Filing summary
Entity and period: The supplied filing is Fortress International Group, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2011, not a filing identified as TSS, Inc. Verify that this is the intended company filing. Fortress provides consulting, design, construction management, installation and facilities-management services for mission-critical facilities.
Financial results
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Revenue | $10.5 million | $20.1 million |
| Gross profit / margin | $3.9 million / 37.1% | $8.0 million / 39.9% |
| Operating income | $1.0 million | $2.1 million |
| Net income | $2.0 million | $3.0 million |
| Diluted EPS | $0.13 | $0.21 |
| Adjusted EBITDA (non-GAAP) | $1.3 million | $2.6 million |
Cash flow and liquidity: Operating activities used $3.5 million in the first half, versus $7.4 million generated in the prior-year period. Cash declined $3.7 million from year-end to $7.3 million. Working capital was $8.6 million, up from $5.3 million; current assets were $17.5 million and current liabilities $8.9 million. Management attributed the operating cash outflow mainly to working-capital movements as a large project wound down, including reductions in payables and advance billings. Investing activities provided $15,000; financing activities used $232,000.
Debt: Total debt was $2.83 million, principally a 4% unsecured convertible note owed to the COO. The filing describes interest-only payments until April 2012, eight $125,000 principal payments beginning April 2012, and a final payment due April 2014; the note may accelerate upon a change of control or the COO’s death. Management expected approximately $0.1 million of debt service over the next 12 months.
Changes and material developments
- Compared with Q2 2010, revenue fell 54% from $22.7 million; first-half revenue fell 49% from $39.8 million. Management attributed the declines to a large construction-management project nearing completion.
- Gross margin rose from 14.1% to 37.1% in Q2 and from 14.2% to 39.9% for the first half. Management cited the project’s final-stage claims/change-order resolution and a better service mix, but expected margins to trend toward 15%–20% for the rest of 2011.
- Net income included $0.9 million of other income from settlement of a dispute concerning a potential project. The filing also reports $50,000 of principal and accrued interest extinguished in a separate SMLB seller-note settlement; review the accounting and disclosures for these items.
- Backlog increased to $41.1 million from $30.6 million at December 31, 2010; $31.3 million was authorized to proceed. The company expected to recognize about 48% of backlog in the next six months. Two customers represented 61% of backlog. A customer contract cancellation reduced backlog by $7.2 million.
- Two customers generated approximately 42% of Q2 revenue and 43% of first-half revenue. Receivables from those customers totaled $3.0 million at quarter-end. The company recorded $90,000 of first-half bad-debt provision and wrote off previously reserved accounts.
Outlook, risks and other disclosures
Management said existing cash and anticipated operating cash generation should cover working capital, capital expenditures, investments and financing obligations for the next 12 months. It may further reduce personnel, marketing and other costs if bookings or expected revenue weaken; it also said it may seek a line of credit or other capital. The outlook is subject to project timing, customer spending delays, competition and pricing pressure, margin variability, customer concentration, collection risk, and uncertainty over continued business with a customer affected by an acquisition. No material litigation or off-balance-sheet arrangements were reported. Disclosure controls were deemed effective, and no material second-quarter change in internal control was reported.
Important facts for investors to verify
- Confirm the issuer: this document names Fortress International Group, Inc., whereas the request identifies TSS, Inc.
- Assess whether Q2 and first-half profitability is repeatable given the $0.9 million dispute-settlement income and management’s 15%–20% margin expectation for the rest of 2011.
- Review cash conversion and working-capital trends, including the large project’s closeout, falling advance billings and payables, and the ability to collect receivables.
- Validate backlog authorization, timing and customer concentration, and the impact of the $7.2 million cancellation and uncertain customer relationship.
- Review the COO-related convertible note’s terms, related-party transactions, and potential dilution; also consider the company’s reliance on two customers and possible need for external financing.