~~The Company believes~~ the ~~long-lived~~amount ~~assets as~~expected ofto ~~July~~be 1,realized ~~2016~~in ~~are fully recoverable~~future periods.

~~Income taxes:~~ Goodwill: The ~~Company~~carrying ~~recognizes~~value ~~deferred~~of ~~tax~~goodwill ~~liabilities~~at ~~and~~June ~~assets~~30, ~~for~~2017 ~~the expected future tax consequences of temporary differences between the carrying amounts~~ and ~~the~~July ~~tax bases of certain assets and liabilities. A valuation allowance is established~~1, as2016 ~~necessary, to reduce deferred income tax assets to~~was ~~the amount expected to be realized in future periods~~zero.

~~Goodwill:~~ Other intangible assets: The net carrying value of ~~goodwill~~ intangible assets at ~~July~~June 130, ~~2016~~2017 and ~~June 26~~July 1, ~~2015~~2016 was ~~zero~~$6.1 million and $167.12 million, respectively. ToThe intangible ~~conduct~~assets ~~the~~accumulated ~~annual~~from ~~goodwill~~acquisitions ~~impairment~~include ~~analysis,~~customer ~~management~~related assets, ~~with~~marketing ~~the~~related ~~assistance~~assets, oftechnology-based anassets, contractual ~~external~~related ~~valuation firm~~assets, ~~estimated~~ ~~the~~and ~~fair~~non-competition ~~value~~related ofassets. These ~~each~~intangible ~~reporting~~assets ~~unit~~are ~~using~~amortized over a ~~market~~ 1.75 -~~based~~ ~~valuation~~15 ~~approach~~year ~~based~~useful life. onVersar ~~comparable~~is ~~public~~required ~~company data~~to ~~(see~~review ~~Note~~its 7amortized intangible assets for ~~results).~~impairment Aswhenever ofevents ~~July~~or 1,changes ~~2016,~~in ~~the~~circumstances ~~Company has~~indicate ~~recognized~~that ~~impairment~~the ~~expense~~carrying value of ~~$11~~the asset might not be recoverable.5 ~~million~~An impairment ~~for~~loss is recognized if the ~~ECM reporting~~carrying ~~unit,~~value $4exceeds the fair value.4 ~~million~~Any ~~for~~impairment of the ~~ESG~~assets ~~reporting~~would ~~unit,~~be ~~and~~treated $4as permanent reductions.4 Based on the results of the impairment ~~million~~testing ~~for~~during the ~~PSG~~fourth ~~reporting~~quarter ~~unit.~~of ~~These~~fiscal ~~charges~~2017, ~~are~~we ~~associated~~concluded that ~~with~~the ~~impairment~~value of ~~goodwill~~intangible ~~acquired~~assets ~~from~~with ~~JCSS,~~a ~~Advent,~~carrying ~~PPS, Charron,~~amount ~~GMI,~~of ~~and~~$6.1 million ~~JMWA~~was recoverable.

~~Other intangible~~ ~~assets~~Treasury stock: ~~The~~Versar ~~net carrying~~accounts ~~value~~for oftreasury ~~intangible~~stock ~~assets~~using atthe ~~July~~cost ~~1, 2016 and June 26, 2015 was $7~~method.2 ~~million~~There ~~and~~were ~~$4.6 million~~379,000 ~~respectively. The intangible assets~~and ~~accumulated from acquisitions include customer related assets~~330, ~~marketing~~742 ~~related~~shares assets, technology-based assets, contractual related assets, and non-competition related assets. These intangible assets are amortized over a 1.75 - 15 year useful life. The Company is required to review its amortized intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of ~~the~~treasury ~~asset~~stock ~~might~~at ~~not~~historical becost ~~recoverable. An impairment loss is recognized if the carrying value exceeds the fair value. Any impairment~~ of ~~the assets would be treated as~~ ~~permanent~~approximately ~~reductions. Based on the results of the impairment testing during the third and fourth quarters of fiscal 2016, the Company concluded that the value of intangible assets with a carrying amount of~~ $31.75 million ~~was~~at ~~not~~June ~~recoverable. As a result of these charges~~30, ~~the~~2017 ~~carrying~~and ~~amount~~July ~~of intangible assets acquired from GMI~~1, ~~Charron~~2016, ~~Advent, JMWA, and PPS has been reduced to zero.~~ ~~The carrying amount of intangible assets in the Company’s PSG and ESG segments have been reduced to zero~~respectively.

~~Treasury~~Foreign ~~stock:~~Currency Translation and Transactions: The ~~Company~~financial position ~~accounts~~and ~~for~~results of operations of Versar’s foreign ~~treasury~~affiliates ~~stock~~are translated using the ~~cost~~local ~~method.~~currency ~~There~~as ~~were~~the functional ~~330,742~~currency. Assets and liabilities of the affiliates are ~~323,841~~translated ~~shares~~at the exchange rate in effect at year-end. Statement of Operations ~~treasury~~accounts ~~stock~~are translated at ~~historical~~the ~~cost~~average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in Other Comprehensive Income (Loss) within the Consolidated Statements of Comprehensive Income (Loss). Gains and losses resulting from foreign currency transactions are included in operations and are not material for the fiscal years presented. At June 30, 2017 and July 1, 2016, Versar held cash in foreign banks of approximately $10.2 million and $0.5 million, atrespectively. At June 30, 2017 and July 1, 2016, we had net assets held in the United Kingdom of approximately zero and ~~June~~$1.3 ~~26,~~million. ~~2015~~On April 4, ~~respectively~~2017, Versar sold its PPS subsidiary and recorded a $1.2 million charge to write-down the related historical cumulative translation adjustment. This amount is recorded as Other Expense in the Consolidated Financial Statements.

~~Foreign~~Fair ~~Currency Translation~~value ~~and~~of ~~Transactions~~Financial Instruments: The ~~financial~~fair ~~position~~values ~~and results~~ of ~~operations of~~ the ~~Company~~Versar’s ~~foreign~~cash ~~affiliates~~and ~~are~~cash ~~translated using~~equivalents, ~~the~~accounts ~~local~~receivable, accounts ~~currency~~payable, asand ~~the~~accrued ~~functional currency. Assets and~~ liabilities ofapproximate ~~the affiliates are translated at the exchange rate~~their incarrying ~~effect~~values atbecause ~~year-end. Statement~~ of ~~Operations accounts are translated at~~ the ~~average~~short-term ~~rate~~nature of ~~exchange prevailing during the~~those ~~year~~instruments. ~~Translation~~The ~~adjustments~~carrying ~~arising~~value ~~from the use~~ of ~~differing exchange~~our ~~rates~~debt ~~from~~approximates ~~period~~its ~~to period are included in Other~~fair ~~Comprehensive~~value ~~Income~~based ~~(Loss)~~upon ~~within~~ the ~~Company’s~~quoted ~~Consolidated Statements~~market ofprice ~~Comprehensive~~offered ~~Income~~us ~~(Loss). Gains and losses resulting from foreign currency transactions are included in operations and are not material~~ for ~~the~~debt ~~fiscal~~of ~~years presented. At July 1, 2016 and June 26, 2015,~~ the ~~Company had cash held in~~ ~~foreign~~same ~~banks~~maturity ~~of approximately $0.5 million~~ and $0quality.~~8 million, respectively. At July 1, 2016 and June 26, 2015, the Company had net assets held in the United Kingdom of approximately $0.3 million.~~

Fair value of Financial Instruments: The fair values of the Company’s cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their carrying values because of the short-term nature of those instruments. The carrying value of the Company’s debt approximates its fair value based upon the quoted market price offered to the Company for debt of the same maturity and quality.

Commitments and Contingencies: Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company adopted this guidance for the fiscal year ended July 1, 2016 and had no impact on the fiscal 2016 financial statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which simplifies the presentation of debt issuance costs as a deduction from the carrying amount of the related debt liability instead of a deferred charge. For public business entities, the amendments of the update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in this update are permitted for financial statements that have not been previously issued. The Company has elected to adopt this standard for the fiscal year ended July 1, 2016. The Company reclassified $0.2 million of the Lenders debt issuance costs from Prepaid expenses within the other current assets to the Bank line of credit section within current liabilities on the Company consolidated balance sheets.

In September 2015, the FASB issued Accounting Standards Update No. 2015-16 – “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805): Business Combinations” (“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 fiscal 2017 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update NO. 2015-17 – “Balance Sheet Classifications of Deferred Taxes” (“ASU 2015-17”). To simplify the presentation of deferred income taxes, ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 eliminate the guidance in Topic 740 that requires an entity to separate deferred tax liabilities and assets into a current amount and a noncurrent amount in a classified statement of financial position. ASU 2017 -17 is effective for fiscal years beginning after December 15, 2016, 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 adopted this guidance for the fiscal year ended July 1, 2016 and had no impact on the fiscal 2016 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 on January 1, 2019, using the modified retrospective method of adoption, with early adoption permitted. We have not yet determined the effect of the adoption of ASU 2016-02 on our consolidated financial statements nor have we selected a transition date.

In ~~March 2016,~~May 2014, the FASB issued ASU ~~2016~~2014-0709, Revenue from Contracts with Customers (Topic ~~323~~606),. ~~Investments –~~ASU ~~Equity~~2014-09 ~~Method~~provides ~~and~~a ~~Joint~~single ~~Ventures.~~comprehensive revenue ~~The~~recognition ~~new~~framework ~~guidance eliminates~~and ~~the~~supersedes ~~requirement~~almost ~~that~~all ~~when~~existing revenue anrecognition ~~investment~~guidance. ~~qualifies~~Included ~~for use~~in of the ~~equity~~new ~~method~~principles-based revenue asrecognition amodel ~~result~~are ofchanges anto ~~increase~~the inbasis ~~the~~for ~~level~~deciding ofon ~~ownership~~the ~~interest~~timing orfor ~~degree~~revenue ofrecognition. ~~influence~~In addition, anthe ~~investor~~standard expands ~~must~~and ~~adjust the~~improves ~~investment,~~revenue ~~results~~disclosures. ofIn ~~operations~~August 2015, ~~and~~the ~~retained earnings~~FASB ~~retroactively~~issued onASU ~~a step~~2015-~~by-step~~14, Revenue from ~~basis~~Contracts aswith ifCustomers ~~the~~(Topic ~~equity~~606): ~~method~~Deferral ~~had~~of Effective ~~been~~Date, into ~~effect~~amend ~~during~~ASU ~~all~~2014-09 ~~previous~~to ~~periods~~defer ~~that~~ the ~~investment~~effective ~~had~~date of ~~been~~the ~~held.~~new ~~The~~revenue ~~guidance~~recognition isstandard. ~~effective~~As ~~for~~a ~~fiscal years~~result, ~~beginning~~ASU 2014-09 is ~~after~~effective ~~December~~for ~~15,~~Versar ~~2016.~~for ~~Early~~fiscal ~~adoption~~2018 isand ~~permitted.~~can ~~The~~be ~~Company~~adopted either ~~does~~retrospectively ~~not~~to ~~anticipate~~each ~~the~~prior ~~adoption~~reporting ofperiod ~~this~~presented ~~guidance~~or toas ~~have~~ a ~~material~~cumulative ~~impact~~effect onadjustment ~~its~~as ~~consolidated~~of ~~financial~~the date of ~~statements~~adoption.

In ~~May~~ ~~2014~~March 2016, the FASB issued ASU ~~2014~~2016-0908, Revenue from Contracts with Customers (Topic 606).: ~~ASU~~Principal ~~2014-09~~versus ~~provides~~Agent aConsiderations ~~single comprehensive~~(Reporting ~~revenue~~Revenue ~~recognition~~Gross ~~framework~~versus ~~and~~Net) ~~supersedes~~to ~~almost~~amend ~~all~~ASU ~~existing revenue~~2014-09, ~~recognition~~clarifying ~~guidance. Included in~~ the ~~new principles-based~~ ~~revenue~~implementation ~~recognition~~guidance ~~model~~on ~~are~~principal ~~changes~~versus toagent ~~the~~considerations ~~basis for deciding on~~in the ~~timing~~new ~~for~~ revenue recognition standard. ~~In addition~~Specifically, ~~the~~ASU ~~standard~~2016-08 ~~expands~~clarifies ~~and~~how ~~improves~~an ~~revenue~~entity ~~disclosures.~~should Inidentify ~~August 2015,~~ the ~~FASB issued~~unit ~~ASU~~of ~~2015-14, Revenue~~accounting ~~from~~(i.e., ~~Contracts~~the ~~with~~specified ~~Customers~~good ~~(Topic~~or ~~606~~service): ~~Deferral~~for ofthe ~~Effective~~principal versus ~~Date,~~agent toevaluation ~~amend~~and ~~ASU~~how ~~2014-09~~it toshould ~~defer~~apply the ~~effective~~control ~~date~~principle ofto ~~the~~certain ~~new~~types ~~revenue~~of ~~recognition standard~~arrangements. AsThe aguidance ~~result, ASU 2014-09~~ is effective for ~~the~~fiscal years ~~Company~~beginning ~~for~~after ~~fiscal~~December ~~2018~~15, ~~and~~2017. ~~can~~Early beadoption ~~adopted either~~is ~~retrospectively~~permitted. toVersar ~~each~~is ~~prior~~evaluating ~~reporting~~the ~~period~~impact ~~presented~~all orthe ~~as a~~foregoing ~~cumulative~~Topic ~~effect~~606 ~~adjustment~~amendments aswill ofhave ~~the~~on ~~date~~its ofconsolidated financial ~~adoption~~statements.

In ~~March~~April 2016, the FASB issued ASU 2016-0810, Revenue from Contracts with Customers (Topic 606): ~~Principal~~Identifying ~~versus~~Performance ~~Agent~~Obligations ~~Considerations~~and ~~(Reporting~~Licensing ~~Revenue Gross versus Net)~~ to amend ASU 2014-09, reducing ~~clarifying~~ the complexity when ~~implementation~~applying the guidance onfor ~~principal~~identifying ~~versus~~performance ~~agent~~obligations ~~considerations in~~and improving the ~~new~~operability ~~revenue~~and ~~recognition~~understandability ~~standard.~~of ~~Specifically,~~the ~~ASU 2016-08~~license ~~clarifies~~implementation ~~how~~guidance. anThe ~~entity~~guidance ~~should~~is ~~identify~~effective ~~the~~for ~~unit of accounting~~fiscal ~~(i.e.~~years, ~~the~~beginning ~~specified~~after ~~good~~December or15, ~~service)~~2017. ~~for~~Early ~~the~~adoption ~~principal versus~~is ~~agent~~permitted. ~~evaluation~~Versar ~~and~~is ~~how~~evaluating itthe ~~should~~impact ~~apply~~all the ~~control~~foregoing Topic ~~principle~~606 ~~to certain~~amendments ~~types~~will ofhave ~~arrangements~~on its consolidated financial statements.

In ~~April~~ May 2016, the FASB issued ASU 2016-1012, Revenue from Contracts with Customers (Topic 606): ~~Identifying~~Narrow-Scope ~~Performance~~Improvements ~~Obligations~~and Practical Expedients. The improvements address completed contracts and ~~Licensing~~contract ~~to amend~~modifications ~~ASU~~at ~~2014-09~~transition, ~~reducing~~ noncash consideration, the presentation ~~complexity~~of sales taxes and other taxes collected from customers, and assessment of collectability when determining ~~applying~~whether ~~the~~a ~~guidance~~transaction ~~for~~represents ~~identifying~~a ~~performance~~valid ~~obligations~~contract. Specifically, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration ~~improving~~received as revenue if an arrangement does not meet the standard’s ~~operability~~contract criteria. The pronouncement is effective for fiscal years, and ~~understandability~~interim ofperiods within those fiscal years, beginning after December 15, 2017. Versar is evaluating the ~~license~~impact ~~implementation~~all ~~guidance~~the foregoing Topic 606 amendments will have on its consolidated financial statements.

In ~~May~~ August 2016, the FASB issued ASU 2016-1215, ~~Revenue~~Statement ~~from~~of ~~Contracts~~Cash ~~with~~Flows ~~Customers~~ (Topic ~~606~~ 230): ~~Narrow-Scope Improvements and Practical Expedients.~~ ~~The~~Classification ~~improvements~~of ~~address~~Certain ~~completed~~Cash ~~contracts~~Receipts and ~~contract modifications~~Cash atPayments. ~~transition, noncash consideration, the~~ASU ~~presentation~~2016-15 ofis ~~sales~~intended ~~taxes~~to ~~and~~reduce ~~other~~diversity ~~taxes~~in ~~collected~~practice ~~from customers,~~in ~~and~~how ~~assessment of collectability when determining~~certain ~~whether~~cash areceipts ~~transaction~~and ~~represents~~cash apayments ~~valid~~are ~~contract.~~presented ~~Specifically, ASU~~and ~~2016-12~~classified ~~clarifies~~in ~~how an entity should evaluate~~ the ~~collectability~~Consolidated ~~threshold~~Statement ~~and~~of ~~when~~Cash anFlows ~~entity~~by ~~can recognize~~providing ~~nonrefundable consideration~~guidance ~~received~~on ~~as revenue if an arrangement does not meet~~eight ~~the~~specific ~~standard’s~~cash ~~contract~~flow ~~criteria~~issues. ~~The~~ASU ~~pronouncement~~2016-15 is effective ~~for~~retrospectively on ~~fiscal~~January ~~years~~1, ~~and~~2018, ~~interim~~with ~~periods~~early ~~within~~adoption ~~those~~permitted. ~~fiscal~~Versar is ~~years,~~evaluating ~~beginning~~the ~~after~~impact ~~December~~the ~~15,~~effect ~~2017.~~of ~~The~~the ~~Company~~ASU ison ~~evaluating the~~its ~~impact~~results ~~all~~of operations, ~~the~~financial ~~foregoing~~condition ~~Topic~~or ~~606~~cash ~~amendments~~flows ~~will~~nor ~~have~~and onhas ~~its~~not ~~consolidated~~selected ~~financial~~a ~~statements~~transition date.

In ~~August~~ ~~27,~~November ~~2014~~2016, the FASB ~~(the “board”)~~ issued ~~Accounting Standards~~ASU ~~Update No. 2014~~2016-1518, ~~Disclosure~~Statement of ~~Uncertainties~~Cash ~~about~~Flows an(Topic 230): ~~Entity’s~~Restricted ~~Ability~~Cash. toASU ~~Continue~~2016-18 asis aintended ~~Going~~to ~~Concern,~~reduce ~~which~~diversity in ~~requires~~practice ~~management~~in tothe ~~assess~~classification aand ~~company’s~~presentation ~~ability~~of tochanges ~~continue~~in asrestricted acash ~~going~~on ~~concern~~the ~~and~~Consolidated toStatement ~~provide~~of ~~related~~Cash ~~footnote~~Flows. ~~disclosures in~~The ~~certain~~ASU ~~circumstances.~~requires ~~Before~~that ~~this~~the ~~new~~Consolidated ~~standard,~~Statement ~~there~~of ~~was~~Cash ~~minimal~~Flows explain ~~guidance~~the change in ~~U.S.~~total ~~GAAP~~cash ~~specific~~and toequivalents ~~going~~and ~~concern.~~amounts ~~Under~~generally described ~~the~~as ~~new standard,~~restricted ~~disclosures~~cash ~~are~~or ~~required~~restricted cash equivalents when reconciling ~~conditions~~the ~~give~~beginning ~~rise~~of- toperiod and end-of-period total ~~substantial~~amounts. ~~doubt~~The ~~about~~ASU aalso ~~company’s~~requires ~~ability~~a toreconciliation ~~continue~~between asthe atotal ~~going~~of ~~concern~~cash ~~within~~and ~~one~~equivalents ~~year~~and ~~from~~restricted ~~the~~cash ~~financial~~presented ~~statement~~on ~~issuance~~the ~~date.~~Consolidated ~~The~~Statement ~~new~~of ~~standard~~Cash ~~applies~~Flows toand ~~all~~the ~~companies~~cash and ~~is effective~~equivalents ~~for~~balance ~~the~~presented ~~annual~~on ~~period~~the ~~ending~~Consolidated ~~after~~Balance ~~December~~Sheet. ~~15,~~ASU 2016,-18 ~~and all~~is ~~annual~~effective ~~and~~retrospectively ~~interim~~on ~~periods~~January ~~thereafter~~1, 2018, with early adoption permitted. ~~The~~We ~~Company~~have ~~will~~not ~~adopt~~yet ~~the guidance~~selected ~~for~~a ~~fiscal~~transition ~~2017~~date. ~~and~~Versar does not expect the adoption of ~~this guidance~~ASU 2016-18 to have a material ~~impact~~effect on its ~~consolidated~~results ~~financial~~of ~~statements~~operations financial condition or cash flows.

In January 2017, the FASB issued ASU 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 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~~Versar ~~Company~~ will continue as a going concern. For the fiscal year ended ~~July~~June 130, ~~2016~~2017, ~~the~~we ~~Company~~ generated a net loss of $~~37.~~9 .6 million and had an accumulated ~~deficits~~deficit of $2737.40 million with limited sources of operating cash flows, and further losses are anticipated in ~~the~~fiscal ~~development of its business~~2018. Further, ~~the Company~~we ~~was~~were in default under ~~its~~ our loan agreement as of ~~July~~June 130, ~~2016~~2017. On December 9, 2016, Versar, together with certain of its domestic subsidiaries acting as guarantors, entered into an ~~Amendment~~amendment ~~and~~ to the ~~Loan~~loan ~~Agreement~~agreement dated September 30, 2015 with the ~~Lender~~lender (see Note 13 – Debt). ~~The Company~~ Versar’s ability to continue as a going concern is dependent upon ~~the~~our ~~Company’s~~ ability to generate profitable operations and/or raise additional capital through equity or debt financing to meet ~~its obligations and repay~~our ~~its~~ liabilities when they come due.

Versar ~~The Company~~ intends to continue funding its business operations and its working capital needs by way of private ~~placements~~placement financing, ~~obtaining~~ obtaining additional term loans or borrowings from other financial institutions, until such time profitable operations can be achieved. As much as ~~management~~we ~~believes~~believe that this plan provides an opportunity for ~~the~~us ~~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~~our ~~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’s~~ ECM business segment provides ~~facility planning and programming,~~ engineering design, construction, ~~construction~~ construction management and security systems installation and support services. ESG provides full service environmental consulting including compliance, cultural resources., ~~Natural~~ natural resources, remediation and UXO/MMRP services. PSG provides onsite environmental, engineering, construction and logistics services.

Summary financial information ~~for the Company’s business segments~~ from continuing operations for the business segments is as follows:

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
	(in thousands)
GROSS REVENUE
ECM	$~~110~~61,~~533~~294	$91110,~~111~~533	~~$52,012~~
ESG	3833,~~688~~320	4638,~~620~~688	~~46,848~~
PSG	1817,~~696~~207	2218,~~146~~696	~~11,420~~
	$167,917	$159,877	$110,280
	$111,821	$167,917
GROSS PROFIT (LOSS) (a)
ECM	$34,~~108~~421	$83,~~030~~108	~~$5,288~~
ESG	~~890~~2,130	~~3,667~~890	~~2,116~~
PSG	(~~824~~651)	~~2,094~~(824)	~~1,115~~
	$3,174	$13,791	$8,519
	$5,900	$3,174
Selling, general and administrative expenses	1312,~~031~~873	1113,~~003~~031	~~10,175~~
Other operating expense (income)	1,~~937~~243	-1,937	~~(1,596)~~
Goodwill impairment	~~20,332~~-	-20,331	~~1,381~~
Intangible impairment	~~3,812~~-	-3,812	-
OPERATING (LOSS) INCOME	$(35,937)	$2,788	$(1,441)
OPERATING (LOSS)	$(8,216)	$(35,937)

(a) - Gross profit is defined as gross ~~revenues~~revenue less purchased ~~services~~ services and materials, at cost, less direct costs of services and ~~overhead~~ overhead allocated on a proportional basis. During fiscal 2015, the Company’s management changed the method of allocating business development (BD) costs to the reportable segments in order to refine the information used by our Chief Operating Decision Maker (CODM). The new methodology allocates BD costs to the selling, general, and administrative expense line, while the old methodology allocated BD costs to contract costs. The presentation for fiscal 2014 has been reclassified to conform to fiscal 2015 presentation. Approximately $1.8 million has been recast from contract costs to selling, general, and administrative expenses for the year ended June 27, 2014.

	As of
	July 1, 2016	June 26, 2015
	June 30, 2017	July 1, 2016
ASSETS	(in thousands)
ECM	$2112,~~842~~949	$3521,~~925~~842
ESG	2116,~~492~~862	4721,~~347~~492
PSG	1714,~~982~~536	517,~~934~~982
Total Assets	$6144,~~316~~347	$8961,~~206~~316

NOTE 4 - ACQUISITIONS AND DIVESTITURES

On September 30, 2015, ~~the~~Versar ~~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 $34.0 million in trailing twelve month revenues prior to the acquisition date from key long term customers such as FAA and FEMA. The Company has incurred approximately $1.3 million of acquisition and integration costs through July 1, 2016, recorded in selling, general, and administrative expenses. The results of operations of VSS have been included in ~~the Company’s~~ consolidated results from the date of of acquisition. VSS has contributed approximately $1716.61 million in revenue and $1511.45 million in expenses ~~from~~during ~~the~~fiscal ~~date~~2017 ~~of the~~and ~~acquisition~~contributed ~~through July 1, 2016. Additionally, the Company has incurred~~ approximately $017.65 million ofin ~~acquisition~~revenue and ~~integration~~$14.7 ~~costs~~million ~~through July 1, 2016, recorded~~ in ~~selling,~~expenses ~~general,~~during ~~and administrative~~fiscal ~~expenses~~2016.

VSS expanded ~~expands the Company~~Versar’s service offerings to include higher ~~margin~~ margin classified construction, ~~enables~~enabling Versar to generate more work ~~with~~ from existing clients and positions ~~the~~us ~~Company~~ to more effectively compete for new opportunities. At closing, ~~the~~we ~~Company~~ paid a cash purchase price of $10.5 million. In addition, ~~the Company~~we agreed to pay contingent consideration of up to a maximum of $9.5 million (undiscounted) based on certain events within the earn out period of 3three years from September 30, 2015. Based on the facts and circumstances as of June ~~April 1~~30, ~~2016~~2017, management believes that the amount of the contingent consideration that will be earned within the earn out period is $3.2.7 million, including probability weighing of future cash flows. This anticipated contingent consideration is recognized as consideration and as a liability, of which $1.6 million is presented within other current liabilities and $1.61 million is presented within other long-term liabilities on the condensed consolidated balance sheet as of ~~July~~June 130, ~~2016~~2017. The ~~potential~~ potential undiscounted amount of all future payments that ~~the Company~~Versar could be required to make under the contingent consideration agreement ranges from $0 to a maximum payout of $9.5 million, with the amount recorded being the most probable.

The final purchase price allocation in the table below reflects ~~the~~ ~~Company~~Versar’s estimate of the fair value of the assets acquired and liabilities assumed as of the September 30, 2015 acquisition date. Goodwill was allocated to the ECM segment. Goodwill represents the value in excess of fair market value that ~~the Company~~we paid to acquire ~~JCSS~~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~~.

	Amount
Description	(in thousands)
Accounts receivable	$6,979
Prepaid and other	15
Property and equipment	29
Goodwill	4,266
Intangibles	8,129
Assets Acquired	19,418

Account payable	1,675
Other liabilities	3,509
Liabilities Assumed	5,184

Acquisition Purchase Price	$14,234

The table below summarizes the unaudited pro forma statements of operations for the fiscal year ended ~~July 1, 2016,~~ June 2630, ~~2015~~ 2017 and ~~June~~July 271, ~~2014~~ 2016, assuming that the VSS acquisition had been completed as of the first day of each of the ~~three~~two fiscal years, respectively. These pro forma statements do not include any adjustments that may have resulted from synergies derived from the acquisition or for amortization of intangibles other than during the period the acquired entity was part of ~~the Company~~Versar.

VERSAR, INC. AND SUBSIDIARIES
Pro forma Consolidated Statements of Operations
(In thousands, except per share amounts)
	For the Fiscal Year EndedJuly 1, 2016(in thousands)			For the Fiscal Year EndedJune 26, 2015(in thousands)			For the Fiscal Year EndedJune 27, 2014(in thousands)
	For the Fiscal Year EndedJune 30, 2017(in thousands)			For the Fiscal Year EndedJuly 1, 2016(in thousands)
	Versar	VSS	Pro Forma Combined	Versar	VSS	Pro Forma Combined	~~Versar~~	~~VSS~~	~~Pro Forma Combined~~
GROSS REVENUE	$~~167~~111,~~917~~821	~~6,497~~-	~~174~~111,~~414~~821	$~~159~~167,~~877~~917	316,~~438~~497	~~191~~174,~~315~~414	~~$110,280~~	~~41,526~~	~~151,806~~
Purchased services and materials, at cost	~~107~~60,~~199~~860	~~3,816~~-	~~111~~60,~~015~~861	90107,~~289~~199	203,~~956~~816	111,~~245~~015	~~55,108~~	~~27,886~~	~~82,994~~
Direct costs of services and overhead	5745,~~544~~061	~~1,043~~-	5845,~~587~~060	5557,~~797~~544	51,~~570~~043	6158,~~368~~587	~~46,653~~	~~7,413~~	~~54,066~~
GROSS PROFIT	35,~~174~~900	~~1,638~~-	45,~~812~~900	133,~~791~~174	41,~~912~~638	184,~~702~~812	~~8,519~~	~~6,227~~	~~14,745~~
Selling, general and administrative expenses	1312,~~031~~873	~~450~~-	1312,~~481~~874	1113,~~003~~031	~~1,207~~450	1213,~~209~~481	~~10,175~~	~~2,021~~	~~12,196~~
Other operating expense (income)	1,~~937~~243	-	1,~~937~~243	-1,937	~~(2)~~-	~~(2)~~1,937	~~(1,596)~~	~~(2)~~	~~(1,598)~~
Goodwill impairment	~~20,332~~-	-	~~20,332~~-	-20,331	-	-20,331	~~1,381~~	-	~~1,381~~
Intangible impairment	~~3,812~~-	-	~~3,812~~-	-3,812	-	-3,812	-	-	-
OPERATING (LOSS) INCOME	(358,~~937~~216)	~~1,188~~-	(348,~~749~~215)	2(35,~~788~~937)	31,~~707~~188	6(34,~~494~~749)	~~(1,441)~~	~~4,208~~	~~2,767~~
OTHER EXPENSE
Interest income	(1914)	-	(1914)	(219)	-	(219)	~~(15)~~	-	~~(15)~~
Interest expense	~~702~~1,446	-	~~702~~1,446	~~447~~702	-	~~447~~702	~~133~~	-	~~133~~
(LOSS) INCOME BEFORE INCOME TAXES, FROM CONTINUING OPERATIONS	(36,620)	1,188	(35,432)	2,343	3,707	6,051	(1,559)	4,208	2,649
(LOSS) INCOME BEFORE INCOME TAXES, FROM OPERATIONS	(9,648)	-	(9,647)	(36,620)	1,188	(35,432)
Income tax (benefit) expense	~~1,267~~(75)	~~457~~-	~~1,724~~(75)	~~936~~1,267	~~1,394~~457	21,~~330~~724	~~(1,043)~~	~~1,520~~	~~477~~
NET (LOSS) INCOME FROM CONTINUING OPERATIONS	(37,887)	731	(37,156)	1,407	2,313	3,720	(516)	2,688	2,172
NET (LOSS) INCOME FROM OPERATIONS	(9,573)	-	(9,572)	(37,887)	731	(37,156)
Income (Loss) from discontinued operations, net of tax	-	-	-	-	-	-	182	-	182
NET (LOSS) INCOME	$(9,573)	-	(9,572)	$(37,887)	731	(37,156)
NET (LOSS) INCOME	$(37,887)	731	(37,156)	$1,407	2,313	3,720	$(334)	2,688	2,354
NET (LOSS) PER SHARE-BASIC and DILUTED	$(0.96)	-	(0.96)	$(3.84)	-	(3.84)
NET (LOSS) INCOME PER SHARE-BASIC and DILUTED
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC AND DILUTED	10,002	-	10,002	9,857	-	9,857
Continuing operations	$(3.84)	-	(3.84)	$0.14	-	0.14	$(0.05)	-	(0.05)
Discontinued operations	-	-		-	-	-	0.02	-	0.02
NET (LOSS) INCOME PER SHARE-BASIC and DILUTED	$(3.84)	-	(3.84)	$0.14	-	0.14	$(0.03)	-	(0.03)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC	9,857	-	9,857	9,771	-	9,771	9,663	-	9,663
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING-DILUTED	9,857	-	9,857	9,771	-	9,771	9,663	-	9,663

OnIn ~~July~~April 12017, ~~2014, Versar acquired all of~~ the ~~issued~~Company ~~and~~sold ~~outstanding~~the ~~capital~~PPS ~~stock~~business, ofwhich ~~JMWA. JMWA~~ was a ~~service~~component ~~disabled~~of ~~veteran~~the ~~owned small~~ECM ~~business providing architectural~~segment, ~~design, planning,~~for ~~construction management~~$214,043 ~~environmental,~~in ~~facilities,~~cash. ~~and~~There ~~logistical consulting~~were ~~services~~no tosignificant ~~federal,~~amounts ~~state,~~due ~~municipal~~to ~~and~~or ~~commercial~~from ~~clients.~~the ~~The~~buyer ~~outstanding~~as ~~capital stock~~ of ~~JMWA~~June ~~was~~30, ~~acquired~~2017. byWe are ~~Versar~~entitled ~~pursuant~~ to aadditional ~~Stock~~cash ~~Purchase~~payments ~~Agreement~~for byPPS ~~and~~up ~~among~~to ~~Versar~~£400,000 ~~JMWA,~~contingent ~~and~~on ~~the~~PPS’ ~~stockholders~~attainment of ~~JMWA~~certain ~~and entered into on June 30,~~performance ~~2014.~~thresholds ~~The~~agreed ~~aggregate~~upon ~~purchase~~with ~~price for~~ the ~~outstanding~~buyer ~~capital stock~~ of ~~JMWA was $13~~PPS.0 ~~million,~~In ~~which was comprised of: (i) cash~~connection inwith the ~~amount~~disposal of ~~$7.0~~the ~~million~~PPS ~~paid~~business, ~~pro~~all ~~rata~~of inthe ~~accordance with each stockholder~~Company’s equity ~~ownership~~ interest in ~~JMWA~~the atwholly-owned ~~closing;~~foreign ~~and~~subsidiary ~~(ii)~~was ~~three~~transferred ~~seller~~to ~~notes~~the ~~with~~buyer anand, ~~aggregate~~following ~~principal amount of $6.0 million issued by Versar to~~ the ~~JMWA stockholders~~disposal, ~~pro~~the ~~rata in~~Company ~~accordance~~retained ~~with~~no ~~each~~investment ~~stockholders’~~or ~~ownership~~ interest in ~~JMWA at~~the ~~closing~~subsidiary. ~~The seller notes bear interest at a rate of 5.00% per~~Accordingly, ~~annum and mature on~~ the ~~third~~net ~~business~~assets ~~day~~ of ~~January~~the ~~2019.~~subsidiary ~~The purchase~~were ~~price~~deconsolidated isand ~~subject to a post-closing adjustment based on an~~the ~~agreed~~associated ~~target~~cumulative ~~net~~currency ~~working~~translation ~~capital~~adjustments ~~of JMWA as of the date of~~were ~~closing.~~reclassified ~~The~~from ~~Stock~~accumulated ~~Purchase~~other ~~Agreement~~comprehensive ~~contains~~loss ~~customary representations~~ and ~~warranties~~included as ~~and~~a ~~requires~~reduction ~~the JMWA stockholders~~ to ~~indemnify~~the ~~Versar~~loss ~~for~~on ~~certain~~the ~~liabilities~~sale ~~arising~~of ~~under~~ the ~~agreement, subject to certain limitations and conditions~~business.

The ~~final~~following ~~purchase price allocation in the~~ table ~~below~~summarizes ~~reflects~~ the ~~Company’s~~calculation ~~estimate~~ of the ~~fair~~loss ~~value~~as ofwell ~~the~~as net assets ~~acquired and~~sold ~~liabilities~~associated ~~assumed on the July 1, 2014 acquisition date.~~with Goodwill has been allocated between our ECM, ESG, and PSG segments based on a percentage of segment specific JMWA revenue dollars for fiscal 2015. Goodwill, which in certain circumstances, may be deductible for tax purposes, represents the ~~value~~disposal ~~in excess~~ of fair market value that the Company paid to acquire JMWA, less identified intangible assets. The Company incurred approximately $0.1 million in transaction costs related to the JMWA acquisition. During fiscal 2015, the Company recorded measurement period adjustments totaling approximately $1.1 million related to accounts receivable, intangible assets, goodwill, accounts payable, and other liabilities.PPS:

	Amount
	Total
Description	(in thousands)
Sale price	$214,043
Cash	$456
Less:
Accounts receivable	4,996
Net working capital (1)	1,830,942
Property and equipment	382
Fixed assets	72,084
Other assets	147
Intangible assets	7,728
Intangibles	2,833
Other long-term liabilities	(11,108)
Goodwill	8,355
Net assets sold	1,899,646
Assets Acquired	17,169
Cumulative translation losses included in long-lived asset group	1,041,154
Account payable	1,603
Direct and incremental transaction costs	276,000
Other liabilities	2,566
Cumulative loss on disposal of PPS	$(3,002,757)
Liabilities Assumed	4,169
Purchase Price	$13,000

(1) Net working capital primarily includes accounts receivable and inventory offset by accounts payable.

The loss on the disposal of PPS is included in the other operating expense in the accompanying consolidated statements of operations.

NOTE 5 – FAIR VALUE MEASUREMENT

Versar applies ASC 820 – Fair Value Measurements and Disclosures in determining the fair value to be disclosed for financial and nonfinancial assets and liabilities.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy and a framework which requires categorizing assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment.

Level 1 inputs are unadjusted, quoted market prices in active markets for identical assets or liabilities.

Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3 inputs include unobservable inputs that are supported by little, infrequent, or no market activity and reflect management’s own assumptions about inputs used in pricing the asset or liability.

As a result of the acquisition of JMWA, ~~the~~Versar ~~Company~~ is required to report at fair value the assets and liabilities it acquired as a result of the acquisition. The significant valuation technique utilized in the fair value measurement of the assets and liabilities acquired was primarily an income approach used to determine fair value of the acquired intangible assets. Additionally, a market approach and an asset-based approach were used as secondary methodologies. This valuation technique is considered to be Level 3 fair value estimate, and required the estimate of appropriate royalty and discount rates and forecasted future revenues generated by each identifiable intangible asset.

NOTE 6 –- ~~DISCONTINUED~~GOODWILL ~~OPERATIONS~~AND INTANGIBLE ASSETS

The consolidated financial statements and related footnote disclosures reflect fiscal 2013 discontinuation of the Lab, Telecom, and Domestic Products business components in the ECM segment. Income and losses associated with these components, net of applicable income taxes, is shown as income or loss from discontinued operations for the fiscal year ended June 27, 2014 (excluding quarterly financial data in Note 18). For the year ended July 1, 2016, there was no activity associated with discontinued operations.

Operating results for the discontinued operations for the years ended July 1, 2016, June 26, 2015, and June 27, 2014, were as follows;

	For the Fiscal Years Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	(in thousands)
Gross Revenues	$-	$-	$-
Income (Loss) from discontinued operations	-	-	317
Provision for income taxes	-	-	(135)
Income (Loss) from discontinued operations, net of taxes	$-	$-	$182

NOTE 7 - GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying value of goodwill at ~~July 1, 2016 and~~ June 2630, ~~2015 was~~2017 ~~zero million~~ and $16.1million, respectively. The goodwill balances were principally generated from our acquisition of VSS during fiscal 2016 (see Note 4), JMWA during fiscal 2015, GMI during fiscal 2014, Charon during fiscal 2012, and PPS and Advent during fiscal 2010. We had three reporting units at July 1, 2016. ~~The~~was ~~aggregate balance of goodwill decreased by $20~~zero.3 million at July 1, 2016 and increased by 8.0 million at June 26, 2015, respectively. In connection with the preparation of fiscal 2016 financial statements, management conducted a test of the Company’s goodwill as of April 2, 2016 and July 1, 2016. A roll forward of the carrying value of the Company’s goodwill balance, by business segment, for fiscal 2016 and 2015 is as follows (in thousands):

	Goodwill Balances
	ECM	ESG	PSG	Total
Balance, June 27, 2014	$5,302	$2,771	$-	$8,073
JMWA Acquisition	1,920	1,631	4,442	7,993
Balance, June 26, 2015	$7,222	$4,402	$4,442	$16,066
VSS Acquisition	4,266	-	-	4,266
Impairment	(11,488)	(4,401)	(4,442)	(20,332)
Balance, July 1, 2016	$-	$-	$-	$-

Versar records goodwill in connection with the acquisition of businesses when the purchase price exceeds the fair values of the assets acquired and liabilities assumed. Generally, the most significant intangible assets from the businesses that we acquire are the assembled workforces, which includes the human capital of the management, administrative, marketing and business development, engineering and technical employees of the acquired businesses. Since intangible assets for assembled workforces are part of goodwill in accordance with the accounting standards for business combinations, the substantial majority of the intangible assets for recent business acquisitions are recognized as goodwill.

The ~~Company~~first ~~records~~step of the goodwill inimpairment ~~connection~~analysis ~~with~~identifies potential impairment and the ~~acquisition~~second step measures the amount of ~~businesses~~impairment ~~when~~loss ~~the~~to ~~purchase~~be ~~price~~recognized, ~~exceeds~~if any. Step 2 is only performed if Step 1 indicates potential impairment. Potential impairment is identified by comparing the fair ~~values~~value of the reporting unit with ~~assets~~its ~~acquired~~carrying ~~and~~amount, ~~liabilities~~including ~~assumed~~goodwill. ~~Generally,~~The ~~the~~carrying ~~most~~amount of a ~~significant~~reporting ~~intangible~~unit equals assets ~~from~~(including goodwill) less liabilities assigned to that reporting unit. The fair value of a reporting unit is the ~~businesses~~price that would be received if the ~~Company~~reporting unit was sold. ~~acquires~~Value ~~are~~is based on the ~~assembled~~assumptions ~~workforces~~of market participants. Market participants may be strategic acquirers, financial buyers, or both. The assumptions of market participants do not include assumed synergies which ~~includes~~are unique to the ~~human~~parent company. Management, with ~~capital~~the assistance of an external valuation firm has estimated the ~~management,~~fair value ~~administrative,~~of ~~marketing~~each ~~and~~reporting ~~business~~unit using the Guideline Public Company ~~development,~~(GPC) ~~engineering~~method ~~and~~under ~~technical~~the ~~employees~~market approach. Each of the ~~acquired~~GPC’s is ~~businesses.~~assumed ~~Since~~to ~~intangible~~be ~~assets~~a ~~for~~market ~~assembled~~participant. ~~workforces~~The ~~are~~valuation analysis ~~part~~methodology ofadjusted ~~goodwill~~the invalue ~~accordance~~of ~~with~~ the ~~accounting~~reporting ~~standards~~units ~~for~~by including ~~business~~a ~~combinations~~premium for control, ~~the~~or ~~substantial~~MPAP. ~~majority~~The ofMPAP reflects the ~~intangible~~capitalized ~~assets~~benefit ~~for~~of ~~recent~~reducing ~~business~~Versar’s ~~acquisitions~~operating costs. These costs are associated ~~recognized~~with asa company’s public reporting requirements. ~~goodwill~~The adjustment assumes an acquirer could take a company private and eliminate these costs.

During fiscal ~~2015~~2016, ~~the~~continued ~~Company~~delays ~~changed~~in ~~the~~contract ~~goodwill~~awards ~~impairment~~and ~~assessment~~contract ~~date~~funding ~~from~~and the ~~last~~direct ~~day~~impact ofon ~~the~~our ~~fiscal~~results ~~year to the first~~of ~~day~~operations, ofcoupled ~~the~~with ~~fourth quarter of~~ the ~~fiscal~~continued ~~year,~~decrease orin ~~March~~stock 28price, ~~2015.~~ ~~Management~~were ~~determined~~deemed ~~that performing the assessment prior~~ to ~~the close~~be oftriggering ~~the~~events ~~fiscal~~that ~~year~~led ~~provided~~to ~~the~~a ~~external~~test ~~valuation~~for ~~firm, the~~goodwill ~~independent~~impairment. ~~registered~~As ~~public~~a ~~accountants,~~result ~~and~~of ~~the~~our ~~Company with sufficient time to generate~~analysis, ~~review,~~we ~~and~~recorded ~~conclude~~an onimpairment charge ~~the~~of ~~valuation analysis~~$20.3 ~~results~~million. AtThe ~~the~~carrying ~~close~~value of ~~each~~goodwill ~~fiscal year, management~~after ~~assessed~~impairment ~~whether~~at ~~there~~July ~~were~~1, ~~any~~2016 ~~conditions~~was ~~present~~zero ~~during~~and the ~~fourth~~ ~~quarter~~carrying ~~that~~amount ~~would indicate impairment subsequent to the~~of ~~initial~~goodwill ~~assessment~~assets ~~date~~in ECM and ~~concluded~~PSG ~~that~~segments nohave ~~such~~been ~~conditions~~reduced ~~were~~to ~~present~~zero.

The first step of the goodwill impairment analysis identifies potential impairment and the second step measures the amount of impairment loss to be recognized, if any. Step 2 is only performed if Step 1 indicates potential impairment. Potential impairment is identified by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The carrying amount of a reporting unit equals assets (including goodwill) less liabilities assigned to that reporting unit. The fair value of a reporting unit is the price that would be received if the reporting unit was sold. Value is based on the assumptions of market participants. Market participants may be strategic acquirers, financial buyers, or both. The assumptions of market participants do not include assumed synergies which are unique to the parent company. Management, with the assistance of an external valuation firm has estimated the fair value of each reporting unit using the Guideline Public Company (GPC) method under the market approach. Each of the GPC’s is assumed to be a market participant. The valuation analysis methodology adjusted the value of the reporting units by including a premium for control, or MPAP. The MPAP reflects the capitalized benefit of reducing the Company’s operating costs. These costs are associated with a company’s public reporting requirements. The adjustment assumes an acquirer could take a company private and eliminate these costs. Based upon fiscal 2015 analysis, the estimated fair value of a company’s reporting units exceeded the carrying value of their net assets and therefore, management concluded that the goodwill was not impaired.

During the third quarter of fiscal 2016, sustained delays in contract awards and contract funding and the direct impact on the Company’s results of operations, coupled with the continued decrease in the Company’s stock price, and were deemed to be triggering events that led to an interim period test for goodwill impairment. As a result of our analysis, we recorded an impairment charge of $15.9 million. The carrying value of goodwill after impairment at April 1, 2016 was $4.4 million. The Company’s remaining goodwill balance, after impairment, was derived from a partial impairment the acquisition of JMWA acquired in fiscal 2015. As a result of these charges, the carrying amount of goodwill assets acquired from VSS, JMWA, GMI, Charron Consulting and PPS has been reduced to zero, and the carrying amount of goodwill assets in the Company’s ECM and PSG segment have been reduced to zero.

The carrying value of goodwill at June 26, 2015 was $16.1 million. The goodwill balance was principally generated from the acquisition of GMI during fiscal 2014, the fiscal 2012 acquisition of Charron, and the fiscal 2010 acquisitions of PPS and Advent. The Company had three reporting units at June 26, 2015. The aggregate balance of goodwill declined by $1.4 million at June 26, 2015. In connection with the preparation of the fiscal 2014 financial statements, the Company conducted a test of our goodwill as of June 26, 2015. The June 26, 2015 decline was due to an impairment charge of $1.4 million as a result of a decline in the estimated fair value of the ECM reporting unit. The June 26, 2015 impairment is attributable to goodwill acquired from acquisitions prior to 2011.

Intangible Assets

In connection with the acquisitions of VSS, JMWA, GMI, Charron, PPS, and Advent, ~~the~~Versar ~~Company~~ identified certain intangible assets. ~~These~~ These intangible assets were customer-related, marketing-related ~~and~~ and technology-related. A summary of the ~~Company’s~~ intangible asset balances as of ~~July~~June 130, ~~2016~~2017 and ~~June~~July 261, ~~2015~~2016, as well as their respective amortization periods, is as follows (in thousands):

	Gross Carrying Amount	Accumulated Amortization	Impairment Expense	Net Carrying Amount	Amortization Period
As of June 30, 2017
Customer-related	$12,409	$(2,856)	$(3,618)	$5,935	5-15 yrs
Marketing-related	1,084	(980)	(104)	-	5-7 yrs
Technology-related	841	(751)	(90)	-	7 yrs
Contractual-related	1,199	(1,199)	-	-	1.75 yrs
Non-competition-related	211	(74)	-	137	5 yrs
Total	$15,744	(5,860)	(3,812)	$6,072
Gross Carrying Amount		Accumulated Amortization	Impairment Expense	Net Carrying Amount	Amortization Period
As of July 1, 2016
Customer-related	$12,409	$(2,407)	$(3,618)	$6,384	5-15 yrs
Marketing-related	1,084	(980)	(104)	-	25-7 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

	Gross Carrying Amount	Accumulated Amortization	Impairment Expense	Net Carrying Amount	Amortization Period
As of June 26, 2015
Customer-related	$5,689	$(1,613)	$-	$4,076	5-15 yrs
Marketing-related	1,084	(698)	-	386	5-7 yrs
Technology-related	841	(660)	-	181	7 yrs
Total	$7,614	$(2,971)	$-	$4,643

Amortization expense for intangible assets was approximately $1.2 million and $1.7 million for fiscal 2017 and 2016, respectively.

~~Amortization~~No ~~expense for~~ intangible ~~assets~~asset was approximately $1.7 million, $1.1 million and $0.6 million for fiscal 2016, 2015, and 2014, respectively. The Company concluded that the value of definite-lived intangible assets with a carrying value of $3.8 million was not recoverable. The Company has recorded a charge of $3.8 million for the full impairment ~~of definite-lived intangible assets. As a result of these~~ charges, ~~the~~were ~~carrying~~recorded ~~amount~~during offiscal ~~intangible assets acquired from JMWA, GMI, Charron and PPS has been reduced to zero, and the carrying amount of intangible assets in the Company’s PSG and ESG segment have been reduced to zero~~2017.

NoDuring ~~intangible~~fiscal ~~asset~~2016 based on the results of the impairment ~~charges~~testing of ~~were~~goodwill, Versar concluded that the value of definite-lived assets with a carrying value of $3.8 million was not recoverable. We recorded ~~during~~a charge of $3.8 million in fiscal 2016 for the full ~~2015~~impairment orof ~~2014~~definite-lived intangible assets acquired from JMWA, GMI, Charron and PPS and as a result of these charges, the carrying amount of intangible assets has been reduced to zero.

Expected future amortization expense in the fiscal years subsequent to ~~July~~June 130, ~~2016~~2017 is as follows:

Years	Amounts	~~Amounts~~
	(in thousands)	~~(in thousands)~~
2017		1,265
2018	490
2018		579
2019	490
2019		579
2020	490
2020		579
2021	459
2021		548
2022	448
Thereafter	3,695	~~3,698~~
Total	$6,072	~~$7,248~~

NOTE 87 - ACCOUNTS RECEIVABLE

Unbilled receivables represent amounts earned which have not yet been billed and other amounts which can be invoiced upon completion of 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~~2018; therefore, they have been presented as current assets in accordance with industry practice. As part of concentration risk, management continues to assess the impact of having the PBR contracts within the ESG segment represent a significant portion of the outstanding receivable balance.

	As of
	July 1, 2016	June 26, 2015
	June 30, 2017	July 1, 2016
	(in thousands)
Billed receivables
U.S. Government	$76,~~531~~785	$87,~~787~~531
Commercial	114,~~159~~057	811,~~074~~159
Unbilled receivables
U.S. Government	20,~~883~~946	4020,~~769~~883
Commercial	~~9,103~~121	~~157~~9,103
Total receivables	4831,~~676~~909	5748,~~787~~676
Allowance for doubtful accounts	(~~1,001~~156)	(~~616~~1,001)
Accounts receivable, net	$4731,~~675~~753	$5747,~~171~~675

NOTE 98 - CUSTOMER INFORMATION

A substantial portion of ~~the Company~~Versar’s revenue from ~~continuing~~ continuing operations is derived from contracts with the U.S. ~~Government~~ asgovernment as follows:

	As of
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
	(in thousands)	~~(in thousands)~~
DoD	$116,062	$129,305	$86,039
DOD	$82,491	$116,062
U.S. EPA	43,~~583~~321	64,~~457~~583	~~1,593~~
Other US Government agencies	3817,~~415~~588	1138,~~552~~415	~~6,314~~
Total US Government	$~~159~~103,~~060~~400	$~~147~~159,~~314~~060	~~$93,946~~

A majority of the DOD work is related to ~~the Company~~Versar’s runway repair project at DAFB, support of the reconstruction efforts in Iraq and Afghanistan with the USAF and U.S. Army, and our PBR contracts with AFCEC. Revenue of approximately $ 1615.67 million for fiscal ~~2016,~~2017 ~~$29 million for fiscal 2015,~~ and $3316.6 million for fiscal ~~2014~~2016, was derived from ~~the Company’s international~~ international work for the U.S. ~~Government~~government, respectively.

NOTE 109 - PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets include the following:

	As of
	July 1, 2016	June 26, 2015
	June 30, 2017	July 1, 2016
	(in thousands)
Prepaid insurance	$18196	$~~295~~18
Prepaid rent	48239	~~113~~48
Other prepaid expenses	~~457~~1,164	~~474~~457
Collateralized Cash	~~472~~-	-472
Miscellaneous receivables	1246	~~658~~12
Total	$1,~~007~~645	$1,~~540~~007

Other prepaid expenses include maintenance agreements, licensing, subscriptions, and miscellaneous receivables from employees and a service provider. The collateralized cash amount is related to a bid bond ~~the~~Versar ~~Company~~ issued.

NOTE 1110 – INVENTORY

~~The Company~~Versar’s inventory balance includes the following:

	As of
	July 1, 2016	June 26, 2015
	June 30, 2017	July 1, 2016
	(in thousands)
Raw Materials	$~~132~~-	$~~722~~132
Finished Goods	94-	~~400~~94
Work-in-process	7-	~~152~~7
Reserve	~~(12)~~-	(8612)
Total	$~~221~~-	$~~1,188~~221

During the fourth quarter of fiscal 2016, ~~the~~Versar ~~Company~~ recorded a $0.6 million charge to write-down certain PPS assets, primarily inventory, to their estimated net realizable value as of July 1, 2016. This amount is recorded as Other Expense (Income) in the financial statements. On April 4, 2017, we sold the PPS subsidiary (including all of its inventory) for cash of $0.2 million. We are entitled to additional cash payments for PPS up to £400,000 contingent on PPS’ attainment of certain performance thresholds agreed upon with the buyer of PPS.

NOTE 1211 - PROPERTY AND EQUIPMENT

		As of
Description	Useful life	~~July~~June 130, ~~2016~~2017	~~June~~July 261, ~~2015~~2016
		(in thousands)
Furniture and fixtures	8	$640	$~~1,274~~640
Equipment	3 to 10	4,~~446~~556	64,~~330~~446
Capital leases	Life of lease	565	565
Leasehold improvements	(a)	~~684~~751	~~1,435~~684
Property and equipment, gross		$6,~~335~~512	$96,~~604~~335
Accumulated depreciation		(5,~~007~~673)	(75,~~520~~007)
Property and equipment, net		$~~1,328~~839	$21,~~084~~328

(a) The useful life is the shorter of lease term or the life of the asset.

Depreciation of property and equipment was approximately $10.37 million and $1.53 million, for the fiscal ~~years~~2017 ~~2016~~ and ~~2015~~2016, respectively.

Maintenance and repair expense approximated $0.1 million for ~~the~~both fiscal ~~years~~2017 and 2016, ~~2015, and 2014~~ respectively.

NOTE 1312 - DEBT

Notes Payable

As part of the purchase price for JMWA in July 2014, ~~the~~Versar ~~Company~~issued ~~agreed~~notes payable to ~~pay~~ the three JMWA stockholders with an aggregate principal balance of up to $6.0 million, which ~~are~~were payable quarterly over a four and a half-year period with interest accruing at a rate of 5% per year. Accrued interest is recorded ~~within the note payable line item~~ in the consolidated balance sheet. As of ~~July~~ 1June 30, ~~2016~~2017, the outstanding principal balance ofowed to the JMWA ~~shareholders~~ stockholders was $3.9 5 million.

On October 3, 2016 ~~the~~Versar ~~Company~~ did not make the quarterly principal payments to the three individuals who were the former owners of JMWA. However, ~~the~~we ~~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~~Versar ~~Company~~ in Fairfax County District Court, VA for failure to make such payments and to enforce their rights to such payments. ~~During~~Consequently, during the second quarter of fiscal 2017, ~~the Company has~~ we moved the long term portion of the debt to short term notes ~~payable~~ payable for a total of $3.5 million. ~~The Company is defending the lawsuit on legal grounds.~~ Starting January 2017, ~~the Company~~ we stopped making the interest only payments to two of the former owners and continues to make the monthly interest only payment at ~~seven~~ seven percent per annum to one former owner.

On September 30, 2015, ~~the Company~~Versar, together with certain of ~~its~~ its domestic subsidiaries acting as guarantors, entered into a ~~Loan~~loan ~~Agreement~~agreement with the ~~Lender~~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 isoriginally 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~~accrued on ~~the~~ the revolving credit facility and the term facility at a rate per ~~year~~ year equal to the LIBOR Daily Floating Rate (as defined in the ~~Loan~~loan ~~Agreement~~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~~loan ~~Agreement~~agreement contains customary affirmative and negative covenants and during fiscal ~~year~~ 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 ~~certain~~the ~~of its domestic subsidiaries acting as guarantors~~Guarantors, entered into an ~~Amendment~~ amendment to the ~~Loan~~loan ~~Agreement~~agreement ~~dated September 30, 2015~~ with the ~~Lender~~lender removing these covenants and adding a covenant requiring Versar to maintain certain minimum quarterly consolidated EBITDA amounts.

The proceeds of the term facility and borrowings under the revolving credit facility were used to repay amounts outstanding under the ~~Company~~Versar’s Third Amended and Restated Loan and Security Agreement with United Bank and to pay a portion the purchase price for the acquisition of VSS.

As of ~~July~~June 130, ~~2016~~2017, ~~the Company~~Versar’s outstanding principal term debt balance was $64.4 million comprised of the ~~Bank~~lender's ~~of America~~ facility ~~term~~ term loan balance of $20.59 million, and JMWA Note balance of $3.8 5 million including interest. The following maturity schedule presents all ~~outstanding~~ outstanding debt as of ~~July~~June 130, ~~2016~~2017.

Fiscal Years	Amounts
	(in thousands)
2017	$3,831
2018	$4,407
2018	1,399
2019	-
2019	1,095
2020	-
Total	$64,~~325~~407

On January 1, 2017 ~~the~~Versar ~~Company~~ did not make $0.1 million in ~~periodic~~ periodic payment to three individuals who participate in a Deferred Compensation Agreement plan established ~~by the Company~~ in 1988. ~~The Company~~We ~~continues~~continue to negotiate with the individuals to reschedule the payments for a future period (Note 21 – Subsequent Events).

Line of Credit

As noted above, ~~the~~Versar ~~Company~~ had a $25.0 million revolving line of of credit facility pursuant to the ~~Loan~~loan ~~Agreement with the Lender~~agreement. The revolving credit facility is scheduled to mature on September 30, 2018. We ~~The Company~~ had $14.8 million outstanding under ~~its~~this line of credit for the fiscal year ended July 1, 2016. On December 9, 2016 Versar~~, together with certain of its~~ ~~domestic~~entered ~~subsidiaries~~into ~~acting~~a asFirst ~~guarantors,~~Amendment ~~entered~~and ~~into~~Waiver ~~an Amendment~~ to the ~~Loan~~loan ~~Agreement~~agreement which, ~~dated~~among ~~September~~other 30things, ~~2015~~reduced ~~with~~ the ~~Lender.~~ ~~The~~revolving ~~Company~~line ~~now~~of ~~has~~credit facility ato $13.0 million. ~~revolving~~The ~~line~~amendment ofincreased the current interest on the revolving credit facility to LIBOR Daily floating rate plus 5%. The Company ~~has~~had $108.30 million outstanding under ~~its~~ its line of credit ~~for~~as ~~the~~of ~~six~~June ~~months ended December~~ 30, ~~2016~~ 2017.

~~The~~Versar ~~Company~~ has elected to adopt ASU No. 2015-13 to simplify the presentation of debt issuance costs for the fiscal year ended July 1, 2016. $0.2 million of remaining unamortized cost associated with the ~~Loan~~loan ~~Agreement~~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~~lender, ~~the~~Versar ~~Company~~ determined that it was not in in compliance with the Consolidated Total Leverage Ratio covenant ~~for~~ for the fiscal quarters ended January 1, 2016, and April 1, 2016, the Consolidated Total Leverage Ratio covenant, Consolidated ~~Senior~~ Senior Leverage Ratio covenant and the Asset Coverage Ratio covenant for the fiscal quarter ended April 1, 2016, which defaults continued as of July 1, 2016. Each failure to comply with these covenants constitutes a default under the ~~Loan~~original ~~Agreement~~loan agreement. On May 12, 2016, the Company, certain of its subsidiaries and the ~~Lender~~ lender entered into a ~~Forbearance~~forbearance ~~Agreement~~agreement pursuant to which the ~~Lender~~ lender agreed to forbear from exercising any and all rights or ~~remedies~~ remedies available to it under the ~~Loan~~loan ~~Agreement~~agreement and applicable law related to these defaults for a period ending on the earliest to occur of: (a) a breach byVersar ~~the Company~~ of any obligation or covenant under the forbearance ~~Forbearance Agreement~~agreement, (b) any other default or event of default under the ~~Loan~~loan ~~Agreement~~agreement or (c) June 1, 2016 (the ~~Forbearance~~ Forbearance Period).

The Forbearance Period was subsequently extended by additional forbearance ~~Forbearance~~agreements ~~Agreements~~ between ~~the~~Versar ~~Company~~ and the ~~Lender~~lender, through December 9, 2016. During the Forbearance Period, ~~the~~we ~~Company was~~ were allowed to borrow funds pursuant to the terms of the ~~Loan Agreement~~loan agreement, consistent with current ~~Company~~operating needs as set forth in a required 13-week cash flow forecast and subject to certain caps on revolving borrowings initially of $15.5 million and reducing to $13.5 million. In addition, the ~~Forbearance~~forbearance ~~Agreements~~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~~loan ~~Agreement~~agreement) plus 3.95%, required that ~~the~~we ~~Company~~ provide a 13 -week cash flow forecast updated on a weekly basis to the ~~Lender~~lender, and ~~waives~~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. On December 9, 2016, Versar, together with ~~certain~~the ~~of its domestic subsidiaries acting as guarantors~~Guarantors, entered into an ~~Amendment~~amendment to the ~~Loan~~loan ~~Agreement dated September 30~~agreement, ~~2015~~eliminating ~~with~~ the ~~Lender, among other things, eliminating the~~ events of ~~default and amending the due date of the loan~~ ~~agreement to September 30, 2017~~default. The ~~Lender~~lender ~~has~~ engaged an advisor to review ~~the~~our ~~Company’s~~ financial ~~condition on the~~ ~~Lender’s behalf~~condition, and pursuant to the Forbearance Agreements and the ~~Amendment~~ amendment, ~~requires~~Versar ~~the Company~~must to pursue ~~alternative~~a ~~sources~~transaction ~~of funding for its ongoing business operations. If the Company is unable~~ to ~~raise additional~~refinance ~~financing,~~or ~~the Company will need to adjust its~~replace ~~operational plans so that~~ the ~~Company~~loan ~~can continue to operate with its existing cash resources~~agreement. ~~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 Additionally, the lender required that Versar provide it with 10-year warrants for the purchase of 10% (subsequently reduced to 9.9% by mutual agreement) of the ~~fiscal~~fully diluted common stock (or 1,095,222 shares) with an exercise price of $.01 per share containing customary provisions for warrants issued by public companies and which may be exercised at any time after the earlier of an Event of Default under the loan agreement or August 30, 2017. The ~~quarter~~amendment ~~ended~~also ~~December~~required the payment of an amendment fee of $0.3 million, which was originally to be paid on the earlier of August 30, ~~2016~~2017 or demand upon an Event of Default, webut ~~are~~was prepaid in ~~compliance~~December ~~with~~2016. ~~all~~As ~~covenants~~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 ~~Amendment~~facility in effect as of the same date (totaling $73,333.54), which fee was due and payable on the earlier of a subsequent event of default or August 30, 2017. Due to subsequent defaults discussed herein, the ~~Loan~~fee was paid on August 7, 2017. ~~Agreement~~On August 9, 2017, Versar issued the warrant to purchase 9.9% of our outstanding common stock to lender. The value of the warrant, $1,544,263, was deferred and amortized as additional interest expense over the term of the loan agreement, as amended. The value was calculated using the Black-Scholes model with the following assumptions:

NOTE 14 - OTHER CURRENT LIABILITIES

Expected volatility	277%
Expected life (in years)	5
Risk free interest rate	1.15%
Expected dividend yield	0.00%

On March 31, 2017, Versar failed its minimum quarterly consolidated EBITDA covenant set forth in the amendment to the loan agreement, which constitutes an Event of Default under the loan agreement. On May 8, 2017, the lender and Versar entered into a Second Amendment and Waiver pursuant to which the lender provided a onetime waiver to this Event of Default effective as of May 5, 2017 in exchange for an amendment fee of $15,000.

If Versar is unable to raise additional financing, we will need to adjust operational plans so that we can continue to operate within existing cash resources. The actual amount of needed will be determined by many factors, some of which are beyond our control and we may need funds sooner than currently anticipated.

As of the end of fiscal 2017, we are not in compliance with the consolidated EBITDA covenant under the amendment to the loan agreement. (See Note 21 – Subsequent Events).

On September 22, 2017, the Company, the subsidiary guarantors and the lender entered into a forbearance agreement pursuant to which the Lender agreed to forbear from exercising any and all rights or remedies available to it under the Loan Agreement and applicable law related to these defaults for a period ending on the earliest to occur of: (a) a breach by the Company of any obligation or covenant under the forbearance agreement, (b) any default or event of default under any of the Loan Documents (other than the Acknowledged Events of Default, as defined in the forbearance agreement), (c) the transaction between Kingswood Genesis Fund I, LLC, KW Genesis Merger Sub, Inc. and Borrower is terminated, or (d) November 17, 2017 (each, a “Forbearance Termination Event”). The period from the effective date under the forbearance agreement to (but excluding) the date that a Forbearance Termination Event occurs is referred to as the “Forbearance Period”.

Additionally, in exchange for the lender’s forbearance, the Company agreed to pay to the lender a forbearance fee in the amount of $150,000 (the “Forbearance Fee”), which shall be fully-earned and non-refundable as of the effective date of the forbearance agreement. The Forbearance Fee is due and payable on the earlier of a Forbearance Termination Event or November 17, 2017, provided that if Borrower repays in full all outstanding obligations due under the Loan Agreement on or before the earlier of a Forbearance Termination Event or November 17, 2017, the Forbearance Fee will be waived.

NOTE 13 - OTHER CURRENT LIABILITIES

Other current liabilities include the following:

	As of
	July 1, 2016	June 26, 2015
	June 30, 2017	July 1, 2016
Project related reserves	$~~867~~2,349	$57867
Payroll related	110	221
ARA settlement	1,445	1,200
Deferred rent	330	63
Lease Loss reserve	349	370
Earn-out obligations	1,577	-
Payroll related	380	110
Severance accrual	96	16
Deferred rent	101	330
Acquired capital lease liability	97	176
Earn-out obligations	1,577	1,577
Warranty Reserve	302	-
Deferred compensation obligation	107	148
ARA Reserve	1,200	-
Legal reserves	247	165
PPS Reserve	1,314	-
Severance accrual	-	96
Other	1,831	581
Acquired capital lease liability	7	97
Total	$7,724	$1,114
Warranty Reserve	248	302
PPS Reserve	-	1,314
JMWA Settlement	275	-
Other	1,478	1,148
Total	$8,563	$7,724

Other accrued and miscellaneous liabilities include accrued legal, audit, VAT tax liability, foreign entity obligations, and other miscellaneous items.

NOTE 1514 – LEASE LOSS LIABILITIES

In March 2016, ~~the~~Versar ~~Company~~ abandoned ~~its~~ field office facilities in Charleston, SC and Lynchburg, VA, both within the ESG ~~and ECM segments, respectively~~segment. Although ~~the~~we ~~Company~~remain ~~remains~~ obligated under the terms of these leases for the rent and other ~~costs~~ associated ~~with these leases~~costs, ~~the~~we ~~Company~~decided ~~made the decision~~ to cease using ~~these~~ these spaces on April 1, 2016, and ~~has~~have no foreseeable plans to ~~occupy~~ occupy them in the future. Therefore, ~~the~~we ~~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~~us ~~Company~~ to the landlord exceeds any rent paid to ~~the Company~~us by a tenant under a sublease over the remainder of the lease terms, which expire in April 2019 for Charleston, SC, and June 2020 for Lynchburg, VA. ~~The~~We ~~Company~~ also recognized $0.1 million of costs for the associated leasehold improvements related to the Lynchburg, VA office.

In June 2016, ~~the~~Versar ~~Company~~ abandoned ~~its~~ field office facilities in ~~San~~ San Antonio, TX within the ECM segment. Although ~~the~~we ~~Company remains~~remain obligated under the terms of the lease for the rent and other costs associated with the lease, ~~the~~we ~~Company~~decided ~~made the decision~~ to cease using this space on July 1, 2016, and ~~has~~have no foreseeable plans to occupy it in the future. Therefore, ~~the Company~~we recorded a charge to selling, general and ~~administrative~~ 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~~us ~~Company~~ to the landlord exceeds ~~any~~ any rent paid to ~~the~~us ~~Company~~ by a tenant under a sublease over the ~~remainder~~ remainder of the lease terms, which expires in February 2019. ~~The Company~~We also recognized $0.2 million of costs for the associated ~~leasehold~~ leasehold improvements related to the San Antonio, TX office.

The following table summarizes information related to our accrued lease loss liabilities at ~~July~~June 130, ~~2016~~2017 and ~~June~~July 261, ~~2015~~2016.

	As of	As of
	July 1, 2016	June 26, 2015
	June 30, 2017	July 1, 2016
	(in thousands)	(in thousands)
Lease loss accruals	$~~718~~467	$-718
Rent payments	(2056)	-(20)
Balance	$~~698~~411	$-698

NOTE 15 – NET INCOME (LOSS) PER SHARE

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share also includes common stock equivalents outstanding during the period, if dilutive. Versar’s common stock equivalent shares consist of shares to be issued under outstanding stock options and unvested restricted stock units.

	As of
	June 30, 2017	July 1, 2016
	(in thousands)
Weighted average common shares outstanding-basic	10,002	9,857
Effect of assumed exercise of options and vesting of restricted stock unit awards, using the treasury stock method	-	-
Shares of common stock issuable upon conversion of warrants	1,095	-
Weighted average common shares outstanding-diluted	11,097	9,857

Common stock equivalent shares are not included in the computation of diluted loss per share, as we have a net loss and the inclusion of such shares would be antidilutive due to the net loss. For the fiscal year ended June 30, 2017 and July 1, 2016, the common stock equivalent shares were, as follows:

	As of
	June 30, 2017	July 1, 2016
	(in thousands)

Unvested restricted stock unit awards	30	-
Shares of common stock issuable upon conversion of warrants	1,095	-
Common stock equivalent shares excluded from diluted net loss per share	1,125	-

NOTE 16 – SHARE-BASED COMPENSATION

In November 2010, the stockholders approved the Versar, Inc. 2010 Stock Incentive Plan (the “2010 Plan”), under which ~~the~~we ~~Company~~ may grant incentive awards to directors, officers, and ~~employees~~ ~~of the Company~~ employees 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 ~~July~~June 130, 2017 ~~2016,~~ a total of ~~551~~562,~~369~~ 994 restricted stock units have been issued under the 2010 Plan. As of ~~July 1,~~ ~~2016~~June 30, 2017 there are ~~448~~437,~~631~~056 shares remaining available for future issuance of awards (including restricted stock units) under the 2010 Plan.

During the twelve month period ended ~~July~~June 130, ~~2016~~2017, ~~the~~Versar ~~Company~~ awarded ~~209~~ 11,~~500~~575 restricted stock units to certain employees, which ~~generally~~ generally vest over a two-year period following the date of grant. The grant date fair value of these awards is approximately $014,672.~~6 million.~~ The total unrecognized compensation cost, measured on the grant date, that relates to ~~130~~30,~~948~~275 non-vested restricted stock awards at ~~July~~June 130, 2017 ~~2016,~~ was approximately $0.41 million, which if earned, will be recognized over the weighted average remaining service period of two years. Share-based compensation expense relating to all outstanding restricted stock unit awards totaled approximately $0.4 3 million and $0.4 million for the year ended ~~July 1~~June 30, ~~2016~~2017 and ~~June 26~~July 1, ~~2015~~2016, respectively. These expenses were included in the direct costs of services and overhead and general and administrative lines of the ~~Company’s~~ Condensed Consolidated Statements of Operations. There were no stock options outstanding and exercisable as of ~~July~~June 130, ~~2016. 20,000 stock~~ ~~options were exercised during fiscal year 2014, with an intrinsic value of approximately $0~~2017.~~1 million.~~

Exercisable qualified stock options outstanding at July 1, 2016 are as follows:

	Option Shares	Weighted Average Option Price Per Share	Total
	(in thousands, except share price)
Outstanding at June 27, 2014	14	$3.99	$57
Exercised	-	-	-
Cancelled	(14)	3.99	(57)
Outstanding at June 26, 2015	-	-	-
Exercised	-	-	-
Cancelled	-	-	-
Outstanding at July 1, 2016	-	$-	$-

NOTE 17 - INCOME TAXES

~~The~~Versar ~~Company~~ regularly reviews the recoverability of its deferred ~~tax~~ tax assets and establishes a valuation allowance as deemed appropriate. We ~~The Company~~ established a full valuation allowance against ~~its~~our U.S. deferred tax assets at June 30, 2017 and July 1, 2016 of $1218.94 and $14.8 million, respectively, as itwe determined ~~they~~we were not more likely than not to realize the deferred tax assets due to current year losses and projections for the near future. ~~The~~We ~~company~~ also maintained full valuation ~~allowances~~allowance on the Philippine ~~and~~branch ~~UK branches~~ of $0.1 ~~million~~ ~~and $0.9~~ million~~, respectively~~. The deferred tax assets in the foreign jurisdictions are related primarily to net operating loss carryforwards, as these jurisdictions have a history of losses and it is not more likely than not that the deferred tax assets will be ~~realized. The valuation allowance at the end of fiscal 2015~~ ~~was $0.8 million to offset the deferred tax asset from the Philippine branch operations, PPS, and for the U.S capital losses not more likely than not to be~~ realized ~~in the future~~.

At ~~July~~June 130, ~~2016~~2017, ~~the~~Versar ~~Company~~had ~~has~~ net operating loss carryforwards in in the Philippines branch of approximately $0.1 million ($0.2 ~~million~~ ~~gross), PPS $1.0~~ million ~~($5.4 million~~ gross) and $0.4 million ($1.1 million gross) from the acquisition of Geo-Marine, Inc. In addition, they had $0.1 million of R&D credits carry forward.

Pretax income (loss) is comprised of the following:

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
	(in thousands)
US Entities	$(396,~~395~~345)	1$(39,~~675~~395)	~~150~~
Foreign Entities	2(3,~~775~~303)	~~669~~2,775	~~(1,709)~~
Total continuing operations	(36,620)	2,343	(1,559)
Total pretax (loss) income	$(9,648)	$(36,620)
Discontinued operations	-	-	317
Total pretax (loss) income	$(36,620)	2,343	(1,244)

Income tax expense (benefit) for continuing operations is as follows:

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
	(in thousands)
Current
Federal	$(~~459~~2)	$(~~254~~459)	~~$(130)~~
State	222	~~182~~2	~~(86)~~
Foreign	-	-	1
Deferred
Deferred
Federal	(3,414)	(10,033)
Federal	(10,033)	873	(819)
State	(1,156)	(1,981)
State	(1,981)	133	(9)
Change in Valuation allowance	4,475	13,738
Foreign	-	(159)	(429)
Income tax (benefit) expenses	$(75)	$1,267
Change in Valuation allowance	13,738	-	429
Income tax (benefit) expenses, continued operations	$1,267	$936	$(1,043)
Income tax benefit, current from discontinued operations	-	-	(189)
Income tax benefit, deferred from discontinued operations	-	-	324
Income tax (benefit) expenses	$1,267	$936	$(908)

Deferred tax assets (liabilities) are comprised of the following as of the dates indicated below:

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015
	June 30, 2017	July 1, 2016
	(in thousands)
Deferred Tax Assets
Employee benefits	$~~283~~248	$~~329~~283
Bad debt reserves	~~382~~61	~~229~~382
All other reserves	1,~~174~~438	~~653~~1,174
Net operating losses and tax credit	49,~~969~~708	14,~~222~~969
Capital loss carryforward	-	108
Accrued expenses	485	435
Accrued expenses	435	446
Depreciation and amortization	6,463	7,430
Depreciation and amortization	7,430	831
Other	1	239
Other	239	1
Total deferred tax assets	$18,404	$14,912
Total deferred tax assets	$14,912	$3,819
Valuation Allowance	$(18,393)	$(14,781)
Valuation Allowance	$(14,781)	$(756)
Deferred Tax Liabilities
Goodwill and intangibles	$~~(70)~~-	$(~~900~~70)
Depreciation and amortization	~~(28)~~-	(~~307~~28)
Other	(3311)	(7633)
Net deferred tax assets	$-	$~~1,780~~-

In accordance with FASB’s guidance regarding uncertain tax positions, ~~the~~Versar ~~Company~~ recognizes income tax benefits in its ~~financial~~ financial statements only when it is more likely than not that the ~~tax~~ tax positions creating those benefits will be sustained by the ~~taxing~~ taxing authorities based on the technical merits of those tax positions. At ~~July~~June 130, ~~2016~~2017, ~~the~~we ~~Company~~ did not have any uncertain tax positions. ~~The Company’s 2011~~Our 2014-~~2015~~2016 tax years remain open to audit in most jurisdictions.

~~The Company~~Versar’s policy is to recognize tax interest expense and penalties as a component of general and administrative expenses.

The provision for income taxes compared with income taxes based on the federal statutory tax rate of 34% follows (in thousands):

	For the Fiscal Year Ended
	July 1, 2016	June 26, 2015	June 27, 2014
	June 30, 2017	July 1, 2016
	(in thousands)
United States Federal tax at statutory rate	$(123,~~004~~261)	$~~796~~(12,004)	~~$(530)~~
State taxes (net of federal benefit)	(1,~~686~~134)	~~160~~(1,686)	~~(49)~~
Permanent items	1265	2212	~~(340)~~
Goodwill Impairment	~~1,194~~-	-1,194	-
Change in tax rates	(44301)	(744)	21
Tax Credits	-	-	(28)
Change in valuation allowance	4,475	13,738
Change in valuation allowance	13,738	0	(1)
Other	81	57
Other	57	(35)	(115)
Total income tax (benefit) expense	$(75)	$1,267
Income tax (benefit) expense from continuing operations	$1,267	$936	$(1,043)
Income tax benefit, current discontinued operations	-	-	(189)
Income tax benefit, deferred discontinued operations	-	-	324
Total income tax (benefit) expense	$1,267	$936	$(908)

NOTE 18 - EMPLOYEE SAVINGS AND STOCK ~~OWNERSHIP~~PURCHASE PLAN

~~The~~Versar ~~Company~~ continues to maintain the Versar, Inc. 401(k) Plan (“401(k) Plan”), which permits voluntary participation upon employment. The 401(k) Plan was adopted in accordance with Section 401(k) of the Internal Revenue Code.

Under the 401(k) Plan, participants may elect to defer up to 50% of their salary through contributions to the plan, which are invested in selected mutual funds. ~~The~~Versar ~~Company~~ matches 100% of the first 3% ~~and~~ and 50% of the next 2% of the employee-qualified contributions for a a total match of 4%. The employer contribution is made in the Company’s cash. InVersar ~~fiscal~~made ~~years~~cash ~~2015,~~contributions ~~2014,~~in fiscal 2017 and ~~2013~~fiscal ~~the Company~~2016 ~~made~~of ~~cash~~$1.1 ~~contributions~~million ofand $1.03 million, respectively. All ~~contributions~~ contributions to the 401(k) Plan vest immediately.

In January 2005, ~~the~~Versar ~~Company~~ established an Employee Stock Purchase ~~Plan~~ Plan (“ESPP”) under Section 423 of the United States Internal Revenue Code. The ESPP was amended and restated in November 2014, for an extended term expiring July 31, 2024. The ESPP allows eligible employees ~~of the Company and its designated affiliates~~ to purchase, through payroll deductions, shares of ~~common~~ common stock ~~of the Company~~ from the open market. ~~The~~Versar ~~Company~~ will not reserve shares of authorized but unissued common stock for issuance under the ESPP. Instead, a designated broker will purchase shares for participants on the open market. Eligible employees may purchase the shares at a discounted rate equal to 95% of the closing price of ~~the Company’s~~ shares on the NYSE ~~MKT~~American on the purchase date.

NOTE 19 – COMMITMENTS AND CONTINGENCIES

Lease Obligations

~~The~~Versar ~~Company~~ leases approximately ~~213~~147,000 square feet of office space, as well as data processing and other equipment under ~~agreements~~ agreements expiring through 2021. Minimum future obligations under ~~operating~~ operating and capital leases are as follows:

Fiscal Year Ended	Total Amount
2017	$2,948
2018	$2,790
2018	2,968
2019	2,265
2019	2,701
2020	1,579
2020	2,023
2021	1,339
2021	1,792
2022	1,125
Thereafter	12,~~554~~025
Total	$1311,~~986~~123

Certain of the lease payments are subject to adjustment for increases in utility costs and real estate taxes. Total office rental expense approximated $2.90 million, ~~$3.2 million,~~ and $2.6 9 million, for fiscal years ~~2016, 2015,~~ 2017 and ~~2014~~2016, respectively. Lease concessions and other tenant allowances are amortized over the life of the lease on a straight line basis. For leases with fixed rent escalations, the total lease costs including the fixed rent escalations are totaled and the total rent cost is recognized on a straight line basis over the life of the lease.

Disallowed Costs

Versar has a substantial number of U.S. ~~Government~~government contracts, and ~~certain~~ certain of these contracts are cost reimbursable. Costs incurred on ~~these~~ these contracts are subject to audit by the Defense Contract Audit ~~Agency~~ Agency (“DCAA”). All fiscal years through ~~2010~~2014 have been audited and closed. We ~~Management~~believe ~~believes~~ that the effect of disallowed costs, if any, for the periods not yet audited and settled with DCAA will not have a material adverse effect on ~~the Company’s~~our Consolidated Balance Sheets or ~~Consolidated~~ Consolidated Statements of Operations. ~~The~~Versar ~~Company~~ accrues a liability from the DCAA audits if needed. As of both ~~July~~June 130, ~~2016~~2017 and ~~June 26~~July 1, ~~2015~~2016, the accrued liability for such matters was immaterial.

Legal Proceedings

Versar and its subsidiaries are parties from time to time to various legal actions arising in the normal course of business. ~~The Company~~We ~~believes~~believe that any ~~ultimate~~ultimately unfavorable resolution of ~~any~~ currently ongoing legal actions will not have a material adverse effect on its consolidated financial condition and/or results of operations.

NOTE 20 – ~~SUBSEQUENT~~NYSE ~~EVENT(S)~~American LLC COMPLIANCE

On ~~September~~April 306, ~~2016~~2017, Versar ~~filed~~received a ~~Form~~letter ~~12b-25~~from ~~with~~ the ~~SEC~~NYSE American ~~indicating~~LLC, ~~that~~formerly NYSE MKT (the ~~Company~~Exchange) ~~was~~in ~~delaying~~which the ~~filing~~Exchange determined ofthat ~~its~~we ~~Annual~~were not in compliance with Section 1003(a)(i) ~~Report~~of onthe ~~Form~~Exchange’s ~~10-K~~Company Guide because our stockholder’s equity reported for the fiscal year ended July 1, 2016 was below $2.0 Onmillion and we had reported net losses for two of the last three fiscal years. The Exchange also informed us that we must submit a plan to the Exchange by May 6, 2017 identifying actions we had taken, or will take, to regain compliance with the Company Guide by October 136, 2018 which period ~~2016~~was subsequently shortened as discussed below. In addition, the letter provided us an early warning regarding potential noncompliance with Section 1003(a)(iv) of the Company ~~notified~~Guide, due to uncertainty regarding our ability to generate sufficient cash flows and liquidity to fund operations. This uncertainty raised substantial doubt about our ability to continue as a going concern. On May 8, 2017, Versar submitted a plan to the Exchange ~~that~~which was accepted by the ~~Form~~Exchange ~~10-K~~via ~~would~~a beletter dated June 30, 2017 for a ~~delayed~~plan ~~beyond~~period through August 15, 2017. Versar received a letter dated August 11, 2017, from the Exchange stating that they had extended the ~~filing~~period for implementation of our plan to restore compliance with Section 1003(a)(i) of the Exchange Company Guide and had granted a plan period ~~afforded~~through September 15, 2017, subject to extensions. We are in discussion with the Exchange for the further extension of the plan period. The staff of the Exchange will review us periodically for compliance with the initiatives outlined in its plan. If we are not in compliance with the continued listing standards by ~~Rule~~September 15, 2017 or if we do not make progress ~~12b-25~~consistent with the plan during the plan period, the Exchange staff has indicated that it would initiate delisting proceedings as appropriate. As of the date of this filing, we have not been provided any update by the Exchange.

OnNOTE ~~October~~21– ~~17,~~SUBSEQUENT 2016 the Company received a letter from 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 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.EVENTS

On ~~November~~June 1430, ~~2016~~2017, Versar ~~filed~~failed athe ~~Form~~minimum ~~12b-25~~quarterly ~~with~~consolidated EBITDA covenant set forth in the ~~SEC~~amendment to its loan agreement, ~~indicating~~which ~~that~~constitutes an Event of Default under the ~~Company~~loan ~~was~~agreement. ~~delaying~~By letters dated July 24, 2017 and August 1, 2017, the ~~filing~~lender provided notice to us of ~~its~~this Event of Default and an additional Event of ~~Quarterly~~Default ~~Report~~due onto ~~Form~~our ~~10-Q~~failure to meet the timeline for consummating a transaction to refinance or replace the ~~three~~loan ~~months~~agreement ~~ended~~and ~~September~~demanded 30payment of a previously agreed fee of $0.1 million. This fee was provided for by the amendment entered into in December 2016 and became payable as a result of the Events of Default. The lender also terminated the automatic advance feature under the loan agreement, effective August 8, 2017, and on August 9, 2017, Versar issued warrants to purchase 9.9% of the outstanding common stock to the lender. These warrants were also required by the December 2016 amendment, but had not been issued as they had not become exercisable.

See OnNote ~~December~~20 ~~15,~~– ~~2016,~~NYSE ~~the~~American ~~Company~~LLC ~~received~~compliance afor ~~letter~~subsequent ~~from the~~events ~~Exchange~~related ~~indicating~~to ~~that the Exchange has accepted the Company~~Versar’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~~on ~~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~~.

On July ~~February 13~~28, 2017, Versar ~~filed~~and two JMWA note holders entered into a ~~Form~~full and ~~12b-25~~final ~~with~~settlement of issues related to the ~~SEC~~payment of the notes ~~indicating~~(Settlement) ~~that~~in the ~~Company~~litigation arising from our payment under the relevant notes. This litigation did not involve the third JMWA note holder, who was ~~delaying~~not a party to the ~~filing~~action. ofWe ~~its~~will pay the note ~~Quarterly~~holders’ ~~Report~~attorney’s onfees ~~Form~~of ~~10-Q~~$80,000 ~~for~~and the ~~six~~parties will ~~months~~continue ~~ended~~to ~~December~~discuss 30resolution of any additional legal fees and costs. Additionally, we will pay during fiscal 2018, $0.2 million representing quarterly interest payments from October 2016 through September 2017. This resolution will become effective on October 20, 2017.

~~The~~In ~~Company~~August, ~~intends~~2017 Versar received a decision from an impartial referee regarding the fiscal 2014 acquisition of GMI, and the related price agreement dated September 2, 2013 between Versar and ARA. Per the agreement, Versar was required to ~~file~~calculate the ~~delinquent~~net working ~~documents~~capital adjustment and then make a payment to, ~~satisfy~~or receive a payment from, ARA for the adjusted amount. The decision is for $1.4 ~~timeline~~million. ~~outlined~~We byrecorded a loss contingency accrual of $1.2 million in fiscal 2016. As a result of this decision, we recorded an additional $0.5 million of costs in fiscal 2017 including legal expenses related to the ~~Exchange~~negotiation ~~discussed~~process. ~~above~~The contracts acquired related to this acquisition are reported within the ECM and ESG segments on a 58.6% and 41.4% allocation with the segments receiving their proportional share of the loss contingency accrual.

On In September ~~2016~~22, 2017, the Company, ~~entered~~the ~~into~~subsidiary aguarantors ~~contract~~and ~~with~~ the ~~Army~~lender ~~Reserve~~entered tointo ~~provide~~a ~~staff~~forbearance ~~augmentation~~agreement ~~services.~~pursuant ~~Management expects this contract~~ to ~~operate~~which ~~at a loss. During September,~~ the ~~Company~~Lender ~~recorded~~agreed ato ~~loss~~forbear offrom ~~$0.6~~exercising ~~million~~any ~~related~~and toall ~~this~~rights ~~contract~~or ~~for~~remedies ~~the~~available ~~base~~to ~~period~~it ofunder ~~nine~~the ~~months.~~Loan ~~The~~Agreement ~~Army~~and ~~Reserve exercised its~~applicable ~~option~~law related to ~~extend~~these ~~the~~defaults ~~contract~~ for anthe ~~additional~~Forbearance ~~year effective April 1~~Period, ~~2017. Management expects this extension to also operate at~~ending aupon ~~loss and intends to record~~ a ~~charge~~Forbearance ofTermination $1Event.~~1 million during its fiscal fourth quarter of 2017.~~

Additionally, ~~Subsequent~~in ~~events~~exchange ~~have~~for ~~been~~the ~~evaluated~~lender’s ~~through~~forbearance, ~~March~~the ~~27,~~Company ~~2017~~agreed to pay to the Forbearance Fee (of $150,000), which shall be fully-earned and isnon-refundable as of the effective date of the ~~financial~~forbearance agreement. ~~statements~~The ~~were~~Forbearance ~~available~~Fee tois bedue ~~issued. Management~~and ~~did~~payable ~~not~~on ~~identify~~the ~~any~~earlier ~~events~~of a ~~requiring~~Forbearance ~~recording~~Termination Event or November 17, 2017, provided that if Borrower ~~disclosure~~repays in full all outstanding obligations due under the ~~financial~~Loan Agreement ~~statements~~on ~~for~~or before the ~~year~~earlier ~~ended~~of ~~July~~a 1,Forbearance Termination ~~2016~~Event or November 17, ~~except~~2017, ~~those~~the ~~described~~Forbearance ~~above~~Fee will be waived.

Subsequent events have been evaluated through September 25, 2017 which is the date the financial statements were available to be issued. We did not identify any events requiring recording or disclosure in the financial statements for the year ended June 30, 2017, except those described above.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Evaluation of the effectiveness of the design and operation of ~~the Company~~Versar’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) was carried out as of ~~July~~June 130, ~~2016,~~ 2017, the last day of the fiscal period covered by this report. ~~This~~ This evaluation was made by the ~~Company’s~~ Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the ~~Company’s~~ Chief Executive Officer and Chief Financial Officer of Versar have concluded that, as a result of the material weakness in internal control over financial reporting discussed below, ~~the Company~~Versar’s disclosure controls and procedures (a) are not effective to ensure that information required to be disclosed ~~by the Company~~ in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) do not fully include controls and procedures designed to ensure that information required to be disclosed by Versar ~~the Company~~ in reports filed or submitted under the Exchange Act is accumulated and communicated to ~~the Company’s~~ management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate ~~internal~~ internal control over financial reporting for ~~the Company~~Versar. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, ~~the Company~~Versar’s principal executive and principal financial officers and effected by the ~~Company’s~~ board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

●

Pertain to the maintenance of records that in reasonable detail ~~accurately~~ accurately and fairly reflect the transactions and dispositions of the assets of ~~the Company~~Versar;

●

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures ~~of the Company~~ are being made only in accordance with authorizations of management and directors of ~~the Company~~Versar; and

●

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of ~~the Company~~Versar’s assets that could have a material effect on the ~~financial~~ financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failure. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

~~The Company~~Versar’s management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of ~~the~~ ~~Company’s~~ internal control over financial reporting as of ~~July~~ 1June 30, ~~2016~~2017. In making this assessment, ~~the Company’s~~ management used the criteria set forth by the Committee of of Sponsoring Organizations of the Treadway Commission’s Internal Control-Integrated Framework (2013 Framework).

Based on our assessment and as a result of the material weakness in internal control over financial reporting discussed below, management has concluded that, as of ~~July~~June 130, ~~2016~~2017, ~~the Company~~Versar’s internal control over financial reporting was not effective based on those criteria.

Material Weakness in Internal Control Over Financial Reporting

As previously reported, during the third quarter of fiscal 2016, ~~after~~ after consultation with ~~the Company~~Versar’s independent auditors, ~~management~~ ~~of the Company~~ management concluded that due to sustained delay in contract awards and contract funding and the direct impact on the ~~Company’s~~ results of operations, coupled with the continued decrease in the ~~Company’s~~ stock price, the goodwill in the ~~Company’s~~ ECM and PSG segments was impaired and ~~recognized~~ recognized impairment charges of $18.8 million. Management then concluded that a material weakness existed as a result of management not recognizing that the third quarter results could have accelerated the triggering event with regard to undertaking Step 1 of the impairment analysis, rather than following its normal practice of conducting such an analysis during the ~~Company’s~~ fourth quarter. Versar ~~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 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~~Versar ~~Company has~~ developed a remediation plan, which includes retaining 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~~we ~~Company~~have ~~has~~ developed and is are 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. As a result, management concluded that as of ~~July~~June 130, ~~2016~~2017, sufficient time had not occurred since remediation efforts commenced for the material weakness to be fully remediated and thus a material weakness continued to exist at such date. Therefore, ~~the~~Versar ~~Company~~ did not have effective internal control over financial reporting and therefore did not have effective disclosure controls and procedures.

Attestation Report of the Independent Registered Public Accounting Firm

This Annual Report does not include an attestation report of ~~the~~ ~~Company~~Versar’s independent registered public accounting firm regarding internal control over financial reporting. Internal control over financial reporting was not subject to attestation by ~~the~~our ~~Company’s~~ independent registered public accounting firm pursuant to a permanent exemption granted under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act for ~~smaller~~ smaller reporting companies that permits ~~the~~Versar ~~Company~~ to provide ~~only~~ only management’s report in this Annual Report.

Changes in Internal Control over Financial Reporting

An independent accounting firm was retained to provide expert ~~advice~~ advice to identify and account for non-routine, complex transactions and facilitate resolution of such issues and ~~the Company~~we implemented the remediation plan discussed above. There were no other changes made to ~~the Company~~Versar’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the ~~Company’s~~ fourth quarter of fiscal ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, ~~the Company’s~~ internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this item is incorporated herein by reference to the ~~Director~~Proxy ~~Qualifications~~Statement ~~and~~for its 2017 Annual Meeting of Stockholders, which ~~Experience~~is expected to be filed with the Commission not later than 120 days after the end of fiscal 2017.

NAME		SERVED AS DIRECTOR
Robert L. Durfee, Ph.D		1969 to the present
	Co-founder of the Company; Executive Vice President of the Company from 1986 to June 2004; President of GEOMET Technologies, LLC, a subsidiary of the Company, from 1991 to June 2004. Age 81. Dr. Durfee is a highly experienced executive. His prior roles at Versar, including as one of the Company’s founders and as President of a subsidiary GEOMET Technologies, LLC, give him unique insight into the Company’s businesses, particularly those aspects of environmental compliance, munitions disposal and control of hazardous or toxic materials.
James L. Gallagher		2000 to the present
	President, Gallagher Consulting Group since September 1999; President of Westinghouse Government and Environmental Services from 1996 to 1999; Executive Vice President of Westinghouse Government and Environmental Services from 1994 to 1996; Vice President and General Manager of Westinghouse Government, Operations Business Unit from 1992 to 1994. Age 80. Mr. Gallagher served as a highly experienced executive of a leading environmental and energy unit of a Fortune 500 company. With his significant financial, business, operations and contracting background, Mr. Gallagher has provided expert leadership to the Board’s Audit Committee. His experience in construction management and outsourcing of large government facilities is important to two of the Company’s core businesses. As a former consultant to the U.S. Department of Energy, Mr. Gallagher is able to provide knowledge of markets and client needs in the energy sector.
Amoretta M. Hoeber		2000 to the present
	President, AMH Consulting since 1992; Director, Strategic Planning of TRW Federal Systems Group and TRW Environmental Safety Systems, Inc. from 1986 to 1992; Deputy Under Secretary, U.S. Army from 1984 to 1986; Principal Deputy Assistant Secretary, U.S. Army from 1981 to 1984. Age 74. Ms. Hoeber’s experience in government contracting, strategic planning and business development brings a unique perspective to the core Versar businesses as well as an understanding of the strategic planning process to advise Versar as it develops its key business competencies. Her extensive network and membership in several key U.S. government advisory boards also give her insight into the needs and priorities of Versar’s biggest client group, the U.S. government, specifically the U.S. Department of Defense.

NAME		SERVED AS DIRECTOR
Paul J. Hoeper		2001 to the present
	Business consultant since February 2001; Assistant Secretary of the Army for Acquisition, Logistics and Technology from May 1998 to January 2001; Deputy Under Secretary of Defense, International and Commercial Programs, from March 1996 to May 1998; President of Fortune Financial from 1994 to January 1996. Age 71. Mr. Hoeper’s experience as a merchant banker and senior Department of Defense official, plus his service as a director of several public companies, provide organizational, financial and business experience to the Board. Since leaving the government, Mr. Hoeper has been an active participant and presenter at conferences focusing on general corporate governance and the specific governance needs of companies, like Versar, that focus on government contracts. Mr. Hoeper’s participation in various government advisory groups and institutions enhances his leadership of the Board and enables him to contribute in a meaningful way to the strategic and risk management tasks of the Board.
Amir A. Metry, Ph.D		2002 to the present
	Business consultant since 1995; part-time Versar employee from 1995 to April 2002; Founding Principal of ERM Program Management Corp. from 1989 to 1995; Vice President of Roy F. Weston from 1981 to 1989. Age 75. Dr. Metry’s prior business experience in the United States and overseas and ongoing charitable work in Egypt and the Sudan provide Versar with international business experience in an area that has become its largest business segment. Dr. Metry’s experience includes launching new business and operations in the Middle East, Europe and the Pacific Rim. Also, Dr. Metry’s many years of experience and present business relationships in engineering and environmental businesses enhances his leadership on organizational and compensation issues faced by Versar.
Anthony L. Otten		2008 to the present
	Chief Executive Officer of Versar since February 2010; Director of Orion Energy Systems, Inc. since August 2015; Managing Member of Stillwater, LLC from July 2009 to February 2010; Director of New Stream Capital, LLC and Operating Partner of New Stream Asset Funding, LLC from 2007 to June 2009; Managing Member of Stillwater, LLC from 2004 to 2007; Principal of Grisanti, Galef and Goldress, Inc. from 2001 to 2004. Age 60. Mr. Otten, as Chief Executive Officer, brings the perspective and input of the senior management team to the Board discussions. As former chief executive officer of a number of companies, senior financial manager and entrepreneur, he brings a strategic vision with practical operating and financial implications to the Board’s discussions.

NAME		SERVED AS DIRECTOR
Frederick M. Strader		2014 to the present
	Business consultant since 2013. Director of HDT Global from January to September 2016; President and Chief Executive Officer of Textron Systems, Inc. from January 2010 to December 2012; Executive Vice President and Chief Operating Officer of Textron Systems, Inc. from January 2008 to December 2009; President and Chief Executive Officer of United Industrial Corporation from August 2003 to December 2007; Chief Operating Officer and Executive Vice President of United Industrial Corporation from 2001 to 2003. Prior to 2001, he spent 21 years at United Defense, L.P. and its former parent, FMC Corporation, in a variety of finance, strategy, operations and general management positions. Retired U.S. Army Reserve officer and member of the Army Acquisition Corps. Age 64. Mr. Strader’s experience in government contracting, leadership and management of public companies, and service as a board member provide him with unique insight and experience for the Board. Mr. Strader is a highly experienced executive who has led several companies serving the Department of Defense and other government agencies. He also has significant experience in finance and the government acquisition process which enable him to provide valuable input for Versar’s strategic direction.
Jeffrey A. Wagonhurst		2011 to the present
	President and Chief Operating Officer of Versar since February 2010; Executive Vice President, Program Management Group of Versar from May 2009 to February 2010; Senior Vice President of Versar from September 2006 to May 2009; joined Versar as Army Program Manager in February 1999; retired from government service in May 1997 as a Colonel after a 30 year career with the U.S. Army. Age 69. Mr. Wagonhurst is an experienced business executive and leader who brings the perspective and input of Versar’s operational management to the Board’s discussions. As a long time Versar executive and senior military officer, he provides a perspective and insight from Versar’s largest client, the U.S. Department of Defense. Our Corporate Governance Guidelines provide that each director nominee must be under the age of 72 at the time of their election to the Board and should not have served as a director for more fifteen (15) years. However these requirements do not apply to any director who was serving at the time of adoption of the guidelines in July 1, 2008.

Executive Officers of the Registrant

The current executive officers of Versar, their ages as of March 1, 2017, their current offices or positions and their business experience for at least the past five years are set forth below.

Anthony L. Otten	60	Chief Executive Officer
Jeffrey A. Wagonhurst	69	President and Chief Operating Officer
Cynthia A. Downes	55	Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer
James D. Villa	54	Senior Vice President, General Counsel, Secretary and Chief Compliance Officer
Linda M. McKnight	68	Senior Vice President of Business Development
Rob A. Biedermann	56	Senior Vice President of Engineering and Construction Management
Wendell A. Newton	59	Senior Vice President of Professional Services
Suzanne J. Bates	45	Senior Vice President of Environmental Services

Anthony L. Otten, BS, MPP, joined Versar as Chief Executive Officer (CEO) in February 2010. Prior to becoming CEO, he had served on Versar's Board of Directors for two years as an independent board member. Mr. Otten served as Managing Member of Stillwater, LLC from July 2009 to February 2011, as an Operating Partner of New Stream Asset Funding, LLC from 2007 to June 2009 and Managing Member of Stillwater, LLC from 2004 to 2007. Mr. Otten has a Bachelor of Science degree from the Massachusetts Institute of Technology and a Masters in Public Policy from Harvard’s Kennedy School of Government. Mr. Otten is an outside member of the board for Orion Energy Systems, Inc. (NASDAQ: OESX).

Jeffrey A. Wagonhurst, BS, MBC, MBA, MNSS, joined Versar in February 1999 as an Army Program Manager. In 2001, he was elected Vice President of Human Resources and Facilities. In September 2006, he was elected Senior Vice President to lead our former Program Management business unit (now ECM). In May 2009, Mr. Wagonhurst was promoted to Executive Vice President, Program Management Group. In February 2010, Mr. Wagonhurst was promoted to President and Chief Operating Officer of Versar. Mr. Wagonhurst concluded his 30 year career with the U.S. Army and retired in May 1997 as a Colonel. He commanded a Combat Engineer Brigade and Battalion during his service as well as previously serving as a Deputy District Commander of the Mobile District, U.S. Army Corps of Engineers.

Cynthia A. Downes, BS, MBA, CPA, joined Versar in April 2011 as Executive Vice President, Chief Financial Officer, Treasurer, and Principal Accounting Officer. From April 2009 to April 2011, Ms. Downes was Vice President and Chief Financial Officer of Environmental Design International, an engineering firm, based in Chicago, specializing in environmental and civil engineering. From January 2007 to April 2009, she was Vice President of Finance of GDI Advanced Protection Solutions and from 2005 to 2007, she was a consultant at Huron Consulting Group, Inc. Ms. Downes also spent 15 years at Tetra Tech, ultimately serving as Vice-President and Chief Financial Officer of Tetra Tech, EM Inc.

James D. Villa, B.A. J.D., joined Versar in March 2014 as Senior Vice President, General Counsel, Secretary, and Chief Compliance Officer. From 2011 to 2014, he served as Vice President and General Counsel of Colonial Parking, Inc. From 2006 to 2010, he served as Vice President and Chief Counsel of AOL, Inc., where he had responsibility for litigation and regulatory matters. Prior to joining AOL, Mr. Villa was a Trial Attorney in the Antitrust Division of the United States Department of Justice and also served as a Special Assistant United States Attorney in the Eastern District of Virginia. Mr. Villa was formerly in private practice with several different law firms in Washington, D.C. Mr. Villa served as a Captain in the United States Army Reserve and served in Saudi Arabia and Kuwait in support of Operations Desert Shield and Desert Storm. He has a Bachelor of Arts degree from the University of Michigan and a Juris Doctor degree from the University of Michigan Law School.

Linda M. McKnight, AA, joined Versar in April 2013 as Director of Business Development. In May of 2013, she was elected as Senior Vice President in charge of business development and strategy. Ms. McKnight has more than 29 years of experience in sales and marketing for environmental, engineering, construction, and logistics services in both domestic and international markets. She has held senior management sales positions with Tetra Tech and Kellogg Brown & Root (KBR) over the past 24 years. From 2010 to 2013, she provided business development consulting to firms focused on enhancing internal sales processes to grow environmental and engineering services to federal clients. Ms. McKnight is a Fellow and active member in the Society of American Military Engineers and serves on the Board of the Society's Academy of Fellows. She is the Immediate Past President of Women in Defense, Capital Chapter.

Rob A. Biedermann, BS, MS, joined Versar in May of 2010 serving as the Afghanistan In-Country Program Manager. In July 2011, he was assigned as the Program Manager for Versar’s Tooele Chemical Demilitarization Project completing the project and demobilization in June 2012. In July 2012, Mr. Biedermann was appointed Vice President and assumed responsibility for Domestic Operations of the Engineering and Construction Management Group. Mr. Biedermann was elected to Senior Vice President in August 2013. He served in the US Army for 12 years departing in 1997 as a Corps of Engineers Major having served in Operations Desert Shield and Storm while assigned to the 249th Engineer Combat Battalion (Heavy), the 101st Airborne Division (Air Assault), the 555th Combat Engineer Group and Mobile District, US Army Corps of Engineers. He served as the Construction Operations Manager and General Manager for JB Rodgers | Kinetics from June of 1997 to March of 2003 managing revenues up to $210 million. From 2003 to 2010, Mr. Biedermann served as the Chief Operating Officer and President of JB Henderson Construction, Inc. of Albuquerque, NM managing operations with revenues of up to $100 million. From October 1998 to March 2010, he was a Labor Arbitrator for the Sheet Metal and Air Conditioning Contractor’s National Association and elected as an Executive Board Member in October, 2008.

Wendell Newton, BS, joined Versar in July 2014 as Senior Vice President of the Professional Services Group. From February 1999 to July 2014, Mr. Newton was the Executive Vice President, Chief Operating Officer and one of the three shareholders of J.M. Waller Associates, Inc. (JMWA). Mr. Newton brings more than twenty-five years of experience in leadership and management in the areas of contracts, operations, finance, project management, human resources, and business development. During his 15-year tenure with JMWA, Mr. Newton was responsible for the executive leadership of the national environmental, facilities and logistics consulting and management groups. He served as senior-level management and provided oversight of environmental and compliance projects as well as projects involving development of facility requirements, master plans, land use and infrastructure plans. He developed and executed capital resource management plans including division and group annual budgets and the management of the technical services support staff. Mr. Newton also served as Vice President for JMWA Division managing the company's professional services resources world-wide and providing oversight to nearly 300 engineering, scientific, management and professional support staff who serve JMWA federal client base.

Suzanne Bates, B.S., M.S., joined Versar in September 2013 as a senior program manager and lead operations manager. Currently, Suzanne serves as Senior Vice President and Group Manager for Versar’s Environmental Services Group. Prior to joining Versar, Suzanne served as the Environmental Group Lead for Geo-Marine, Inc., (GMI) leading programs and projects focused on the Department of Defense and other federal agencies. She is a graduate of Texas A&M University-Corpus Christi with a Bachelor of Science degree in biology and chemistry and a Master of Science degree in marine sciences.

For the purpose of calculating the aggregate market value of the voting stock of Versar held by non-affiliates as shown on the cover page of this report, it has been assumed that the directors and executive officers of the Company and the Company’s 401(k) Plan are the only affiliates of the Company. However, this is not an admission that all such persons are, in fact, affiliates of the Company.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires Versar’s executive officers, directors and persons who beneficially own more than 10% of Versar’s Common Stock to file initial reports of ownership and reports of changes in ownership with the SEC. Based solely on Versar’s review of such reports furnished to Versar, Versar believes that all reports required to be filed by persons subject to Section 16(a) of the Exchange Act, and the rules and regulations thereunder, during fiscal 2016, were timely filed.

Audit Committee and Audit Committee Financial Expert

The Audit Committee, which the Board has determined is composed exclusively of non-employee directors who are independent, as defined by the NYSE MKT LLC (“NYSE MKT”) listing standards and the rules and regulations of the SEC, consisted of Mr. Gallagher (Chair), Dr. Durfee, Mr. Hoeper and Mr. Strader during fiscal 2016.

The Committee’s primary responsibilities, pursuant to a written charter, which is posted on the Company's website at www.versar.com under Corporate Governance (located under the “Investors” tab), are to provide oversight of the Company’s accounting and financial controls, review the scope of and procedures to be used in the annual audit, review the financial statements and results of the annual audit, and retain, and evaluate the performance of, the independent accountants and the Company’s financial and accounting personnel. The Board of Directors has determined that Mr. Strader qualifies as an Audit Committee Financial Expert as such term is defined under Item 407(d)(5) of Regulation S-K and is independent as noted above.

Code of Business Ethics and Conduct

The Company’s Board has adopted a Code of Business Ethics and Conduct, most recently restated in April 2016, that applies to all directors and employees, including the Company’s principal executive officer, principal financial officer, principal accounting officer and controller. The Code of Business Ethics and Conduct is posted on the Company’s web site www.versar.com under Corporate Governance (located under the “Investors” tab). The Company intends to disclose on its website any amendments or modifications to the Code of Business Ethics and Conduct and any waivers granted under this Code to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. In fiscal 2016 and through the date of this Annual Report, no waivers have been requested or granted.

Item 11. Executive Compensation

Information ~~COMPENSATION~~required ~~DISCUSSION~~by ~~AND~~this ~~ANALYSIS~~item is incorporated herein by reference to the Proxy Statement for its 2017 Annual Meeting of Stockholders, which is expected to be filed with the Commission not later than 120 days after the end of fiscal 2017.

Overview

The following Compensation Discussion and Analysis reviews the executive compensation program, policies and decisions of the Company’s Compensation Committee with respect to the Company’s executive officers listed in the Summary Compensation Table below (the “Named Executive Officers”). For fiscal 2016, the named executive officers are:

Name Position Anthony L. Otten Chief Executive Officer Jeffrey A. Wagonhurst President and Chief Operating Officer Cynthia A. Downes Executive Vice President, Chief Financial Officer and Treasurer James D. Villa Senior Vice President, General Counsel, Secretary and Chief Compliance Officer Linda M. McKnight Senior Vice President, Business Development

Executive Compensation Philosophies and Policies

The compensation philosophy of the Compensation Committee (the “Committee”) is built on the principles of pay for performance, stock ownership and alignment of management interests with the long-term interest of the Shareholders. The Committee’s executive compensation policies are designed to provide competitive levels of compensation that integrate pay with performance, recognize individual initiative and achievements and assist the Company in attracting and retaining qualified executive officers. The target levels of new executive officers’ overall compensation are intended to be aligned with and benchmarked against compensation in the professional services industry for similar executives. In addition, the Committee seeks to provide a clear and transparent executive compensation process that reflects the understanding, input and decision factors that make the compensation and incentive system a valuable tool to increase Shareholder value.

The Company’s executive compensation program includes three components:

●

Base Salary – Salaries are benchmarked against those paid to other executives in the professional services industry as determined based on information provided from time to time by the Committee’s compensation consultant, as described below.

●

Long-Term Equity Incentive Awards – The purpose of this element of the Company’s executive compensation program is to link the Company’s most senior managers’ compensation with the long-term interests of the Company’s Shareholders, as well as the performance of the Company in a single fiscal year. Long-term incentive awards may be granted to named executive officers and other employees usually in the form of restricted stock or restricted stock units from a pool established under an incentive pay for performance plan at the beginning of each fiscal year by the Committee and approved by the Board. The Committee bases its decision to grant such awards, if a pool is established, on the individual’s performance and potential to contribute to the creation of Shareholder value. In February 2015, the Committee approved a Long-Term Incentive Compensation Program under which long-term incentive awards in the form of restricted stock units may be granted to the Company’s Chief Executive Officer, President/Chief Operating Officer and Chief Financial Officer based on a formula if the Company achieves certain defined growth in diluted earnings per share each year. The Long-Term Incentive Compensation Program is effective from fiscal 2015 through fiscal 2017. The Company had a similar program that operated for fiscal 2011 through 2014.

●

Non-Equity Incentive Plan Compensation – Non-equity incentive plan compensation is paid in cash pursuant to the above-noted incentive pay for performance plan and seeks to reward performance achieved during the applicable fiscal year. This pay for performance incentive plan balances the short-term and long-term needs of the Company. Under the non-equity incentive plan compensation element of the plan, a cash incentive pool is recommended each fiscal year upon the Company’s attainment of certain financial targets set by the Board. If the Company meets the targets, the Committee then determines the allocation of a pre-determined portion of the cash incentive pool among the executive officers based on each executive officer’s position and individual contribution to the Company’s performance. Each executive officer’s performance is measured against financial, profitability, growth, strategic and operational goals consistent with the Company’s business plan. For the immediate future, greater emphasis is focused on the short-term well-being of Versar in determining the allocation of cash awards to executive officers.

Impact of 2015 “Say on Pay” Advisory Vote.

We provided our shareholders with an advisory “say on pay” vote on the compensation of our named executive officers at our 2015 Annual Meeting of Shareholders. We received approximately 83.6% support in such vote. The Compensation Committee evaluated the results of this vote when making the determinations described herein and, as a result, the Compensation Committee has continued to apply substantially similar effective principles and philosophy it has used in previous years in determining executive compensation and made no material changes in fiscal 2016. The Compensation Committee will continue to consider shareholder concerns and feedback in the future.

Incentive Compensation Philosophy and Policies

Incentive Compensation Pay For Performance Plan

The Committee annually establishes a company-wide Incentive Compensation Pay For Performance Plan (“Incentive Plan”) at its first meeting held during the fiscal year. The Incentive Plan is based on a set of general principles that apply to all elements of compensation and establish the rules for awarding non-equity incentive plan compensation and stock-based compensation. The Incentive Plan consists of two parts: the first part is a written Incentive Compensation Plan, which was adopted in September 2010 and, the second part consists of annual general principles and guidelines for incentive compensation, including performance criteria, defined incentive groups and the target percentages of the pool to be allocated to each group for the fiscal year. The guidelines applicable to all elements of the Company’s compensation program and that apply directly to the Incentive Plan each year include:

●

The senior management team’s compensation is linked to Versar’s profitability, growth and strategic position;

●

The Incentive Plan’s key concept, pay for performance, balances short-term needs and long-term goals of the Company and the senior management team;

●

The Pay For Performance concept is applicable to all elements of compensation, including base salary and merit increases, non-equity incentive plan compensation and restricted stock awards;

●

The Incentive Plan is simple, rational, consistent and based on agreed-upon measurable parameters;

●

The Incentive Plan is based upon the Company’s achievement of certain levels of pre-tax income; and

●

The Incentive Plan is driven by a combination of metrics, depending on the level of management. The intent is that all levels of senior management have a significant portion of their compensation tied to the Company’s performance.

For fiscal 2016, the Committee determined that individual Incentive Plan awards would be based 10% to 60% on financial goals emphasizing the short-term well-being of Versar and 40% to 90% upon meeting strategic growth and sustainability goals of Versar over a longer period.

Restricted Stock Awards. Awards of restricted stock or restricted stock units (“restricted stock”) take into account both past performance and the need to provide the executive officers, other managers and key employees with an incentive to drive future performance of the Company. Restricted stock is also used as an incentive for future performance and long-term retention and commitment to the Company’s future. Restricted stock awards are currently made under the Company’s 2010 Stock Incentive Plan. While this Plan allows the use of stock options and other forms of stock-based awards, the Committee has determined that all awards will currently be in the form of restricted stock and restricted stock units, because restricted stock provides an opportunity to tie employees’ incentives to the growth of Shareholder value while potentially having less of an impact than stock options from an accounting standpoint on the earnings of the Company.

In the fiscal 2016 Incentive Plan, the number of restricted shares available for award was based on the same measure used to establish the size of the cash bonus pool, subject to a minimum and maximum award range. For fiscal 2016, the minimum pool for restricted stock awards was set at 25,000 shares and the maximum pool was 150,000 shares. Shares of restricted stock are awarded from the pool in the discretion of the Compensation Committee. The Incentive Plan for fiscal 2017 follows the same format as the previous year, and the minimum pool will be 25,000 shares and the maximum pool will be 175,000 shares.

Non-Equity Incentive Plan Compensation. Under the Incentive Plan, if the Company meets the minimum pre-tax income targets set in advance by the Board, then a non-equity incentive plan compensation pool is created. For fiscal 2016, the Board set the sole criteria for the creation of the non-equity incentive plan compensation pool as the Company’s pre-tax income. The minimum goal for fiscal 2016 was $4.1 million in pre-tax income, with a non-equity incentive plan compensation pool of $400,000 at that level. The non-equity incentive plan compensation pool was designed to increase as pre-tax income reached higher levels so that at $6.2 million of pre-tax income, a $1.6 million non-equity incentive plan compensation pool would be created. An executive officer’s participation in the pool, if any, is based on achievement of individually designed performance criteria. For fiscal 2017, the Board has again adopted a pre-tax income target for the non-equity incentive plan compensation pool. At this time, the Company believes that disclosure of the fiscal 2017 pre-tax income target could cause competitive harm to the Company’s business. While the Company believed that the fiscal 2017 target was challenging but attainable when adopted, based on performance to date in fiscal 2017, the Company does not anticipate a bonus pool will be created.

The fiscal 2016 non-equity incentive plan compensation pool was divided into six (6) levels: Executive Team, Senior Vice Presidents, Vice Presidents, Directors, Supervisors below Director Level and Non-Supervisors. There are varying percentages of participation by each group. If the Named Executive Officers and other senior managers are entitled to non-equity incentive plan compensation, the Committee will determine the allocation of non-equity incentive plan compensation among the named executive officers and other senior managers from the pools established for each category of employee, based on each executive officer’s or manager’s position, contribution to the Company including the achievement of established financial, strategic direction and leadership performance goals, and information regarding mid-range bonuses paid by others in the professional services industry based on information provided by its compensation consultant discussed below. The Incentive Plan for fiscal 2017 also divides the incentive groups into six (6) levels: Executive Team; Senior Vice Presidents, Vice Presidents, Directors, Supervisors below Director Level and Non-Supervisors.

Long-Term Incentive Compensation Program

On February 3, 2015, the Committee approved the Versar, Inc. 2015 Long-Term Incentive Compensation Program (the “LTICP”) adopted under the Company’s 2010 Stock Incentive Plan (the “2010 Plan”). The LTICP was effective as of June 28, 2014. The LTICP provides for the creation for each of fiscal 2015, 2016 and 2017 of a performance pool equal to 30% of the amount by which the Company’s diluted earnings per share exceeds that fiscal year’s target diluted earnings per share (which will be $0.299 for the 2015 Performance Period, $0.329 for the 2016 Performance Period and $0.362 for the 2017 Performance Period), times the weighted average number of the Company’s common stock outstanding, on a diluted basis (the “LTICP Pool”). The LTICP Pool shall in no event be less than zero for any fiscal year. To the extent that the LTICP Pool is zero in any fiscal year covered by the LTICP, no LTICP Pool will be created for the subsequent fiscal year.

In any year that an LTICP Pool is created, each participant in the LTICP may receive a restricted stock award pursuant to the 2010 Plan. The number of shares of restricted stock received by each participant will be calculated by multiplying the LTICP Pool by each participant’s designated percentage and then dividing the result by the fair market value of the Company’s common stock on the last day of the fiscal year to which the award relates. Each participant must be employed by the Company on the date the award amounts are determined in order to be eligible to receive an award, except as specified by the LTICP. The participants in the LTICP are the Company’s Chief Executive Officer, President/Chief Operating Officer and Chief Financial Officer and their participation percentages are 60%, 25% and 15%, respectively, subject to change by the Compensation Committee for any fiscal year.

One third of the restricted shares granted from the LTICP Pool will vest immediately following the Compensation Committee meeting at which such award is confirmed, and the remaining restricted shares will vest in equal proportions on the first and second anniversaries of the valuation date applicable to the restricted share award. Such restricted stock shall be forfeited if employment is terminated prior to vesting upon the terms set forth in the award agreement. Any unvested restricted shares will be subject to accelerated vesting if the Company’s board of directors determines in its discretion that the award recipients have complied with the terms of and objectives as set forth in the LTICP. Further, vesting will be suspended in any year in which the LTICP Pool is equal to zero or, in periods following fiscal 2017, if the Company fails to achieve the performance measures then established for that fiscal year. If in a succeeding performance period, as defined by the LTICP, an LTICP Pool is created, the previously suspended restricted stock awards will vest. Participation in the LTICP will generally cease upon termination of a participant’s service with the Company provided that if a participant’s service with the Company is terminated without cause, or by the participant for good reason, or as a result of retirement, death or disability after the end of a fiscal year but before the receipt of restricted shares under the LTICP has been determined, such participant will continue to participate and receive restricted shares from the LTICP Pool for the then completed fiscal year as if a continuing employee of the Company at that time. Upon a Change in Control, as defined by the 2010 Plan, all participation in the LTICP will cease and no further awards will occur. However, upon a Change in Control, any unvested restricted shares previously granted pursuant to the LTICP will immediately vest.

Compensation Process

Incentive Compensation Pay For Performance Plan

As noted above, in establishing the annual Incentive Plan, the Committee annually reviews the overall compensation of senior management, as well as the size and composition of the non-equity portion and stock-based award portion of the Incentive Plan at the beginning of each fiscal year.

At the same time, the Committee gathers data regarding the Company’s performance during the immediately preceding fiscal year to determine the awards to be made under the Incentive Plan for that then completed fiscal year.

In making its compensation decisions, the Committee has historically, and again in fiscal 2016, engaged the services of Steve Parker of HR-3D, a compensation consulting firm. Annually, Mr. Parker compiles information from publicly available compensation surveys and benchmarks, including those prepared by Willis Towers Watson, Radford Surveys & Consulting, and Culpepper and Associates, Inc., regarding companies in the professional services industry. The compilation prepared by Mr. Parker for fiscal 2016 included benchmarked compensation data for different executive levels of professional services companies of various sizes and in various geographic locations, but did not include the names of the individual companies whose salary data is utilized to compile the survey data. The publicly available compensation surveys and benchmarks used to prepare the compilation were chosen by Mr. Parker based on general direction from the Committee. Under the direction of Dr. Metry, Mr. Parker provided detailed information by type of executive position for fiscal 2016 focused on professional service companies with revenues in a range similar to that targeted by Versar over the same period. The compilation included an average of the mid-range of salaries and bonus percentages for the various executive levels within the professional services industry. In making compensation decisions, the Committee’s goal is to over time provide for executives’ salaries and bonuses within a particular range based on averages as supported by the compilation.

The Committee also considers the accounting and tax impact to the Company of the proposed compensation. Section 162(m) of the Internal Revenue Code has not been a relevant factor in the Committee’s compensation decisions to date, because the levels of compensation historically paid to the executive officers have been substantially below the $1 million threshold set forth in Section 162(m). If the Committee were to consider compensation increases sufficient to reach this threshold, it would seek advice regarding application and impact of Section 162(m). In setting compensation, the Committee also considers ways to minimize the adverse tax consequences from the impact of Section 409A of the Internal Revenue Code. If an executive officer is entitled to nonqualified deferred compensation benefits, as defined by and subject to Section 409A, and such benefits do not comply with Section 409A, such executive officer would be subject to adverse tax treatment (including accelerated income recognition in the first year that benefits are no longer subject to a substantial risk of forfeiture) and a 20% penalty tax. Versar’s compensation plans and programs are, in general, designed to comply with the requirements of Section 409A so as to avoid possible adverse tax consequences.

Long-Term Incentive Compensation Program

The Committee annually reviews the LTICP in order to determine if the mechanics of the plan, including the calculation of the LTICP Pool and the vesting schedule of awards, remain appropriate, and to determine if the participants in the pool and their respective participation percentages should be modified. Otherwise, as the process in which awards are granted under the terms of the LTICP is fixed pursuant to the terms of the LTICP, the Committee has no further discretion with respect to awards under the LTICP.

Compensation Decisions

Base Salary

For current executive officers, the Committee intends to focus on providing significant incentive compensation to drive the Company’s performance rather than annual base salary increases, except as required in the case of misaligned salary levels or as deemed necessary following review of the executives’ overall compensation packages supported by surveys conducted by Mr. Parker of executive compensation at similar companies in the professional services industry. After discussion of survey data included in the Company’s annual executive compensation analysis with Mr. Parker and consideration of the Company’s current financial situation, the Committee determined not to make any changes to base salaries, and has sought to reduce other prerequisites as appropriate.

Stock Based Awards (including Long-Term Incentive Compensation Program)

Restricted stock or restricted stock units may be awarded to executive officers pursuant to the terms of the annual Incentive Plan and the LTICP if the specified criteria are met. In fiscal 2016, the Company did not achieve the targets necessary to trigger the award of restricted stock or restricted stock units under the 2016 Incentive Plan and the LTICP.

The Committee did however approve certain discretionary grants of restricted stock units to executive officers as set out below.

As was reported in the Company’s Proxy Statement for its 2015 Annual Shareholders’ Meeting, the Company did not achieve the targets necessary to trigger the award of restricted stock or restricted stock units under the 2015 Incentive Plan and the LTICP. However, on September 1, 2015, after review of the Company’s overall performance and the efforts made by management with respect to achieving certain goals of the Company and in order to provide further incentives for improved performance in the future, the Committee approved the following grants of restricted stock units to named executive officers: Mr. Otten, 13,300 shares, Mr. Wagonhurst, 6,700 shares, Ms. Downes, 6,000 shares, Mr. Villa 2,700 shares and Ms. McKnight 2,700 shares. Fifty percent of these restricted stock units vest on each of the immediately succeeding two anniversaries of the date of grant until fully vested.

Further, the Committee approved an additional grant of restricted share units to each of the named executive officers on February 1, 2016 as follows: Mr. Otten, 18,000 shares, Mr. Wagonhurst 5,000 shares, Ms. Downes 9,000 shares, Mr. Villa 3,000 shares and Ms. McKnight 5,000 shares. Fifty percent of these restricted stock units vest on each of the immediately succeeding two anniversaries of the date of grant until fully vested Such grants were made to recognize the contributions of these individuals and to incent them to continue their performance on behalf of the Company.

Non-Equity Incentive Plan Compensation

In fiscal 2016, the Company did not achieve the targets necessary to trigger the accrual of a bonus pool under the 2016 Incentive Plan. Thus, no non-equity incentive plan compensation was paid to the named executive officers for fiscal 2016.

Summary Compensation Table

The following table presents compensation information earned by the Company’s Principal Executive Officer, Principal Financial Officer, each of the Company’s three other most highly compensated executive officers during the fiscal year ended July 1, 2016, and compared with the two prior years. We refer to these executive officers as our named executive officers in this Annual Report.

Name and Principal Position	Year	Salary ($)(1)	Bonus ($)	Stock Awards ($)(2)	All Other Compensation ($)(3)	Total ($)
Anthony L. Otten Chief Executive Officer	2016	375,000	-	84,305	36,775	496,080
	2015	331,068	-	-	20,196	351,264
	2014	325,000	-	16,252	16,802	358,054
Jeffrey A. Wagonhurst President and Chief Operating Officer	2016	270,000	-	32,585	30,923	339,508
	2015	261,154	-	-	19,390	280,544
	2014	263,285(4)	-	13,000	17,422	293,707
Cynthia A. Downes Executive Vice President and Chief Financial Officer	2016	230,000	-	40,170	23,161	293,331
	2015	230,000	-	-	14,723	244,724
	2014	230,000	-	11,499	13,669(5)	255,168
James D. Villa Senior Vice President, General Counsel and Chief Compliance Officer	2016	210,000	-	22,763	18,210	250,973
	2015	210,000	-	-	16,940	226,940
	-	-	-	-	-	-
Linda M. McKnight Senior Vice President, Business Development	2016	200,000	-	20,385	21,271	241,656
	2015	200,000	-	-	13,681	213,681
	-	-	-	-	-	-

(1)

Includes regular base salary earnings for fiscal 2016, 2015 and 2014.

(2)

Amounts shown are the aggregate grant date fair value of time-based restricted stock unit awards computed in accordance with FASB ASC Topic 718.

(3)

Consists of the following: Any severance payments, payments for accrued personal time off after leaving the Company, Company paid life insurance, Company paid disability, executive medical reimbursement, and Company match to employee’s 401(k) Plan contribution.

(4)

Includes $2,500 for payout of personal time off in excess of 200 hours and $785 for service achievement

(5)

As previously reported included $51,167 for relocation expenses which actually were paid in a prior year.

Grants of Plan Based Awards

Name	Grant Date	Estimate Future Payouts Under Non-Equity Incentive Plan Awards (1)			All Other Stock Awards: Number of Shares of Stock or Units	Grant Date Fair Value of Stock and Option Awards ($)(2)
		Threshold ($)	Target ($)	Maximum ($)
Anthony L. Otten		210,000	262,500	450,000
	9/1/15				13,300	40,565
	2/1/16				18,000	43,740
Jeffrey A. Wagonhurst		108,000	135,000	162,000
	9/1/15				6,700	20,435
	2/1/16				5,000	12,150
Cynthia A. Downes		82,800	103,500	124,200
	9/1/15				6,000	18,300
	2/1/16				9,000	21,870
James D. Villa		58,800	73,500	88,200
	9/1/15				2,700	8,235
	2/1/16				3,000	7,290
Linda M. McKnight		56,000	70,000	84,000
	9/1/15				2,700	8,235
	2/1/16				5,000	12,150

(1)

Amounts represent the threshold (payment made if performance criteria met at 80% level for fiscal year), target (payment made if the performance criteria are met for the fiscal year) and maximum payouts (payment made if the performance criteria are exceeded for the fiscal year) under the 2016 Incentive Plan. No amounts were earned by the Named Executive Officers during fiscal 2016 as the performance criteria was not achieved at the minimum level.

(2)

The amounts in this column do not represent amounts the named executive officers received or are entitled to receive. Rather, the reported amounts represent the grant date fair values of the awards. The grant date fair value is determined in accordance with FASB ASC Topic 718 by multiplying the number of shares underlying the units granted by the closing price of the Company's Common Stock on the grant date.

Outstanding Equity Awards at Fiscal Year-End

Name	Option Awards			Stock Awards
	Number of Securities Underlying Unexercised Options (#) Exercisable	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)	Market Value of Shares or Units of Stock That Have Not Vested ($)
Anthony L. Otten	0	-	-	31,300	38,812
Jeffrey A. Wagonhurst	0	-	-	11,700	14,508
Cynthia A. Downes	0	-	-	15,000	18,000
James D. Villa	0	-	-	7,575	9,393
Linda M. McKnight	0	-	-	7,000	9,548

(1)

Based on the Fair Market Value of the Company’s Common Stock (based on the closing price for the Common Stock on the NYSE MKT) on July 1, 2016.

Stock Vested

Name	Number of Shares Acquired on Vesting (#)(2)	Value Realized on Vesting ($)(1)
Anthony L. Otten	6,650	10,706.50
Jeffrey A. Wagonhurst	3,350	5,393.50
Cynthia A. Downes	3,000	4,830.00
James D. Villa	1,350	2,173.50
Linda M. McKnight	1,350	2,173.50

(1)

Calculated by multiplying the number of shares by the fair market value of the Company’s Common Stock (based on the closing price for the Common Stock on the NYSE MKT) on the date of vesting.

(2)

Represents the shares that vested on September 2, 2016 from the restricted stock unit award granted on September 2, 2015.

Director Compensation Fiscal Year 2016

During fiscal 2016, each of the Company’s non-employee directors received an annual fee consisting of $8,000 in cash, plus the grant of 8,500 shares of restricted stock, all of which vest over a one-year period. Each non-employee director was paid an attendance fee of $1,400 in cash for each meeting of the Board or of its committees for which the director was physically present and $700 in cash for each meeting attended telephonically. In addition, the Chairs of the Audit, Compensation and Nominating & Governance Committees were paid an additional $6,000 a year in cash as compensation for increased responsibility and work required in connection with those positions. The non-employee Chairman of the Board was paid an additional $15,000 in cash and was granted an additional 6,000 shares of restricted stock for additional responsibilities and efforts on behalf of the Company.

Name (1)	Fees Earned or Paid in Cash ($)(2)	Stock Awards ($) (3)	Total ($)
Paul J. Hoeper	39,100	40,170	79,270
Robert L. Durfee	26,900	24,720	51,620
James L. Gallagher	30,100	24,720	54,820
Amoretta M. Hoeber	30,100	24,720	54,820
Amir A. Metry	30,100	24,720	54,820
Frederick M. Strader	26,200	24,720	50,920

(1)

Anthony L. Otten and Jeffrey A. Wagonhurst are not included in this table because as employees of Versar, they receive no extra compensation for their service as directors. Their compensation for fiscal 2016 is shown on the Summary Compensation Table included herein above.

(2)

Includes all fees earned or paid for services as a director in fiscal 2016, including annual retainer, committee or Board chair fees and meeting fees.

(3)

Represents the grant date fair value of shares of restricted stock granted in fiscal 2016 which is the amount recognized for financial reporting purposes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 718 (“Topic 718”). In accordance with Topic 718, the grant date fair value of each share of restricted stock is based on the closing price of Versar's Common Stock on the date of the grant, November 10, 2015 for all stock awards, which was $3.09 per share. Restricted stock awarded to Directors in fiscal 2016 vested on November 14, 2016, the day before the anticipated first annual meeting of shareholders after the date of grant.

At the end of fiscal 2016, the non-employee directors owned the following number of unvested shares of restricted stock:

NAME	Unvested Restricted Stock Awards
Paul J. Hoeper	14,500
Robert L. Durfee	8,500
James L. Gallagher	8,500
Amoretta M. Hoeber	8,500
Amir A. Metry	8,500
Frederick M. Strader	8,500

Change in Control Agreements

On September 1, 2015, the Company amended the change in controls severance agreements with Mr. Otten, Mr. Wagonhurst, Ms. Downes, Ms. McKnight and Mr. Villa and extended the term of the change in control agreements until September 13, 2017. The agreements provide that there is a “change in control” upon the occurrence of the first of the following events: an acquisition of a controlling interest (defined as 25% or more of the combined voting power of the Company’s then outstanding securities); if during the term of the agreement, individuals serving on the board at the time of the agreement, or their approved replacements, cease to constitute a majority of the board; a merger approval (subject to exceptions listed in the agreement); a sale of all or substantially all of the Company’s assets; a complete liquidation or dissolution of the Company, or a going private transaction. If a potential change in control occurs during the term, the termination date is automatically extended to the later of the existing termination date or the date that is six months from the date of the potential change in control. If a change in control occurs during the term, the termination date will not apply and the agreement will terminate only on the last day of the 24th calendar month beginning after the calendar month in which the change in control occurred. Under each of the agreements, severance benefits are payable to an executive officer if, during the term of the agreement and following a change in control, the executive’s employment is terminated by the Company without cause (other than as a result of his death or disability) or if the executive resigns for good reason (identified as a result of change in title, salary reduction, or change in geographic location). Severance benefits will also be triggered if, after a potential change in control, but before an actual change in control, the executive’s employment is terminated without cause or the executive resigns for good reason, if the termination is at the direction of a person who has entered into an agreement with the Company that will result in a change in control, or the event constituting good reason is at the direction of such a person. Finally, benefits will be triggered if a successor to the Company fails to assume the agreement. Severance benefits include: (i) a lump sum cash payment equal to two times the executive’s annual base salary, or, if higher, the annual base salary in effect immediately before the change in control, potential change in control or good reason event; (ii) a lump sum cash payment equal to two times the higher of the amounts paid to the executive under any existing bonus or incentive plan in the calendar year preceding the termination of his employment or the calendar year in which the change in control occurred; (iii) a lump sum payment for any amounts accrued under any other incentive plan; (iv) a continuation for 24 months of the life, disability and accident benefits the executive was receiving before the end of his employment; (v) a continuation for 18 months of the health and dental insurance benefits he or she was receiving before the end of his or her employment; (vi) a lump sum payment of $16,000 in lieu of medical benefits made available by the Company to its officers; (vii) all unvested options will immediately vest and remain exercisable of the longest period of time permitted by the applicable stock option plan; and (viii) all unvested restricted stock awards will immediately vest. Further, the Company may provide certain medical benefits to retired executive officers who serve as chief executive officer, president, executive vice president, senior vice president, corporate vice president, or a Board-elected vice president. A termination following a change in control will be deemed retirement for purposes of the provision of these medical benefits.

The following table estimates and summarizes potential payments and benefits, other than the benefits ordinarily available to salaried employees, that Mr. Otten would have received had his employment been terminated on the last day of fiscal 2016 under the circumstances described below.

	Salary $	Bonus $	Benefits $(1)
Termination or resignation following a change of control	750,000	0	37,694
Termination or resignation following a potential change of control	750,000	0	37,694
Successor fails to assume the contract	750,000	0	37,694

(1)

Payment for benefit costs paid by the Company on behalf of Mr. Otten that are not generally available to other employees for insurance and medical benefits calculated based on current applicable premiums.

The following table estimates and summarizes potential payments and benefits, other than the benefits ordinarily available to salaried employees, that Mr. Wagonhurst would have received had his employment been terminated on the last day of fiscal 2016 under the circumstances described below.

	Salary $	Bonus $	Benefits $(1)
Termination or resignation following a change of control	540,000	0	31,334
Termination or resignation following a potential change of control	540,000	0	31,334
Successor fails to assume the contract	540,000	0	31,334

(1)

Payment for benefit costs paid by the Company on behalf of Mr. Wagonhurst that are not generally available to other employees for insurance and medical benefits calculated based on current applicable premiums.

The following table estimates and summarizes potential payments and benefits, other than the benefits ordinarily available to salaried employees, that Ms. Downes would have received had her employment been terminated on the last day of fiscal 2016 under the circumstances described below.

	Salary $	Bonus $	Benefits $(1)
Termination or resignation following a change of control	460,000	0	31,526
Termination or resignation following a potential change of control	460,000	0	31,526
Successor fails to assume the contract	460,000	0	31,526

(1)

Payment for benefit costs paid by the Company on behalf of Ms. Downes that are not generally available to other employees for insurance and medical benefits calculated based on current applicable premiums.

The following table estimates and summarizes potential payments and benefits, other than the benefits ordinarily available to salaried employees, that Mr. Villa would have received had his employment been terminated on the last day of fiscal 2016 under the circumstances described below.

	Salary $	Bonus $	Benefits $(1)
Termination or resignation following a change of control	420,000	0	19,139
Termination or resignation following a potential change of control	420,000	0	19,139
Successor fails to assume the contract	420,000	0	19,139

(1)

Payment for benefit costs paid by the Company on behalf of Mr. Villa that are not generally available to other employees for insurance and medical benefits calculated based on current applicable premiums.

The following table estimates and summarizes potential payments and benefits, other than the benefits ordinarily available to salaried employees, that Ms. McKnight would have received had her employment been terminated on the last day of fiscal 2016 under the circumstances described below.

	Salary $	Bonus $	Benefits $(1)
Termination or resignation following a change of control	400,000	0	24,816
Termination or resignation following a potential change of control	400,000	0	24,816
Successor fails to assume the contract	400,000	0	24,816

(1)

Payment for benefit costs paid by the Company on behalf of Ms. McKnight that are not generally available to other employees for insurance and medical benefits calculated based on current applicable premiums.

Risk Oversight

Management of risk is the direct responsibility of the Company’s CEO and the senior management team. The Board has oversight responsibility focusing on key enterprise risk management issues and evaluating the risk mitigation processes established by senior management.

Versar faces a variety of enterprise risks, including legislative and regulatory risk, liquidity risk, compliance risk and operational risk. The Board believes that an effective risk management process should (1) identify in a timely fashion the material risks facing the Company, (2) communicate to the Board the relevant information regarding senior executive management strategies and their associated risks, (3) implement appropriate and responsive risk management strategies consistent with the Company’s risk profile, and (4) integrate risk management throughout the Company’s decision-making processes.

In addition to the formal compliance program, the Board and senior management promote a corporate culture that incorporates risk management into the Company’s corporate strategy and daily operations. The Board also continually works, with the input of senior management, to assess and analyze the most likely areas of future risk for the Company. We believe that the Board’s leadership structure, including strong Board committee chairs and open communication between senior management and directors, promotes effective oversight of Versar’s risk management program.

During fiscal 2016, the Compensation Committee considered the impact of the Company’s executive compensation policies and practices, and the incentives created by its policies and practices, on the Company’s risk profile, and concluded that such policies and practices do not motivate imprudent risk taking. In addition, the Committee periodically reviews all of the Company’s compensation policies and procedures, including the incentives they create, and factors that may reduce the likelihood of excessive risk taking, to determine whether they present a significant risk to the Company. In conducting this review, the Committee also reviews the compensation program for any design features which have been identified by experts as having the potential to encourage excessive risk-taking, including:

●

excessive focus on equity;

●

compensation mix overly weighted toward annual incentives;

●

highly leveraged payout curves and uncapped payouts;

●

unreasonable goals and thresholds; and

●

steep payout cliffs at performance levels that may encourage short-term business decisions to meet payout thresholds.

In reaching its conclusion, the Committee identified several features of its compensation program that reduce the likelihood of excessive risk taking:

●

the Company’s program and policies are designed to provide a balanced mix of cash and restricted equity, annual and longer-term incentives;

●

maximum payout levels for non-equity incentive plan compensation are capped based on a review of the Company’s economic position and prospects, as well as the benchmarking of compensation offered by comparable companies; and

●

the Committee has discretion to alter, including to reduce, incentive plan payouts or make discretionary awards.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item is incorporated herein by reference to the Proxy ~~Stock~~Statement ~~Ownership~~for its 2017 Annual Meeting of ~~Certain~~Stockholders, which is ~~Beneficial~~expected ~~Owners~~to be filed with the Commission not later than 120 days after the end of fiscal 2017.

The table below sets forth, as of March 1, 2016, the only persons known by the Company to be the beneficial owners of more than 5% of the outstanding shares of Common Stock.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percent of Class of Stock
Ariel Investments, LLC (1) 200 E. Randolph Drive, Suite 200 Chicago, IL 60601	1,765,373	17.8
Wedbush, Inc. (2) 1000 Wilshire Boulevard Los Angeles, California 90017	698,514	7.00
Dr. Robert L. Durfee (3) 6850 Versar Center Springfield, VA 22151	596,948	5.99
Illinois Municipal Retirement Fund (4) 2211 York Road, Suite 500 Oak Brook, IL 60523	557,335	5.6

(1)

The information with respect to the shares of Common Stock held by Ariel Investments, LLC (“Ariel”) is based on a filing made on Schedule 13G/A on February 14, 2017 with the U.S. Securities and Exchange Commission (the “SEC”) by Ariel. Ariel reports sole voting power as to 1,032,735 shares and sole dispositive power as to 1,765,373 such shares.

(2)

The information with respect to the shares of Common Stock held by Wedbush, Inc. is based on filings made on Schedule 13G/A on February 15, 2017 with the SEC by Wedbush, Inc., Edward W. Wedbush and Wedbush Securities, Inc. (collectively, “Wedbush”) filing as a group. Wedbush reports that Wedbush, Inc. has sole voting and sole dispositive power as to 218,268 shares. Edward W. Wedbush has the sole voting and sole dispositive power as to 365,255 shares. Wedbush Securities, Inc. has sole voting and sole dispositive power as to zero shares. Wedbush, Inc. has shared voting and dispositive power as to 218,268 shares. Edward W. Wedbush has shared voting power as to 583,523 and shared dispositive power as to 698,514 shares. Wedbush Securities, Inc. has shared voting power as to 218,268 shares and shared dispositive power as to 328,259.

(3)

For a description of the nature of the beneficial ownership of Dr. Durfee, see “Stock Ownership of Directors and Officers” below. The information with respect to shares of Common Stock held by Dr. Durfee is based upon filings with the SEC and information supplied by Dr. Durfee.

(4)

The information with respect to the shares of Common Stock held by Illinois Municipal Retirement Fund (“IMRF”) is based on filings made on Schedule 13G on February 11, 2013 with the SEC by IMRF. IMRF reports sole voting and shared dispositive power with respect to all such shares.

Stock Ownership of Directors and Officers

The following table sets forth certain information regarding the ownership of Versar's Common Stock by the Company’s Directors and each named executive officer listed in the Summary Compensation Table, each nominee for Director and the Company's Directors and executive officers as a group, as of March 1, 2016.

Individual or Group	Shares of Common Stock Beneficially Owned as of March 1, 2016 (1)
	Number (5)	Percent
Paul J. Hoeper	95,590	*
Robert L. Durfee	596,948	5.99
James L. Gallagher	58,390	*
Amoretta M. Hoeber	56,790	*
Amir A. Metry	74,519	*
Anthony L. Otten (2)	119,442	1.20
Frederick M. Strader	25,000	*
Jeffrey A. Wagonhurst	82,346	*
Cynthia A. Downes (3)	33,035	*
James D. Villa (4)	21,180	*
Linda M. McKnight	21,498	*
All directors and executive officers as a group (11 persons) (4)	1,184,738	11.91

* = Less than 1%

(1)

For the purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 under the Securities and Exchange Act, as amended. The table includes all unvested shares of restricted stock and restricted stock units owned by the individual.

(2) Mr. Otten is a Trustee of Versar Inc.’s 401(k) Plan and as such, he has shared investment power as to 223,880 shares and shared voting power as to 223,880 shares held by this plan. Mr. Otten disclaims beneficial ownership of the plan shares arising solely from his position as Trustee, none of which are included in the above table.

(3)

Ms. Downes is a Trustee of Versar Inc.’s 401(k) Plan and as such she has shared investment power over 223,880 shares and shared voting power over 223,880 shares held by this plan. Ms. Downes disclaims beneficial ownerships of the plan shares arising solely from her position as Trustee, none which are included in the above table.

(4)

Mr. Villa is a Trustee of Versar Inc.’s 401(k) Plan and as such he has shared investment power over 223,880 shares and a shared voting power over 223,880 shares held by this plan. Mr. Villa disclaims beneficial ownerships of the plan shares arising solely from his position as Trustee, none of which are included in the above table.

(5)

Excludes shares held by Versar Inc.’s 401(k) Plan as described in notes 3 and 5. Includes restricted stock units that have not yet vested.

Item 13. Certain Relationships and Related Transactions, and Director Independence

~~The~~Information ~~Company~~required ~~does~~by ~~not~~this ~~generally~~item ~~engage~~is inincorporated ~~related~~herein ~~party~~by ~~transactions with~~reference ~~its~~to ~~directors~~the Proxy orStatement ~~executive~~for ~~officers~~its or2017 ~~their~~Annual ~~affiliates.~~Meeting Ifof aStockholders, which ~~proposed~~is ~~related~~expected ~~transaction~~to ~~arises,~~be filed with the ~~Company~~Commission ~~will~~not ~~present~~later ~~such a~~than ~~transaction~~120 todays after the ~~full~~end ~~Board~~of ~~for~~fiscal ~~its review and approval~~2017.

The Board believes that independent directors must constitute a substantial majority of the Board. The Board has determined that all of the following six (6) non-employee directors in fiscal 2016 are independent directors: Paul J. Hoeper, Robert L. Durfee, James L. Gallagher, Amoretta M. Hoeber, Amir A. Metry and Frederick M. Strader. Throughout fiscal 2016, all Board members, except Mr. Otten and Mr. Wagonhurst, met the NYSE MKT and SEC standards for independence.

Item 14. Principal Accountant Fees and Services

Information ~~Pre-Approval~~required by this item is incorporated herein by reference to the Proxy Statement for its 2017 Annual Meeting of ~~Independent~~Stockholders, ~~Auditor~~which is ~~Fees~~expected ~~and~~to ~~Services~~be filed with the Commission not later than 120 days ~~Policy~~after the end of fiscal 2017.

The Audit Committee has adopted a pre-approval policy for services and fees by its registered public accounting firm. Pursuant to this policy, the Audit Committee is required to pre-approve the audit and non-audit services to be performed by the independent registered public accounting firm in order to assure that the provision of such services does not impair the firm’s independence. The services and estimated fees are presented to the Audit Committee for consideration in the following categories: Audit, Audit-Related, Tax and All Other (each as defined in Schedule 14A of the Securities Exchange Act of 1934). All services by Grant Thornton rendered in fiscal 2016 and 2015 received prior approval by the Audit Committee. The Committee expects that all services performed by Urish Popeck in fiscal 2017 will be subject to pre-approval by the Audit Committee.

Audit Fees

In fiscal 2016 and 2015, Versar paid Grant Thornton $400,260 and $281,360, respectively, for quarterly reviews and the annual fiscal year audit. Versar also made payments of $9,567 and $4,879 in fiscal 2016 and 2015 to SGV & Co. for audit services in the Philippines. Versar paid Grant Thornton $22,754 and $36,614 for audit services in the United Kingdom in fiscal 2016 and 2015. During fiscal 2017 the Company changed independent auditors from Grant Thornton to Urish Popeck & Co. for our fiscal 2016 audit. We paid Urish Popeck $210,000 to complete our fiscal 2016 audit.

Audit-Related Fees

Versar paid Grant Thornton $75,953 in fiscal 2016 and $137,467 in fiscal 2015 for audit-related fees for assurance and related services.

Tax Fees

In fiscal 2016 and 2015, Versar paid $158,445 and $249,182, respectively, to Grant Thornton for federal and state tax compliance services. Versar paid $4,686 and $1,318 in fiscal 2016 and 2015 to SGV & Co. for tax advisory services in the Philippines.

All Other Fees

In fiscal 2016 and 2015, Versar paid $25,351 and $36,815, respectively, to Grant Thornton for various tax consulting, including acquisition accounting advice. In fiscal 2016, Versar paid Grant Thornton $4,686 for various tax consulting and stamp duty filings in the United Kingdom.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(1) Financial Statements:

The following consolidated financial statements of Versar, Inc. and Subsidiaries are included as part of this report on Form 10-K in Item 8. Financial Statements and Supplementary Data.

~~a. Report of Independent Registered Public Accounting Firm~~●

Report ~~b. Consolidated Balance Sheets as~~ of ~~July~~Independent 1,Registered ~~2016~~Public ~~and~~Accounting ~~June 26, 2015~~ Firm

~~c. Consolidated Statements of Operations for the Years Ended July 1, 2016, June 26, 2015, and June 27, 2014.~~●

d. Consolidated ~~Statements of Comprehensive Income (Loss) for~~ ~~the~~Balance ~~Years~~Sheets ~~Ended~~as ~~July~~of ~~1, 2016,~~ June 2630, ~~2015,~~2017 and ~~June~~July 271, ~~2014.~~ 2016

~~e. Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended July 1, 2016, June 26, 2015, and June 27, 2014.~~●

f. Consolidated Statements of ~~Cash~~Operations ~~Flows~~ for the Years Ended ~~July~~ ~~1, 2016,~~ June 2630, ~~2015,~~2017 and ~~June 27~~July 1, ~~2014~~2016.

~~g. Notes to Consolidated Financial Statements~~●

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2017 and July 1, 2016.

●

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended June 30, 2017 and July 1, 2016.

●

Consolidated Statements of Cash Flows for the Years Ended June 30, 2017 and July 1, 2016,

●

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules:

~~a. Schedule II - Valuation and Qualifying Accounts for the Years Ended July 1, 2016, June 26, 2015, and June 27, 2014.~~●

Schedule II - Valuation and Qualifying Accounts for the Years Ended June 30, 2017 and July 1, 2016.

All other schedules, except those listed above, are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

(3) ~~The exhibits to this Form 10-K are set forth in a separate Exhibit Index which is included on pages 64 through 67 of this report.~~Exhibits:

The exhibits to this Form 10-K are set forth in the Exhibit Index which is included on this report.

Exhibit Index

Item No	Description	Reference
3.1	Restated Certificate of Incorporation of Versar, Inc. filed on September 25, 1986	(L)
3.2	Certificate of Amendment of Restated Certificate of Incorporation of Versar, Inc. filed on December 24, 1996	(L)
3.3	Certificate of Amendment of Restated Certificate of Incorporation of Versar, Inc. filed on January 26, 1999	(L)
3.4	Second Amended and Restated By-laws of Versar, Inc. Specimen of Certificate of Common Stock of Versar, Inc. (A)	(B)
4.1	Versar, Inc. Restated Employee 401(k) Plan	(C)
4.2	Amendment to the Versar, Inc. Restated Employee 401(k) Plan implementing automatic enrollment unless the participant makes a contrary election	(C)
4.3	Amendment merging the Advent 401(k) Profit Sharing Plan and Trust to the Versar, Inc. Restated Employee 401(k) Plan	(C)
4.4	Amendment to the Versar, Inc. Restated Employee 401(k) Plan implementing 1% automatic annual increase of deferral amount to all participants under 6% deferral rate effective January 1, 2013 until it reached the maximum cap of 6%	(C)
4.5	Amendment to the Versar, Inc. Restated Employee 401(k) Plan excluding employees who are already eligible to participate in the Charron Construction Consulting, Inc. 401(k) Plan	(C)
4.6	Amendment to the Versar, Inc. Restated Employee 401(k) Plan adding Roth Deferrals in the Contribution types and merging the Charron Construction Consulting, Inc. 401(k) Plan with and into the Plan	(C)
10.1	Executive Tax and Investment Counseling Program	(A)
10.2	Form of Indemnification Agreement*	(F)
10.3	Change in Control Severance Agreement between Anthony L. Otten and Versar, Inc. effective as of May 24, (G) 2011*	(E)
10.4	2010 Stock Incentive Plan*	(G)
10.4.1	Form of Restricted Share Award Agreement*	(G)
10.4.2	Form of Performance Stock Award Agreement*	(G)
10.4.3	Form of Deferral Election Agreement for Deferred Share Units*	(G)
10.4.4	Form of Stock Option Award Agreement*	(G)
10.4.5	Form of Stock Appreciation Right Award Agreement*	(G)
10.4.6	Form of Restricted Stock Unit Award Agreement*	(G)
10.5	Change in Control Severance Agreement between Christine B. Tarrago and Versar, Inc. effective as of June 1, 2017*	(H)
10.6	Amendment to Change in Control Severance Agreement dated March 9, 2012 between Versar, Inc. and Anthony L. Otten*	(D)
10.7	Versar, Inc. 2012 Long-Term Incentive Compensation Program*	(I)
10.8	Amended and Restated Loan and Security Agreement date September 13, 2012 between the Registrant, certain of the Registrant’s subsidiaries and United Bank	(M)
10.9	Amended and Restated Revolving Commercial Note dated September 14, 2012	(N)
10.10	Change in Control Severance Agreement between Versar, Inc. and Anthony L. Otten	(J)
10.11	Change in Control Severance Agreement between Versar, Inc. and Jeffrey A. Wagonhurst	(J)
10.12	Change in Control Severance Agreement between Versar, Inc. and Christine B. Tarrago	(S)
10.13	Change in Control Severance Agreement between Versar, Inc. and Linda M. McKnight	(J)
10.14	Change in Control Severance Agreement between Versar, Inc. and James D. Villa	(K)
10.15	Loan agreement, dated September 30, 2015, by and among Versar, Inc. and Bank of America, N.A.	(O)
10.16	Security Agreement, dated September 30, 2015, by and among Versar, Inc. and GEO-Marine, Inc., Versar International, Inc., J.M. Waller Associates, Inc. and Bank of America, N.A.	(P)
10.17	First Amendment and Waiver dated as of December 9, 2016, by and among Versar, Inc. and Bank of America, N.A. as lender and l/c issuer	(Q)
10.18	Second Amendment and Waiver dated as of May 5, 2017, by and among Versar, Inc. and Bank of America, N.A. as lender and l/c issuer
10.19	Letter Agreement, dated June 1, 2017, by and between Versar, Inc. and Christine B. Tarrago*	(R)
10.20	Change in Control Severance Agreement, dated June 15, 2017, by and between Versar, Inc. and Christine B. Tarrago*	(S)
10.21	Separation Agreement and General Release dated June 12, 2017, by and between Versar, Inc. and Cynthia A. Downes	(T)
10.22	Common Stock Purchase Warrant dated August 8, 2017 by and between Versar, Inc. and Bank of America, N.A.	(U)
21	Subsidiaries of the Registrant
23.1	Consent of Independent Registered Public Accounting Firm, Urish Popeck & Co., LLC
31.1	Certifications by Anthony L. Otten, Chief Executive Officer Pursuant to Securities Exchange Rule 13a-14
31.2	Certifications by Christine B. Tarrago, Senior. Vice President, Chief Financial Officer and Treasurer pursuant to Securities Exchange Rule 13a-14
32.1	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002, for the period ending July 1, 2016 by Anthony L. Otten, Chief Executive Officer
32.2	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002, for the period ending July 1, 2016 by Christine B. Tarrago, Exec. Vice President, Chief Financial Officer and Treasurer
101+	The following materials from Versar Inc.’s Annual Report on Form 10-K for the fiscal year ended July 1, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of July 1, 2016, June 29, 2014; (ii) Consolidated Statements of Operations for the years ended June 29, 2012; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended June 27, 2014 and June 29, 2012; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 27, 2014 and June 29, 2012; (v) Consolidated Statements of Cash Flows for the years ended July 1, 2016, June 29, 2012,; (vi) Schedule II — Valuation and Qualifying Accounts; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text

10.4.2	Form of Performance Stock Award Agreement*	(G)
10.4.3	Form of Deferral Election Agreement for Deferred Share Units*	(G)
10.4.4	Form of Stock Option Award Agreement*	(G)
10.4.5	Form of Stock Appreciation Right Award Agreement*	(G)
10.4.6	Form of Restricted Stock Unit Award Agreement*	(G)
10.5	Change in Control Severance Agreement between Cynthia A. Downes and Versar, Inc. effective as of September 8, 2011*	(H)
10.6	Amendment to Change in Control Severance Agreement dated March 9, 2012 between Versar, Inc. and Anthony L. Otten*	(D)
10.7	Versar, Inc. 2012 Long-Term Incentive Compensation Program*	(I)
10.8	Amended and Restated Loan and Security Agreement date September 13, 2012 between the Registrant, certain of the Registrant’s subsidiaries and United Bank	(M)
10.9	Amended and Restated Revolving Commercial Note dated September 14, 2012	(N)
10.10	Change in Control Severance Agreement between Versar, Inc. and Anthony L. Otten	(J)
10.11	Change in Control Severance Agreement between Versar, Inc. and Jeffrey A. Wagonhurst	(J)
10.12	Change in Control Severance Agreement between Versar, Inc. and Cynthia A. Downes	(J)
10.13	Change in Control Severance Agreement between Versar, Inc. and Linda M. McKnight	(J)
10.14	Change in Control Severance Agreement between Versar, Inc. and James D. Villa	(K)
10.15	Loan Agreement, dated September 30, 2015, by and among Versar, Inc. and Bank of America, N.A.	(O)
10.16	Security Agreement, dated September 30, 2015, by and among Versar, Inc. and GEO-Marine, Inc., Versar International, Inc., J.M. Waller Associates, Inc. and Bank of America, N.A.	(O)

(A)	Incorporated by reference to the similarly numbered exhibit to the Registrant’s Form S-1 Registration Statement effective November 20, 1986.
(B)	Incorporated by reference to the exhibit to the Registrant’s Form 8-K filed with the Commission on February 17, 2010.
(C)	Incorporated by reference to exhibits 4.1 through 4.6 to the Registrant’s Form S-8 Registration Statement filed with the Commission on March 22, 2013.
(D)	Incorporated by reference to exhibit 10.30 to the Registrant’s Form 10-K Annual Report for the fiscal year ended June 27, 2014 filed with the Commission on September 18, 2012.
(E)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 10-Q filed with the Commission on November 8, 2010.
(F)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on May 11, 2009.
(G)	Incorporated by reference to exhibits 4.1 through 4.7 to the Registrant’s Form S-8 filed with the Commission on February 15, 2011.
(H)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on September 13, 2011.
(I)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on May 9, 2012.
(J)	Incorporated by reference to exhibits 10.35 through 10.37 and exhibit 10.40 to the Registrant’s Form 8-K filed with the Commission on September 18, 2013.
(K)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on May 14, 2014.
(L)	Incorporated by reference to exhibit 3.1 to the Registrant’s Form 10-K filed with the Commission on September 10, 2014.
(M)	Incorporated by reference to exhibit 10.34 to the Registrant’s Form 8-K filed with the Commission on September 17, 2012.
(N)	Incorporated by reference to exhibit 10.33 to the Registrant’s Form 8-K filed with the Commission on September 17, 2012.
(O)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on October 6, 2015.
(P)	Incorporated by reference to exhibit 10.2 to the Registrant’s Form 8-K filed with the Commission on October 6, 2015.

21	Subsidiaries of the Registrant
23.1	Consent of Independent Registered Public Accounting Firm, Urish Popeck & Co., LLC
23.2	Consent of Independent Registered Public Accounting Firm, Grant Thornton LLP
31.1	Certifications by Anthony L. Otten, Chief Executive Officer Pursuant to Securities Exchange Rule 13a-14
31.2	Certifications by Cynthia A. Downes, Exec. Vice President, Chief Financial Officer and Treasurer pursuant to Securities Exchange Rule 13a-14
32.1	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002, for the period ending July 1, 2016 by Anthony L. Otten, Chief Executive Officer
32.2	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002, for the period ending July 1, 2016 by Cynthia A. Downes, Exec. Vice President, Chief Financial Officer and Treasurer
101+	The following materials from Versar Inc.’s Annual Report on Form 10-K for the fiscal year ended July 1, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of July 1, 2016, June 29, 2014; (ii) Consolidated Statements of Operations for the years ended June 29, 2012; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended June 27, 2014 and June 29, 2012; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 27, 2014 and June 29, 2012; (v) Consolidated Statements of Cash Flows for the years ended July 1, 2016, June 29, 2012,; (vi) Schedule II — Valuation and Qualifying Accounts; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text

(Q)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on December 12, 2016
(R)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on June 5, 2017
(S)	Incorporated by reference to exhibit 10.2 to the Registrant’s Form 8-K filed with the Commission on June 5, 2017
(T)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on June 22, 2017
(U)	Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on August 15, 2017

(A) Incorporated by reference to the similarly numbered exhibit to the Registrant’s Form S-1 Registration Statement effective November 20, 1986. (B) Incorporated by reference to the exhibit to the Registrant’s Form 8-K filed with the Commission on February 17, 2010. (C) Incorporated by reference to exhibits 4.1 through 4.6 to the Registrant’s Form S-8 Registration Statement filed with the Commission on March 22, 2013. (D) Incorporated by reference to exhibit 10.30 to the Registrant’s Form 10-K Annual Report for the fiscal year ended June 27, 2014 filed with the Commission on September 18, 2012.

(E) Incorporated by reference to exhibit 10.1 to the Registrant’s Form 10-Q filed with the Commission on November 8, 2010. (F) Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on May 11, 2009. (G) Incorporated by reference to exhibits 4.1 through 4.7 to the Registrant’s Form S-8 filed with the Commission on February 15, 2011. (H) Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on September 13, 2011. (I) Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on May 9, 2012. (J) Incorporated by reference to exhibits 10.35 through 10.37 and exhibit 10.40 to the Registrant’s Form 8-K filed with the Commission on September 18, 2013. (K) Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on May 14, 2014. (L) Incorporated by reference to exhibit 3.1 to the Registrant’s Form 10-K filed with the Commission on September 10, 2014. (M) Incorporated by reference to exhibit 10.34 to the Registrant’s Form 8-K filed with the Commission on September 17, 2012. (N) Incorporated by reference to exhibit 10.33 to the Registrant’s Form 8-K filed with the Commission on September 17, 2012. (O) Incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on October 6, 2015. (P) Incorporated by reference to exhibit 10.2 to the Registrant’s Form 8-K filed with the Commission on October 6, 2015.

__________________________________________________

* Indicates management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

VERSAR, INC.	~~VERSAR, INC.~~
Date: March 28, 2017	By:	/s/ Paul J. Hoeper
Date: September 25, 2017	By:	/s/ Paul J. Hoeper
		Paul J. Hoeper
		Chairman and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Paul J. Hoeper	Chairman and Director	~~March~~September 2825, 2017
Paul J. Hoeper
/s/ Anthony L. Otten	Chief Executive Officer and Director	~~March~~September 2825, 2017
Anthony L. Otten
/s/ Cynthia A. Downes	Executive Vice President, Chief Financial Officer, Treasurer, and Principal Accounting Officer	March 28, 2017
/s/ Christine B. Tarrago	Senior Vice President, Chief Financial Officer, and Principal Accounting Officer	September 25, 2017
Cynthia A. Downes
Christine B. Tarrago

/s/ Frederick M. Strader	Director	~~March~~September 2825, 2017
Frederick M. Strader
/s/ Robert L. Durfee	Director	~~March~~September 2825, 2017
Robert L. Durfee
/s/ James L. Gallagher	Director	~~March~~September 2825, 2017
James L. Gallagher

/s/ Amoretta M. Hoeber	Director	~~March~~September 2825, 2017
Amoretta M. Hoeber
/s/ Amir A. Metry	Director	~~March~~September 2825, 2017
Amir A. Metry
/s/ Jeffrey A. Wagonhurst, Sr.	Director	~~March~~September 2825, 2017
Jeffrey A. Wagonhurst, Sr.

Schedule II

VERSAR, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts

	BALANCE AT BEGINNING OF YEAR	ADDITIONS CHARGED TO COSTS AND EXPENSES	CHARGEOFFS	BALANCE AT END OFYEAR
Allowance for Doubtful Accounts
2017	$1,001,000	$-	$845,000	$156,000
2016	$616,000	$890,000	$(505,000)	$1,001,000
2015	$643,000	$138,000	$(165,000)	$616,000
2014	$1,529,000	$340,000	$(1,226,000)	$643,000
Deferred Tax Valuation Allowance
2017	$14,781,000	$ 4,470,000	$ (883,000)	$18,368,000
2016	$756,000	$14,025,000	$-	$14,781,000
2015	$595,000	$161,000	$-	$756,000
2014	$167,000	$428,000	$-	$595,000

Filing Compare · VERSAR INC