Global Defense & National Security Systems, Inc.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a comprehensive revenue recognition standard for virtually all industries under GAAP, including those that previously followed industry-specific guidance. Under the guidance, all entities should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, various updates have been issued during 2015 and 2016 to clarify the guidance in Topic 606. The guidance is effective for the Company in the first quarter of 2018 using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated financial statements and our method of adoption.  The adoption is expected to impact our revenue recognition and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. This ASU is effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The Company has not yet evaluated the impact, if any, that the adoption of ASU 2017-09 will have on the condensed consolidated financial statements.

During the three months ended June 30, 2017, the Company recorded an impairment charge of $21.1 million. The Company determined that a triggering event had occurred since the Company was unable to achieve its targeted revenue and profit forecasts during the six months ended June 30, 2017; therefore, the Company’s third party valuation firm performed an interim goodwill impairment test under the provisions of ASU 2017-04 and determined that the estimated fair value of the Company’s sole reporting unit was lower than the carrying value. The decline in the estimated fair value of the Company was primarily due to significantly lower revenue in 2017 than planned due to losing certain contract proposals and delays in the timing of other anticipated contract awards causing management to revise its 2017 forecast. Projected growth rates in future years remain comparable to the prior planned growth, however, projected future revenue and related profits are less than the previous plan due to significantly lower than expected revenue forecasted for 2017.

Upon completion of the interim goodwill impairment test, the Company recorded a noncash goodwill impairment charge of $21.1 million, or 29% of the total goodwill asset. Additional sensitivity testing was completed using assumptions of only achieving 95% and 90% of the revised 2017 forecasted plan with other major assumptions including growth rates, profit margins, and discount factors remaining the same. The result of this analysis was an estimated additional goodwill impairment of between $0.7 million and $6.7 million and $4.7 million and $10.4 million, respectively. The Company also has some ability to control indirect costs during the remainder of 2017 that could mitigate any additional shortfalls in our revised 2017 revenue and profit estimates.

Indirect and selling expenses increased $1.0 million or 8% for the three months ended June 30, 2017 compared to the same period a year ago. The net increase in the indirect and selling expenses were due primarily to a $0.9 million, or 13%, net decrease in fringe benefits and overhead related expenses for the three months ended June 30, 2017 compared to the three months ending June 30, 2016. The decreases in fringe benefit expenses were due to a reduction in the Company’s total labor costs in the second quarter 2017 when compared to the second quarter 2016. The net decrease in overhead expense is due to lower severance benefits in the second quarter 2017 when compared to the second quarter 2016. General and administrative expenses increased by $0.5 million, or 9%, for the three months ended June 30, 2017 when compared to the same period ending June 30, 2016 primarily due to increases in legal expenses in the second quarter 2017. There was also a $1.4 million increase in acquisition related legal and other fees during the second quarter 2017 compared to the second quarter 2016.