TSSI

TSS, Inc. 10-Q Filing Summary

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for TSS, Inc. (formerly Fortress International Group, Inc.) for the period ended June 30, 2013. TSS provides comprehensive services for the planning, design, development, and maintenance of mission-critical facilities and information infrastructure, including data centers and security operations centers. The company is classified as a smaller reporting company.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($10,987,912) minus Total Current Liabilities ($8,793,374). Total Debt includes $2,000,000 in credit facility borrowings and $871,343 in convertible notes payable.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased by $8.6 million (55%) for the quarter and $8.8 million (30%) year-to-date compared to the prior year. This was primarily due to the absence of a large construction management project that occurred in the prior year.
• Margin Improvement: Despite lower revenue, gross profit margins improved significantly. The quarterly gross margin rose to 28.4% from 15.0% in the prior year, attributed to a shift in project mix toward higher-margin work.
• Acquisition Activity: On May 20, 2013, the company acquired the Systems Integration business from arvato digital services LLC for approximately $1.47 million. This acquisition contributed $0.65 million in revenue for the quarter.
• Debt Restructuring: The company restructured a convertible note with its President/COO, reducing the principal by $307,301. Additionally, a new $6.0 million revolving credit facility was established with Bridge Bank, NA, replacing a terminated facility with Wells Fargo.
• Goodwill Impairment: Unlike the prior year, which included a $2.1 million goodwill impairment charge, no such charge was recorded in the current period.

Guidance, Outlook, and Risks

Management Commentary: Management believes cash on hand, operating cash flows, and the new credit facility will provide adequate resources for the next 12 months. The company is monitoring proposal pricing and contract volume closely due to economic uncertainty and price pressure from larger competitors.

Material Risks and Contingencies:

• Capital Markets Access: The company failed to timely file a Form 8-K/A regarding the Systems Integration acquisition. Consequently, TSS cannot currently have a registration statement declared effective by the SEC, limiting its ability to raise capital through public debt or equity markets until compliance is achieved.
• Liquidity Dependence: The company relies heavily on its revolving credit facility, which is secured by substantially all assets and subject to a borrowing base of 80% of eligible receivables. Loss of this facility would materially impair operations.
• Acquisition Risks: Integration of the new Systems Integration business carries risks regarding under-performance, unanticipated liabilities, and retention of key personnel.

Investor Verification Checklist

• SEC Filing Compliance: Verify the status of the missing Form 8-K/A regarding the Systems Integration acquisition and the timeline for restoring the ability to file registration statements.
• Credit Facility Covenants: Review the specific financial covenants of the new Bridge Bank facility (e.g., asset coverage ratio of 1.5 to 1.0) to assess the risk of default.
• Acquisition Integration: Monitor the performance of the newly acquired Systems Integration business against pro forma expectations.
• Related Party Transactions: Review ongoing lease agreements with entities owned by former CEO Thomas P. Rosato and current President Gerard Gallagher to ensure terms remain at fair market value.
• Convertible Note Terms: Understand the conversion triggers and subordination status of the restructured note held by Gerard Gallagher.