Attached files
file | filename |
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EX-31.1 - TSS, Inc. | v222421_ex31-1.htm |
EX-32.1 - TSS, Inc. | v222421_ex32-1.htm |
EX-31.2 - TSS, Inc. | v222421_ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2011
or
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 000-51426
FORTRESS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
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20-2027651
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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7226 Lee DeForest Drive, Suite 209
Columbia, Maryland
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21046
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(Address of principal executive offices)
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(Zip Code)
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(410) 423-7300
(Registrant’s telephone number, including area code)
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 past 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 x No o
Indicate by check mark whether each 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company x
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Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.0001 per share, as of May 10, 2011 14,716,980
FORTRESS INTERNATIONAL GROUP, INC.
Table of Contents
Page
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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||||
Condensed Consolidated Balance Sheets as of March 31, 2011 and as of December 31, 2010
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1 | |||
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and March 31, 2010
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2 | |||
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and March 31, 2010
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3 | |||
Notes to Condensed Consolidated Financial Statements
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4 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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8 | |||
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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15 | |||
Item 4T. Controls and Procedures
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15 | |||
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings
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16 | |||
Item 1A. Risk Factors
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16 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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16 | |||
Item 3. Defaults upon Senior Securities
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16 | |||
Item 4. Removed and reserved.
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16 | |||
Item 5. Other Information
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16 | |||
Item 6. Exhibits
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17 | |||
SIGNATURES
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18 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FORTRESS INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
March 31,
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December 31,
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|||||||
2011
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2010
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|||||||
Assets
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||||||||
Current Assets
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||||||||
Cash and cash equivalents
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$ | 6,962,766 | $ | 10,980,420 | ||||
Contract and other receivables, net
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7,653,645 | 10,134,475 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts
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1,605,689 | 1,079,813 | ||||||
Prepaid expenses and other current assets
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639,901 | 555,375 | ||||||
Total current assets
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16,862,001 | 22,750,083 | ||||||
Property and equipment, net
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335,602 | 375,926 | ||||||
Goodwill
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3,811,127 | 3,811,127 | ||||||
Other intangible assets, net
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60,000 | 60,000 | ||||||
Other assets
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38,677 | 40,210 | ||||||
Total assets
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$ | 21,107,407 | $ | 27,037,346 | ||||
Liabilities and Stockholders’ Equity
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||||||||
Current Liabilities
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||||||||
Notes payable, current portion
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$ | 120,572 | $ | 200,572 | ||||
Accounts payable and accrued expenses
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5,956,126 | 9,370,446 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts
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4,230,691 | 7,892,460 | ||||||
Total current liabilities
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10,307,389 | 17,463,478 | ||||||
Notes payable, less current portion
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- | - | ||||||
Convertible notes, less current portion
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2,832,301 | 2,750,000 | ||||||
Other liabilities
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122,128 | 137,218 | ||||||
Total liabilities
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13,261,818 | 20,350,696 | ||||||
Commitments and Contingencies
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- | - | ||||||
Stockholders’ Equity
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||||||||
Preferred stock- $.0001 par value; 1,000,000 shares authorized; no shares
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||||||||
issued or outstanding
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- | - | ||||||
Common stock- $.0001 par value, 100,000,000 shares authorized; 13,922,876
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||||||||
and 13,857,127 issued; 13,429,807 and 13,384,860 outstanding at March 31, 2011 and December 31, 2010, respectively
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1,386 | 1,386 | ||||||
Additional paid-in capital
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65,414,455 | 65,247,545 | ||||||
Treasury stock 493,069 and 472,267 shares at cost at
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March 31, 2011 and December 31, 2010, respectively
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(1,114,706 | ) | (1,084,809 | ) | ||||
Accumulated deficit
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(56,455,546 | ) | (57,477,472 | ) | ||||
Total stockholders' equity
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7,845,589 | 6,686,650 | ||||||
Total liabilities and stockholders’ equity
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$ | 21,107,407 | $ | 27,037,346 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
FORTRESS INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) | ||||||||
For the Three Months Ended | ||||||||
March 31, 2011 | March 31, 2010 | |||||||
Results of Operations:
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Revenue
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$ | 9,614,930 | $ | 17,115,493 | ||||
Cost of revenue
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5,478,859 | 14,650,971 | ||||||
Gross profit
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4,136,071 | 2,464,522 | ||||||
Operating expenses:
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Selling, general and administrative
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3,034,612 | 2,620,405 | ||||||
Depreciation and amortization
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62,699 | 95,479 | ||||||
Total operating costs
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3,097,311 | 2,715,884 | ||||||
Operating income (loss)
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1,038,760 | (251,362 | ) | |||||
Interest income (expense), net
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(16,834 | ) | (38,789 | ) | ||||
Income (loss) from continuing operations before income taxes
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1,021,926 | (290,151 | ) | |||||
Income tax expense
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- | - | ||||||
Net income (loss) from continuing operations
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$ | 1,021,926 | $ | (290,151 | ) | |||
Basic Earnings (Loss) per Share:
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||||||||
Earnings (loss) per common share | $ | 0.08 | $ | (0.02 | ) | |||
Weighted average common shares outstanding
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13,399,683 | 13,038,719 | ||||||
Diluted Earnings (Loss) per Share: | ||||||||
Earnings (loss) per common share
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$ | 0.07 | $ | (0.02 | ) | |||
Weighted average common shares outstanding
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14,379,035 | 13,038,719 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
FORTRESS INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) | ||||||||
For the Three Months Ended | ||||||||
March 31, 2011
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March 31, 2010
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Cash Flows from Operating Activities:
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Net income (loss)
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$ | 1,021,926 | $ | (290,151 | ) | |||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
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Depreciation and amortization
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62,699 | 95,479 | ||||||
Provision for doubtful accounts
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30,000 | - | ||||||
Stock-based compensation
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166,910 | 155,858 | ||||||
Other non cash items
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- | 2,935 | ||||||
Changes in operating assets and liabilities:
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Contracts and other receivables
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2,450,830 | (463,572 | ) | |||||
Costs and estimated earnings in excess of billings on uncompleted contracts
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(525,876 | ) | 29,031 | |||||
Prepaid expenses and other current assets
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(129,697 | ) | 107,221 | |||||
Other assets
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1,533 | 21,403 | ||||||
Accounts payable and accrued expenses
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(3,332,019 | ) | 605,973 | |||||
Billings in excess of costs and estimated earnings on uncompleted contracts
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(3,661,769 | ) | 3,723,824 | |||||
Other liabilities
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(15,090 | ) | (13,565 | ) | ||||
Net cash (used in) provided by operating activities
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(3,930,553 | ) | 3,974,436 | |||||
Cash Flows from Investing Activities:
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Purchase of property and equipment
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(22,375 | ) | (27,515 | ) | ||||
Proceeds from repayment of note in connection with
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the sale of substantially all assets and liabilities of Rubicon
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45,171 | - | ||||||
Net cash provided by (used in) investing activities
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22,796 | (27,515 | ) | |||||
Cash Flows from Financing Activities:
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Payments on notes payable
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- | (1,248 | ) | |||||
Payment on seller notes
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(80,000 | ) | (18,231 | ) | ||||
Purchase of treasury stock
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(29,897 | ) | (84,468 | ) | ||||
Net cash used in financing activities
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(109,897 | ) | (103,947 | ) | ||||
Net (decrease) increase in cash
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(4,017,654 | ) | 3,842,974 | |||||
Cash, beginning of period
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10,980,420 | 2,263,146 | ||||||
Cash, end of period
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$ | 6,962,766 | $ | 6,106,120 | ||||
Supplemental disclosure of cash flow information:
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Cash paid for interest
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$ | 31,016 | $ | 126,444 | ||||
Cash paid for taxes
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- | 27,323 | ||||||
Supplemental disclosure of non-cash financing activities:
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Promissory notes, issued to an officer, converted to common stock
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$ | - | $ | 1,250,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
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Basis of Presentation
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The unaudited condensed consolidated financial statements are as of March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010 for Fortress International Group, Inc. (“Fortress” or the “Company” or “We”).
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. We recommend that you read these unaudited condensed consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010, previously filed with the SEC. We believe that the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q reflect all adjustments that are necessary to fairly present the financial position, results of operations and cash flows for the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results that can be expected for the full year.
Nature of Business and Organization
The Company provides a single source solution for highly technical mission-critical facilities such as data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. The Company’s services consist of technology consulting, design and engineering, construction management, systems installations and facilities management.
The Company’s focus is centered on growing cash reserves, while attempting to organically grow profitability and corresponding cash flow. In response to the downturn in the economy during 2009, 2010 and continuing in 2011, the Company worked to increase project utilization and realign selling, general and administrative expenses through cost cutting measures. In our efforts to maintain and grow profitability, we will closely monitor our costs relative to actual and anticipated revenues and may make further reductions to selling, general and administrative expenses including but not limited to personnel and related costs and marketing.
In an effort to improve our capitalization and liquidity in 2010, the Company sought to restructure scheduled debt repayments with its creditors. In addition to the added liquidity from the proceeds of the sale of Rubicon, the Company eliminated scheduled debt repayments through debt forgiveness of approximately $0.6 million owed to the former sellers of TSS/Vortech. On February 28, 2010, the Company improved its net worth through the principal conversion of $1.3 million of principal due on a seller note to its Chief Operating Office (“COO”). Furthermore, the principal repayment of the remaining $2.7 million was amended to begin in the second quarter of 2012.
As a result of the cost reduction efforts to realign operations with decreased anticipated revenues undertaken through 2010, the resulting operating profitability and the prior year financial restructuring of the $4.0 million note to our COO, management believes the Company’s current cash and cash equivalents and expected future cash generated from operations will satisfy its expected working capital, capital expenditure and investment requirements and financing obligations through the next twelve months.
Recently Issued Accounting Pronouncements
In December 2010, the FASB issued ASU No. 2010-29, “Business combinations – disclosure of supplementary pro forma information,” (“ASU 2010-29”) to amend topic ASC 805 “Business Combinations,” by improving disclosure requirements related to the business combinations performed during the year being reported on. Under the amended guidance, a public entity that presents comparative financial statements must disclose the pro forma revenue and earnings of the combined entity as though the business combination had occurred as of the beginning of the prior annual reporting period. The provision of ASU 2010-29 did will be implemented in the event of future acquisitions.
4
FORTRESS INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(2)
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Accounts Receivable, net
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The Company had an accounts receivable allowance for doubtful accounts of $0.5 million at March 31, 2011 and December 31, 2010. Bad debt expense for the three months ended March 31, 2011 and 2010 was $30,000 and zero, respectively.
Included in accounts receivable was retainage associated with construction projects totaling $0.3 million and $0.5 million at March 31, 2011 and December 31, 2010, respectively.
The Company earned approximately 37% and 64% of its revenue from one and two customers for the three months ended March 31, 2011 and 2010, respectively. Accounts receivable from this customer at March 31, 2011 and December 31, 2010 was $1.1 million and $1.2 million, respectively. Additionally, two customers comprising 41% of the Company’s total revenue for the three months ended March 31, 2011 were purchased in 2010. We are unable determine the effect the merger may have on continued business with our customer.
(3)
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Basic and Diluted Earnings (Loss) per Share
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Basic and diluted net earnings (loss) per common share are computed as follows:
Three Months Ended March 31, | ||||||||||||||||||||||||
2011
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2010
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Income
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Shares
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$ per
Share
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Income
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Shares
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$ per
Share
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BASIC EARNINGS (LOSS) PER SHARE
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Earnings (loss)
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$ | 1,021,926 | 13,399,683 | $ | 0.08 | $ | (290,151 | ) | 13,038,719 | $ | (0.02 | ) | ||||||||||||
EFFECT OF DILUTIVE SECURITIES
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Unvested restricted stock
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- | 979,352 | - | - | - | - | ||||||||||||||||||
DILUTED EARNINGS (LOSS) PER SHARE
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$ | 1,021,926 | 14,379,035 | $ | 0.07 | $ | (290,151 | ) | 13,038,719 | $ | (0.02 | ) |
Unsecured promissory notes convertible into 366,666 shares of common stock that were outstanding at March 31, 2011 were not included in the computation of diluted net loss per common share for the three months ended March 31, 2011, as their inclusion would be anti-dilutive.
885,601 shares of unvested restricted stock, unsecured promissory notes convertible into 366,667 shares of common stock and options to purchase 700,000 shares of common stock, respectively, that were outstanding at March 31, 2010 were not included in the computation of diluted net loss per common share for the three months ended March 31, 2010, as their exercise prices were all above the average market price of the Company’s common stock for the period and thus would be anti-dilutive.
(4)
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Employee Benefit Plans
|
Restricted Stock
For the three months ended March 31, 2011 and March 31, 2010, the Company granted 66,250 and zero shares of restricted stock, respectively, under the 2006 Omnibus Incentive Compensation Plan. For the three months ended March 31, 2011 and 2010, the Company recorded non-cash compensation expense included in selling, general and administrative expenses associated with vesting awards of $0.2 million and $0.1 million in both periods. At March 31, 2011, there was approximately $0.4 million of unrecognized stock compensation with a weighted average remaining life of one year.
(5)
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Income Taxes
|
The Company accounts for income taxes under the asset and liability method. Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The Company is in a net operating loss carryover position. The net operating losses not utilized can be carried forward for 20 years to offset future taxable income. As of March 31, 2011 and December 31, 2010, a full valuation allowance has been recorded against the Company’s deferred tax assets, as the Company has concluded that, under relevant accounting standards, it is more likely than not that the deferred tax assets will not be realizable.
The Company’s effective tax rate is based upon the rate expected to be applicable to the full fiscal year.
The Company files a consolidated federal tax return in states that allow it, and in other states the Company files separate tax returns.
The Company’s prior federal and state income tax filings since 2007 remain open under statutes of limitation. Innovative Power System Inc.’s statutes of limitation are open from the 2007 tax year forward for both federal and Commonwealth of Virginia purposes. Quality Power Systems Inc.’s statutes of limitation are open from the 2007 tax year forward for both federal and Commonwealth of Virginia purposes. SMLB, Ltd. statutes of limitation are open from the 2007 tax year forward for both federal and State of Illinois purposes.
5
FORTRESS INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(6)
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Notes Payable
|
March 31, 2011
|
December 31, 2010
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Convertible, unsecured promissory note, due 2012 (4.0%)
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$ | 2,832,301 | $ | 2,750,000 | ||||
Unsecured promissory note, due 2011 (6.0%)
|
120,572 | 120,572 | ||||||
Unsecured promissory note, due 2011 (6.0%)
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- | 80,000 | ||||||
Total debt
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2,952,873 | 2,950,572 | ||||||
Less current portion
|
120,572 | 200,572 | ||||||
Total debt, less current portion
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$ | 2,832,301 | $ | 2,750,000 |
On March 31, 2011, the Company made its final payment of $80,000 on seller notes associated with the acquisition of Innovative. For the three months ended March 31, 2010, the Company made principal repayments of $19,479.
At March 31, 2011, the Company had not made its scheduled payments on the $0.1 million due to the sellers of SMLB, LTD. The purchase agreement executed in connection with the SMLB transaction contains a provision requiring minimum working capital of $0.3 million as of the closing date. The seller note would be reduced for any shortfall and the Company would owe any excess. Per the terms of the purchase agreement, the Company delivered the working capital calculation of approximately negative $80,000 in 2008, and in the first quarter of 2011, the sellers have separately responded with a calculation of $0.4 million, based on varying interpretations of the purchase agreement. Subsequently, the Company entered into discussions with the SMLB sellers regarding the working capital and other earn-out provisions, which were previously deemed to be zero per the terms of the purchase agreement. The Company has made no payment on the seller note, which will be paid subject to finalizing these discussions.
On February 28, 2010, the COO entered into an agreement with the Company to convert $1.3 million of the outstanding note balance into equity at a conversion price of $2.00 per share, resulting in the aggregate issuance of 625,000 shares of the Company’s common stock. The amount of the excess of the conversion price of $2.00 over the market price at $0.56 on the date of conversion totaling $0.9 million has been recorded as additional paid-in capital. The shares will be subject to that certain Registration Rights Agreement between the Company and the COO. The terms on the remaining principal balance of $2.8 million were amended reducing the interest rate under the note from 6% to 4%, providing for the payment of certain amounts of accrued interest over time, providing for interest-only payments under the note until April 1, 2012, providing for eight principal payments in the amount of $125,000 each beginning on April 1, 2012, and providing for a final payment of all remaining amounts of principal and interest due under the note on April 1, 2014. The note amendment also provides for the acceleration of all amounts due under the note upon a change of control of the Company or the death of the COO.
6
FORTRESS INTERNATIONAL GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(7)
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Related Party Transactions
|
The Company participates in transactions with the following entities affiliated through common ownership and management. The Audit Committee in accordance with its written charter reviews and approves in advance all related party transactions greater than $25,000 and follows a pre-approved process for contracts with a related party for less than $25,000.
S3 Integration, LLC (S3 Integration) is 15% owned by each of the Company’s Chief Executive Officer and Chief Operating Officer. S3 Integration provides commercial security systems design and installation services as a subcontractor to the Company.
Chesapeake Systems, LLC (Chesapeake Systems) was 9% owned and significantly indebted to the Company’s Chief Executive Officer until the sale of his equity interest and satisfaction of his note on December 31, 2010. Chesapeake Systems is a manufacturers’ representative and distributor of mechanical and electrical equipment.
Chesapeake Mission Critical, LLC (Chesapeake MC) is 9% owned by each of the Company’s Chief Executive Officer and its Chief Operating Officer. Additionally, it is significantly indebted to the Company’s Chief Executive Officer. Chesapeake MC is a manufacturers’ representative and distributor of electrical equipment.
CTS Services, LLC (CTS) is 9% owned by the Company’s Chief Executive Officer. CTS is a mechanical contractor that acts as a subcontractor to the Company for certain projects. In addition, CTS utilizes the Company as a subcontractor on projects as needed.
Telco P&C, LLC (Telco P&C) is 12% owned by the Company’s Chief Executive Officer. Telco P&C is a specialty electrical installation company that acts as a subcontractor to the Company. The Company has also acted as a subcontractor to Telco P&C as needed.
TPR Group Re Three, LLC (TPR Group Re Three) is 50% owned by each of the Company’s Chief Executive Officer and its Chief Operating Officer. TPR Group Re Three leases office space to the Company under the terms of a real property lease to TSS/Vortech. The Company obtained an independent appraisal of the lease, which determined the lease to be at fair value.
Chesapeake Tower Systems, LLC (Chesapeake) is owned 100% by the Company’s Chief Executive Officer. During the second quarter 2009 and concurrent with an expiring leased facility, the Company leases approximately 25,000 square feet of combined office and warehouse space from Chesapeake.
The following table sets forth transactions the Company has entered into with the above related parties for the three months ended March 31, 2011 and 2010. It should be noted that revenue represents amounts earned on contracts with related parties under which we provide services; and cost of revenue represents costs incurred in connection with related parties which provide services to us on contracts for our customers. As such a direct relationship to the revenue and cost of revenue information below by company should not be expected.
Three Months Ended
|
||||||||
March 31, 2011
|
March 31, 2010
|
|||||||
Revenue
|
||||||||
Telco P&C, LLC
|
$ | 220,976 | $ | 246,247 | ||||
Chesapeake Mission Critical, LLC
|
149,763 | 1,298 | ||||||
Total
|
$ | 370,739 | $ | 247,545 | ||||
Cost of Revenue
|
||||||||
CTS Services, LLC
|
$ | 9,285 | $ | 78,146 | ||||
Chesapeake Mission Critical, LLC
|
65,552 | 6,800 | ||||||
S3 Integration, LLC
|
38,271 | 97,106 | ||||||
Telco P&C, LLC
|
- | 1,077 | ||||||
Total
|
$ | 113,108 | $ | 183,129 | ||||
Selling, general and administrative
|
||||||||
Office rent paid to Chesapeake Tower Sytsems
|
57,923 | 29,117 | ||||||
Office rent paid to TPR Group Re Three, LLC
|
142,732 | 100,927 | ||||||
Total
|
$ | 200,655 | $ | 130,044 |
Three Months Ended
|
||||||||
March 31, 2011
|
December 31, 2011
|
|||||||
Accounts receivable/(payable):
|
||||||||
CTS Services, LLC
|
$ | 7,155 | $ | 17,555 | ||||
CTS Services, LLC
|
(7,073 | ) | - | |||||
Chesapeake Mission Critical, LLC
|
287,426 | - | ||||||
Telco P&C, LLC
|
339,280 | 364,348 | ||||||
Telco P&C, LLC
|
(600 | ) | (600 | ) | ||||
S3 Integration, LLC
|
(1,905 | ) | (25,924 | ) | ||||
Total Accounts receivable
|
$ | 633,861 | $ | 381,903 | ||||
Total Accounts (payable)
|
$ | (9,578 | ) | $ | (26,524 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report.
The terms “we” and “our” and the “Company” as used throughout this Quarterly Report on Form 10-Q refer to Fortress International Group, Inc. and its consolidated subsidiaries, unless otherwise indicated.
Business Formation and Overview
We were incorporated in Delaware on December 20, 2004 as a special purpose acquisition company formed under the name “Fortress America Acquisition Corporation” for the purpose of acquiring an operating business that performs services in the homeland security industry. On July 20, 2005, we closed our initial public offering of 7,800,000 units (including underwriters exercise of an over-allotment option), resulting in proceeds net of fees to us of approximately $43.2 million.
On January 19, 2007, we acquired all of the outstanding membership interests of each of VTC, L.L.C., doing business as “Total Site Solutions” (“TSS”), and Vortech, L.L.C. (“Vortech” and, together with TSS, “TSS/Vortech”) and simultaneously changed our name to “Fortress International Group, Inc.” The acquisition fundamentally transformed the Company from a special purpose acquisition company to an operating business.
Building on the TSS/Vortech business, management continued an acquisition strategy to expand our geographical footprint, add complementary services, and diversify and expand our customer base. After acquiring TSS/Vortech, the Company continued its expansion through the acquisitions of Comm Site of South Florida, Inc. on May 7, 2007 (“Comm Site”), Innovative Power Systems, Inc. and Quality Power Systems, Inc. (collectively, “Innovative”) on September 24, 2007, Rubicon Integration, LLC (“Rubicon”) on November 30, 2007 and SMLB Ltd. (“SMLB”) on January 2, 2008.
The company’s strategic growth through acquisitions was suspended due to the downturn in the economy, the impact this had on its existing customer base, and as well as the impact it had on the company’s own financial security and common stock value. The corporate focus became centered on preserving cash, achieving positive cash flow and discontinuing or selling operations that threatened that focus. The Company engaged an investment bank to assist it in evaluating various disposition and financial alternatives, which culminated in the sale of the Rubicon division to its management and former owners on December 29, 2009.
Based on an unexpected lack of closed contracts and continued customer delays experienced at June 30, 2009 and through December 31, 2009, management revised our financial forecast and implemented selling, general and administrative cost cutting measures with an approximate annual savings of $2.2 million. In an effort to attempt to achieve positive cash flows from operations and align costs with forecasted revenues in the future, the Company delisted from the NASDAQ Capital Market in March 2010 to reduce professional fees and other costs necessary to maintain a listing on the NASDAQ Capital Market.
We provide comprehensive services for the planning, design, and development of mission-critical facilities and information infrastructure. We also provide a single source solution for highly technical mission-critical facilities such as data centers, operation centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services include technology consulting, engineering and design management, construction management, system installations, operations management, and facilities management and maintenance.
Competition in Current Economic Environment
Our industry has been and may be further adversely impacted by the current economic environment and tight credit conditions. We have seen larger competitors seek to expand their services offerings including a focus in the mission-critical market. These larger competitors have an infrastructure and support greater than ours, and accordingly, we have experienced some price pressure as some companies are willing to take on projects at lower margins. With certain customers, we have experienced a delay in spending, or deferral of projects to an indefinite commencement date due to the economic uncertainty or lack of access to capital.
8
We believe there are high barriers to entry in our sector for new competitors due to our specialized technology service offerings which we deliver to our customers, our top secret clearances, and our turnkey suite of deliverables offered. We compete for business based upon our reputation, past experience, and our technical engineering knowledge of mission-critical facilities and their infrastructure. We are developing and creating long term relationships with our customers because of our excellent reputation in the industry and will continue to create facility management relationships with our customers that we expect will provide us with steadier revenue streams to improve the value of our business. Finally, we seek to further expand our energy services that focus on operational cost savings that may be used to either fund the project or increase returns to the facility operator. We believe these barriers and our technical capabilities and experience will differentiate us to compete with new entrants into the market or pricing pressures.
Although we will closely monitor our proposal pricing and the volume of the work, we have seen our margins decrease and cannot be certain that our current margins will be sustained. Furthermore, given the economic environment, to the extent the volume of our contracts further decreases, we may have to take additional measures to reduce our operating costs through additional reductions in general, administrative and marketing costs, including potential reductions in personnel and related costs.
Contract Backlog
We believe an indicator of our future performance is our backlog of uncompleted projects in process or recently awarded. Our backlog represents our estimate of anticipated revenue from executed and awarded contracts that have not been completed and that we expect will be recognized as revenues over the life of the contracts. We have broken our backlog into the following three categories: (i) technology consulting consisting of services related to consulting and/or engineering design contracts, (ii) construction management, and (iii) facility management.
Backlog is not a measure defined in generally accepted accounting principles, and our methodology for determining backlog may not be comparable to the methodology of other companies in determining their backlog. Our backlog is generally recognized under two categories: (1) contracts for which work authorizations have been or are expected to be received on a fixed-price basis, guaranteed maximum price basis or time and materials basis, and (2) contracts awarded to us where some, but not all, of the work have not yet been authorized. At March 31, 2011, we had authorizations to proceed with work for approximately $11.0 million, or 40% of our total backlog of $27.7 million. At December 31, 2010, we had authorizations to proceed with work for approximately $13.9 million, or 45% of our total backlog of $30.6 million.
Approximately $19.4 million, or 71% of our backlog, relates to three customers at March 31, 2011 and $25.9 million, or 85%, to four customers at December 31, 2010. Additionally, two customers, who comprised 37% and 42% of our total backlog at March 31, 2011 and December 31, 2010, respectively, were purchased in 2010. We are unable to determine the effect the transaction may have on continued business with our customer.
As of March 31, 2011, our backlog was approximately $27.7 million, compared to approximately $30.6 million at December 31, 2010. We believe that approximately 45% of the backlog at March 31, 2011 will be recognized during the next nine months. The following table reflects the value of our backlog in the above three categories as of March 31, 2011 and December 31, 2010, respectively.
(In millions)
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Technology consulting
|
$ | 10.6 | $ | 9.9 | ||||
Construction management
|
4.8 | 7.5 | ||||||
Facilities management
|
12.3 | 13.2 | ||||||
Total
|
$ | 27.7 | $ | 30.6 |
9
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of the financial statements included elsewhere in this Quarterly Report on Form 10-Q requires that management make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ significantly from those estimates.
We believe the following critical accounting policies affect the more significant estimates and judgments used in the preparation of our financial statements.
Revenue Recognition
We recognize revenue when pervasive evidence of an arrangement exists, the contract price is fixed or determinable, services have been rendered or goods delivered, and collectability is reasonably assured. Our revenue is derived from the following types of contractual arrangements: fixed-price contracts, time-and-materials contracts and cost-plus-fee contracts (including guaranteed maximum price contracts). Revenue from fixed-price contracts is accounted for under the application of ASC 605-35Construction-Type and Certain Production-Type Contracts, recognizing revenue on the percentage-of-completion method using costs incurred in relation to total estimated project costs. The cost to total cost method is used because management considers cost incurred and costs to complete to be the best available measure of progress in the contracts. Contract costs include all direct materials, subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, payroll taxes, employee benefits and supplies.
Revenue on time-and-material contracts is recognized based on the actual labor hours performed at the contracted billable rates, and costs incurred on behalf of the customer. Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred, plus an estimate of the applicable fees earned. Fixed fees under cost-plus-fee contracts are recorded as earned in proportion to the allowable costs incurred in performance of the contract.
Contract revenue recognition inherently involves estimation. Examples of estimates include the contemplated level of effort to accomplish the tasks under the contract, the costs of the effort and an ongoing assessment of the Company’s progress toward completing the contract. From time to time, as part of our standard management process, facts develop that require us to revise our estimated total costs on revenue. To the extent that a revised estimate affects contract profit or revenue previously recognized, we record the cumulative effect of the revision in the period in which the revisions become known. The full amount of an anticipated loss on any type of contract is recognized in the period in which it becomes probable and can reasonably be estimated.
Under certain circumstances, we may elect to work at risk prior to receiving an executed contract document. We have a formal procedure for authorizing any such at risk work to be incurred. Revenue, however, is deferred until a contract modification or vehicle is provided by the customer.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on an analysis of our historical experience with bad debt write-offs and an aging of the accounts receivable balance. Unanticipated changes in the financial condition of clients, or significant changes in the economy could impact the reserves required. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
10
Non-cash Compensation
The Company applies the fair value method that requires all share-based payments to employees be expensed over their requisite service period based on their fair value at the grant date. The recognition of the value of the instruments results in compensation or professional expenses in our financial statements. The expense differs from other compensation and professional expenses in that these charges are typically settled through the issuance of common stock, which would have a dilutive effect upon earnings per share, if and when such restricted stock vests. The determination of the estimated fair value used to record the compensation or professional expenses associated with the equity or liability instruments issued requires management to make a number of assumptions and estimates that can change or fluctuate over time.
Goodwill and Other Purchased Intangible Assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Other purchased intangible assets include the fair value of items such as customer contracts, backlog and customer relationships. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but rather tested for impairment on an annual basis or triggering event. Purchased intangible assets with a definite useful life are amortized on a straight-line basis over their estimated useful lives.
The estimated fair market value of identified intangible assets is amortized over the estimated useful life of the related intangible asset. We have a process pursuant to which we typically retain third-party valuation experts to assist us in determining the fair market values and useful lives of identified intangible assets. We evaluate these assets for impairment when events occur that suggest a possible impairment. Such events could include, but are not limited to, the loss of a significant client or contract, decreases in federal government appropriations or funding for specific programs or contracts, or other similar events. We determine impairment by comparing the net book value of the asset to its future undiscounted net cash flows. If impairment occurs, we will record an impairment expense equal to the difference between the net book value of the asset and its estimated discounted cash flows using a discount rate based on our cost of capital and the related risks of recoverability.
Long-Lived Assets (Excluding Goodwill)
In accordance with the accounting guidance related to accounting for long-lived assets such as property, equipment and intangible assets subject to amortization, we review the assets for impairment. If circumstances indicate the carrying value of the asset may not be fully recoverable, a loss is recognized at the time impairment exists and a permanent reduction in the carrying value of the asset is recorded. We believe that the carrying values of its long-lived assets as of March 31, 2011 are fully realizable.
Income Taxes
Deferred income taxes are provided for the differences between the basis of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities are measured using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which principally arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We also must analyze income tax reserves, as well as determine the likelihood of recoverability of deferred tax assets, and adjust any valuation allowances accordingly. Considerations with respect to the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income, as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors.
We adopted ASC 740 Income Taxes, which prescribes a more-likely-than-not threshold of financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. As of March 31, 2011, we do not have any material gross unrecognized tax benefit liabilities.
We believe the following critical accounting policies affect the more significant estimates and judgments used in the preparation of our financial statements.
Recently Issued Accounting Pronouncements
In December 2010, the FASB issued ASU No. 2010-29, “Business combinations – disclosure of supplementary pro forma information,” (“ASU 2010-29”) to amend topic ASC 805 “Business Combinations,” by improving disclosure requirements related to the business combinations performed during the year being reported on. Under the amended guidance, a public entity that presents comparative financial statements must disclose the pro forma revenue and earnings of the combined entity as though the business combination had occurred as of the beginning of the prior annual reporting period. The adoption of ASU 2010-29 did not have a material impact on the Company’s condensed consolidated financial statements.
11
Results of operations for the three months ended March 31, 2011 compared with the three months ended March 31, 2010.
Revenue. Revenue decreased $7.5 million to $9.6 million for the three months ended March 31, 2011 from $17.1 million for the three months ended March 31, 2010. The decrease primarily relates to a large construction management project that was entering its final stages in the first quarter of 2011 as compared to it entering into full production in the first quarter of 2010.
Cost of Revenue. Cost of revenue decreased $9.2 million to $5.5 million for the three months ended March 31, 2011 from $14.7 million for the three months ended March 31, 2010. The decrease in revenue described above was the primary driver for the decrease in cost of revenues.
Gross Margin Percentage. Gross margin percentage increased to 43.0% for the three months ended March 31, 2011 compared to 14.1% for the three months ended March 31, 2010. The increase in gross margin is attributable primarily to the effect of a large construction management project entering its final stages of completion, whereby claims and estimates relating to disputed change orders were concluded and we experienced an improving mix in our services. We anticipate that gross margin will trend towards 15% to 20% for the remainder of the year.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.4 million to $3.0 million for the three months ended March 31, 2011 from $2.6 million for the three months ended March 31, 2010. The increase is primarily driven by $0.5 million increase in salaries, commissions and related costs due to a reinstatement of salaries in the second half of 2010 as a result of increased profitability. We will continue to closely monitor our bookings and anticipated revenues, and we may take future actions to reduce operating costs associated with personnel and related costs in an effort to remain profitable.
Depreciation. Depreciation remained consistent at $0.1 million for the three months ended March 31, 2011 compared to $0.1 million for the three months ended March 31, 2010.
Interest income (expense), net. Our interest income (expense), net remained consistent at ($16,834) for the three months ended March 31, 2011 compared to ($38,789) for the three months ended March 31, 2010.
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Financial Condition, Liquidity and Capital Resources
For the Three Months Ended March 31,
|
||||||||||||
2011
|
2010
|
Change
|
||||||||||
Net income (loss)
|
$ | 1,021,926 | $ | (290,151 | ) | $ | 1,312,077 | |||||
Adjustments to reconcile net income (loss) to net cash
|
||||||||||||
used in) provided by operations:
|
||||||||||||
Depreciation and amortization
|
62,699 | 95,479 | (32,780 | ) | ||||||||
Stock-based compensation
|
166,910 | 155,858 | 11,052 | |||||||||
Provision for doubtful accounts
|
30,000 | - | 30,000 | |||||||||
Other non-cash items
|
- | 2,935 | (2,935 | ) | ||||||||
Net adjustments to reconcile net income for non-cash items
|
259,609 | 254,272 | 38,117 | |||||||||
Net change in working capital
|
(5,212,088 | ) | 4,010,315 | (9,222,403 | ) | |||||||
Cash (used in) provided by operations
|
(3,930,553 | ) | 3,974,436 | (7,872,209 | ) | |||||||
Cash provided by (used in) investing
|
22,796 | (27,515 | ) | 50,311 | ||||||||
Cash used in financing
|
(109,897 | ) | (103,947 | ) | (5,950 | ) | ||||||
Net (decrease) increase in cash
|
$ | (4,017,654 | ) | $ | 3,842,974 | $ | (7,827,848 | ) |
Cash and cash equivalents decreased $4.0 million to $7.0 million at March 31, 2011 from $11.0 million at December 31, 2010. The decrease was primarily attributable to $4.0 million used in operating activities driven by a $5.2 million decrease in working capital.
Operating Activity
Net cash used by operating activities totaled $3.9 million for the three months ended March 31, 2011 compared to $4.0 million provided by operating activities for the three months ended March 31, 2010. The $7.9 million decrease in operating cash flow was attributable to a $9.2 million decrease in working capital, offset in part by an increase in net income of $1.3 million. The decrease in working capital was attributable primarily to a significant project entering into the closure process in the first quarter 2011 as compared to the same project under full production and being billed ahead in the first quarter 2010. The result of the project concluding attributed primarily to the decrease in billings in excess of costs and accounts payable of $3.7 million and $3.4 million, respectively for the three months ended March 31, 2011.
Investing Activity
Net cash provided by investing activities increased $50,311 to $22,796 for the three months ended March 31, 2011 from $27,515 used in for the three months ended March 31, 2010. The increase was associated with proceeds from repayment of notes issued in the sale of Rubicon, which principal began amortizing in April 2010.
Financing Activity
Net cash used in financing remained consistent at $0.1 million for the three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011, financing activities consisted primarily of scheduled seller note repayments as compared to treasury stock repurchases associated with payment of taxes on the vesting of restricted stock held by employees for the three months ended March 31, 2010.
Non-Cash Financing Activity
On February 28, 2010, we entered into an agreement with our COO to convert $1.3 million of the outstanding note balance into equity at a conversion price of $2.00 per share, resulting in the aggregate issuance of 625,000 shares of our common stock. The amount of the excess of the conversion price of $2.00 over the market price at $0.56 on the date of conversion totaling $0.9 million has been recorded as additional paid-in capital. The shares will be subject to that certain Registration Rights Agreement between us and the COO. The terms on the remaining principal balance of $2.8 million were amended reducing the interest rate under the note to 4%, providing for the payment of certain amounts of accrued interest over time, providing for interest-only payments under the note until April 1, 2012, providing for eight principal payments in the amount of $125,000 each beginning on April 1, 2012, and providing for a final payment of all remaining amounts of principal and interest due under the note on April 1, 2014. The note amendment also provides for the acceleration of all amounts due under the note upon a change of control of the Company or the death of the COO.
There were no and no other non-cash activities during the three months ended March 31, 2011 and 2010, respectively.
13
Adjusted EBITDA
A reconciliation of Adjusted EBITDA to net income (loss):
(Unaudited) | ||||||||
For the Three Months Ended | ||||||||
March 31, 2011
|
March 31, 2010
|
|||||||
Adjusted EBITDA
|
$ | 1,298,369 | $ | 19,863 | ||||
Stock-based compensation
|
(166,910 | ) | (155,858 | ) | ||||
Lease exit costs
|
- | (19,888 | ) | |||||
Provision for bad debts
|
(30,000 | ) | - | |||||
EBITDA
|
$ | 1,101,459 | $ | (155,883 | ) | |||
Interest (income) expense, net
|
(16,834 | ) | (38,789 | ) | ||||
Income tax expense (benefit)
|
- | - | ||||||
Depreciation and amortization
|
(62,699 | ) | (95,479 | ) | ||||
Net income (loss)
|
$ | 1,021,926 | $ | (290,151 | ) |
Adjusted EBITDA increased $1.3 million to $1.3 million in the three months ended March 31, 2011 from zero for the three months ended March 31, 2010. The increase was primarily driven by increased gross profit for the three months ended March 31, 2011. Please refer to the preceding discussion within this “Results of Operations” section.
Adjusted EBITDA is a supplemental financial measure not defined in GAAP. We define Adjusted EBITDA as net income before interest expense, income taxes, depreciation and amortization, impairment loss on goodwill and other intangibles, net, stock-based compensation, lease exit costs, and provision for bad debts. We present Adjusted EBITDA because we believe this supplemental measure of operating performance is helpful in comparing our operating results across reporting periods on a consistent basis by excluding items that may, or could, have a disproportionate positive or negative impact on our results of operations in any particular period. We also use Adjusted EBITDA as a factor in evaluating the performance of certain management personnel when determining incentive compensation. We believe that the line item on the consolidated statement of operations entitled “net income” is the most directly comparable GAAP financial measure to Adjusted EBITDA. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net income as an indicator of operating performance or any other GAAP financial measure. Adjusted EBITDA, as calculated by us, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. As Adjusted EBITDA excludes certain financial information that is included in net income attributable to the Company, users of this financial information should consider the type of events and transactions that are excluded. Our non-GAAP performance measure, Adjusted EBITDA, has certain material limitations as follows:
· |
It does not include impairment loss on goodwill and other intangibles, net. Because we utilize goodwill and other intangibles to generate revenues in our operations, this is a periodic and ongoing cost of our operations.
|
|
· |
It does not include stock-based compensation. Stock based compensation is a necessary and ongoing part of our costs and has assisted us in reducing our cash compensation to attract and retain our workforce who support and generate revenues. Stock-based compensation will remain a key element of our overall compensation program.
|
|
· |
It does not include provision for bad debts. Provision for bad debts is necessary as we take credit risk with customers and is an ongoing part of our operations.
|
· |
It does not include interest expense. Because we have borrowed money to finance some of our operations, interest is a necessary and ongoing part of our costs and has assisted us in generating revenue.
|
· |
It does not include taxes. Because the payment of taxes is a necessary and ongoing part of our operations.
|
· |
It does not include depreciation and amortization. We must utilize property, plant and equipment and intangible assets in order to generate revenues in our operations, depreciation and amortization are necessary and ongoing costs of our operations.
Other Companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
|
14
We had $7.0 million and $11.0 million of unrestricted cash and cash equivalents at March 31, 2011 and December 31, 2010, respectively. During the three months ended March 31, 2011, we have financed our operations primarily with cash on hand and operating cash flows.
Our current corporate focus is centered on growing cash reserves, while attempting to organically grow profitability and corresponding cash flow. During 2009 and through 2010, we worked to increase project utilization and realign selling, general and administrative expenses through cost cutting measures. In our efforts to maintain and grow profitability, we will closely monitor our costs relative to actual and anticipated revenues and may make further reductions to selling, general and administrative expenses including but not limited to personnel and related costs and marketing.
In an effort to improve our capitalization and liquidity in 2010, we sought to restructure scheduled debt repayments with our creditors. In addition to the added liquidity from the proceeds of the sale of Rubicon, we eliminated scheduled debt repayments through debt forgiveness of approximately $0.6 million owed to the former sellers of TSS/Vortech. On February 28, 2010, we improved our net worth through the principal conversion of $1.3 million of principal due on a seller note to our COO. Furthermore, the principal repayment of the remaining $2.7 million was amended to begin in the second quarter of 2012.
As a result of the cost reduction efforts to realign operations with decreased anticipated revenues undertaken through 2010, the resulting operating profitability and the prior year financial restructuring of the $4.0 million note to our COO, we believe that our current cash and cash equivalents and expected future cash generated from operations will satisfy our expected working capital, capital expenditure and investment requirements and financing obligations through the next twelve months. If we experience an increase in revenue, we will attempt to maximize a fixed operating structure and attempt to take a measured approach in any increase to selling, general and administrative costs to support that additional revenue. We may elect to secure additional capital in the future, at acceptable terms, to improve our liquidity or fund acquisitions. The amounts involved in any such transaction, individually or in the aggregate, may be material. To the extent that we raise additional capital through the sale of equity securities, the issuance of such securities could result in dilution to our existing stockholders. If we raise additional funds through the issuance of debt securities, the terms of such debt could impose additional restrictions on our operations. Although we believe that our current cash and cash equivalents and expected future cash generated from operations will satisfy our expected working capital, capital expenditure and investment requirements through the next twelve months, failure to obtain additional financing, if necessary, could have a material adverse impact our business, financial condition and earnings.
Off Balance Sheet Arrangements
As of March 31, 2011, we do not have any off balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information called for by this item is not required as we are a smaller reporting company.
Item 4. Controls and Procedures.
Our management performed an evaluation under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of March 31, 2011. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2011, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting for the first quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act of 1934, as amended.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any material litigation in any court, and management is not aware of any contemplated proceeding by any governmental authority against us. From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business. We currently believe that any ultimate liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and, in particular, our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Part I—Item 2 contain or incorporate a number of forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “anticipates,” ”plans,” “expects” and similar expressions that are intended to identify forward-looking statements. You should read such statements carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. There are a number of factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements, many of which are beyond our control, including the factors set forth under “Item 1A. Risk Factors” of our 2010 Annual Report on Form 10-K
Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. In addition, the forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Monthly Period During the Three
Months Ended March 31, 2011
|
Total Shares
Purchased (a)
|
Average
Price Paid
per Share
|
Total Shares
Purchased as Part of
Publically Announced
Plans
|
Approximate Dollar
Amount of Shares Yet
To Be Purchased Under
Plans
|
||||||||||||
January 1, 2011-January 31, 2011
|
6,501 | $ | 1.50 | - | - | |||||||||||
February 1, 2011- February 28, 2011
|
- | - | - | - | ||||||||||||
March 1, 2011-March 31, 2011
|
14,301 | 1.49 | - | - | ||||||||||||
Total
|
20,802 | $ | 1.49 | - | - |
All of these shares were acquired from associates to satisfy tax withholding requirements upon the vesting of restricted stock.
|
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4.(Removed and Reserved).
Item 5. Other Information.
Not applicable.
16
Item 6. Exhibits.
31.1*
|
Certification of Fortress International Group, Inc. Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
Certification of Fortress International Group, Inc. Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1‡
|
Certification of Fortress International Group, Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
*
|
Filed herewith.
|
‡
|
Furnished herewith.
|
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FORTRESS INTERNATIONAL GROUP, INC.
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Date: May 16, 2011
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By:
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/s/ Thomas P. Rosato
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Thomas P. Rosato
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Chief Executive Officer (Authorized Officer
and Principal Executive Officer)
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Date: May16, 2011
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By:
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/s/ Timothy C. Dec
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Timothy C. Dec
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Chief Financial Officer (Authorized Officer
and Principal Financial Officer)
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