Business context and reporting period
This is a quarterly report for the three and nine months ended September 30, 2012, filed November 13, 2012. The filing registrant is Fortress International Group, Inc. (which describes its business as TSS/Vortech), not a company named TSS, Inc. It provides design, construction management, installation and facilities services for mission-critical infrastructure.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $9.27 million | $7.68 million | $39.12 million | $27.81 million |
| Gross profit | $2.63 million | $2.96 million | $7.02 million | $11.00 million |
| Gross margin | 28.4% | 38.6% | 17.9% | 39.6% |
| Operating income (loss) | $(82,349) | $140,258 | $(3.51) million | $2.24 million |
| Net income (loss) | $(267,136) | $112,818 | $(3.79) million | $3.10 million |
| Adjusted EBITDA, non-GAAP | $12,752 | $287,040 | $(967,733) | $3.86 million |
- At September 30, cash was $5.38 million, total current assets $15.08 million, and current liabilities $9.83 million. Total liabilities were $11.98 million.
- Convertible unsecured notes totaled $2.58 million, including $500,000 classified as current; the notes bear 4% interest and are due in 2014.
- Operating cash flow was $(839,067) for the nine months, compared with $(2.99) million a year earlier. Investing cash flow was $(226,115) and financing cash flow was $(291,235). Cash declined $1.36 million from year-end 2011.
- No income tax expense was recorded; the company reported a full valuation allowance against deferred tax assets.
Material changes versus the prior comparable period
- Revenue increased 21% in Q3 and 41% for the nine-month period, primarily due to construction management work. However, gross margin fell sharply, reflecting favorable disputed-change-order outcomes on a prior-year project and the current project mix.
- Nine-month results included a $2.07 million goodwill impairment after a decline in the company’s market capitalization. Net goodwill fell from $3.84 million at December 31, 2011 to $1.77 million at September 30, 2012.
- The company recorded $279,286 in restructuring charges for the nine months and said its plan included an 18-employee workforce reduction. It estimated annual savings of $2.8 million, including $1.4 million in SG&A savings.
- Backlog declined to $16.6 million from $35.3 million at year-end 2011. Work authorizations covered $8.7 million, or 52%, of backlog, versus $27.2 million, or 77%, at year-end. Two customers represented 58% of current backlog.
- The company failed to meet certain financial covenants on its revolving credit facility during Q1; the facility was terminated June 28, 2012. It had no borrowings outstanding when terminated.
Outlook, commentary, risks and unusual items
- Management anticipated gross margins of 15%–25% for the remainder of 2012, citing a mix with fewer large construction projects. It expected approximately 55% of September 30 backlog to be recognized over the following 12 months.
- Management said cash on hand and expected operating cash generation should cover working capital, capital expenditure and financing needs for the next 12 months, including $500,000 in note repayments. This is an expectation, not a guarantee; the company reported operating losses and cash use.
- Management cited economic uncertainty, tight credit, delayed or deferred customer projects, competition from larger firms and price pressure as risks to revenue and margins. It noted that further cost reductions, including personnel reductions, may be considered.
- A Q3 settlement unrelated to a customer contract resulted in a $160,000 expense; a comparable prior-year settlement had generated $919,084 of other income. A project estimate revision added approximately $600,000 to gross profit.
- Revenue was concentrated: three customers generated 56% of Q3 revenue, and two customers generated 48% of nine-month revenue. The filing also discloses related-party subcontracting and office leases.
- The company reported no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2012.
Important facts for investors to verify
- Confirm the issuer’s identity: the supplied metadata says TSS, Inc., while this filing is for Fortress International Group, Inc.
- Assess whether backlog, particularly the portion not yet authorized and concentrated in two customers, converts to revenue as expected.
- Monitor gross margins, operating cash flow and cash balances against management’s stated 12-month liquidity outlook.
- Review the terms, repayment schedule and potential dilution associated with the convertible notes and outstanding equity awards.
- Evaluate the assumptions behind the goodwill impairment, estimated restructuring savings and management’s projected margin range.