An anonymous director reports
FORTRESS GLOBAL ENTERPRISES REPORTS THIRD QUARTER 2019 RESULTS
Fortress Global Enterprises Inc. had third quarter 2019 operating EBITDA (net income before interest, income taxes, depreciation, amortization, non-operating income and expenses, and stock-based compensation) loss of $7.2-million compared with operating EBITDA loss of $9.5-million in the previous quarter and operating EBITDA of $7.5-million in the prior-year comparative period. The dissolving pulp segment incurred operating EBITDA loss of $6.4-million. Development costs incurred in the bioproducts segment were $300,000, which was offset by $100,000 of grants and financing. Corporate costs were $600,000 in the third quarter of 2019.
Third quarter 2019 segment results and outlook
As a result of a lower realized sales price resulting from a softened demand for dissolving pulp, an inventory writedown and significantly reduced sales volumes due to unusually low demand for dissolving pulp, operating results in the third quarter of 2019 were well below management expectations. Despite the significant headwinds in the dissolving pulp market, the Fortress specialty cellulose (FSC) mill realized one of its better operational quarters from a dissolving pulp production and power generation perspective.
As a result of a thorough evaluation of the operating economics at the FSC mill and the prevailing market conditions, the company determined to take market downtime on Oct. 8, 2019. This market curtailment strategy will enable the company to focus its efforts on executing on the previously announced strategic initiative, which includes the consideration of various strategic and financing alternatives potentially available to the company, including a recapitalization, restructuring and/or business combination transaction, as well as planning the optimized restart of the mill when dissolving pulp prices normalize. The company has also pro-actively allocated resources to enable it to restart the FSC mill on an expedited basis to take advantage of any significant rebound in dissolving pulp pricing. Based on historical trends, the company continues to believe in the future pricing recovery and prospects for dissolving pulp as the market adjusts to currently volatile conditions.
A total of 42,074 air dried metric tonnes (ADMT) of dissolving pulp were produced in the third quarter of 2019, and the FSC mill sold 16,517 ADMT of dissolving pulp in the same period, compared with sales of 33,585 ADMT and 38,433 ADMT of dissolving pulp in the previous quarter and prior-year comparative period, respectively.
In accordance with the company's accounting policy, each asset or cash generating unit is evaluated at each reporting date to determine whether there are any indicators of impairment. Management's impairment evaluation resulted in the identification of an impairment loss of $31.7-million and $76.6-million at the FSC mill operations, during the three- and nine-months periods ended Sept. 30, 2019.
The financial statements have been prepared under the historical cost convention, except for certain classes of property, plant and equipment. The financial statements have also been prepared on a going-concern basis, which assumes that the company will be able to realize its assets and discharge its liabilities in the normal course of business.
Subsequent to the quarter ended Sept. 30, 2019, the company determined after conducting an impairment analysis that it was not in compliance with one of its financial covenants as at Sept. 30, 2019. Accordingly, $119.9-million was recorded in current liabilities for the period ended Sept. 30, 2019. However, a waiver from compliance with the applicable covenant through to the period ended Dec. 31, 2019, was subsequently obtained from the lender, which reclassifies the $119.9-million as long-term debt after receipt of the waiver. In addition, approvals for compliance with the terms and conditions from the lender of the $31.7-million secured loan have not been formally finalized in writing as at Sept. 30, 2019. Accordingly, $31.7-million was recorded in current debt for the period ended Sept. 30, 2019.
Cash flows from operations, primarily based on operating results, have historically been the company's primary source of liquidity and capital resources. Management anticipates that, based upon current dissolving pulp market prices, the market downtime being taken by the FSC mill and the working capital as at Sept. 30, 2019, the forecasted cash flows will not be sufficient to meet the company's obligations, commitments and budgeted expenditures through Sept. 30, 2020. As a result, there is significant uncertainty whether the company will continue as a going concern and, therefore, whether it will realize the stated value of its assets and settle its liabilities and commitments in the normal course of business and at the amounts stated in the financial statements. No adjustments have been made to the financial statements relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might be necessary should the consolidated entity not continue as a going concern. These adjustments could be material.
The company has implemented measures to mitigate against the impact of the decline in dissolving pulp prices. On Sept. 4, 2019, the company announced that its subsidiaries entered into had entered into a financing agreement with their secured lenders or their affiliates providing for a senior secured credit facility in the amount of up to $15.0-million. The facility provided the company with supplemental liquidity to initially allow for uninterrupted operations to execute on its strategic initiative. To date, the borrowers have drawn down an aggregate of $7.0-million under the facility.
Management of the company continues its active discussions with its financial partners, including its senior lenders, to secure the long-term financial viability of the company's business. While management is continuing to execute on its strategic initiative, no assurance can be provided that it will be successful or that the amounts realized for its assets will be equal to the amounts reflected in the interim consolidated financial statements. There is also no assurance that the company will not be required, or will not determine, that it is in its best interests to file for any form of creditor protection proceeding imminently or in the near future whether or not in connection with any transaction.
The company's ability to continue future operations and finance its planned activities is dependent on the company's ability to seek out proposals from existing and potential new stakeholders and to execute the strategic initiative.
Corporate and cash
Corporate expenses for the three months ended Sept. 30, 2019, were $600,000, compared with $900,000 in the previous quarter. Cash and restricted cash at Sept. 30, 2019, were $4.1-million compared with $8.8-million at June 30, 2019.
For a summary of significant developments, please refer to management's discussion and analysis for the three- and nine-month period ended Sept. 30, 2019 (available on SEDAR).
Selected financial information
The selected financial information presented herein is qualified in its entirety by, and should be read in conjunction with, the company's unaudited condensed consolidated financial statements as at and for the three- and nine-month period ended Sept. 30, 2019, and the related notes thereto and management's discussion and analysis, which are available on SEDAR.
Reference is made in this news release to operating EBITDA, which the company considers to be an indicative measure of operating performance and a metric to evaluate profitability. Operating EBITDA is not a generally accepted earnings measure and should not be considered as an alternative to net loss or cash flows as determined in accordance with international financial reporting standards. As there is no standardized method of calculating this measure, the company's operating EBITDA may not be directly comparable with similarly titled measures used by other companies.
A conference call to discuss the financial results for the third quarter of 2019 will be held on Nov. 12, 2019, at 6 a.m. PST. To participate in the conference call, please dial one of the following numbers.
Calgary or international: 403-532-5601
Toll-free dial-in number: 1-855-353-9183 from Canada and the United States
Participant passcode: 15086 followed by the number sign
Conference reference No.: 1249767 followed by the number sign
A replay of the conference call will be available for 30 days. To access the replay, listeners may dial 1-855-201-2300 from North America or 403-255-0697 international. The conference reference number is 1248084 followed by the number sign, and the participant passcode to access the replay is 15086 followed by the number sign.
NET (LOSS) TO OPERATING EBITDA (LOSS) RECONCILIATION
(thousands of dollars)
Q3 2019 Q2 2019 Q3 2018
Net (loss) ($51,786) ($61,243) ($4,702)
Foreign exchange loss (gain) 1,837 (1,007) 1,272
Net finance expense 4,447 2,814 5,656
Amortization 6,379 5,536 5,566
Loss (gain) on financial instruments 47 (517) (283)
Stock-based compensation 91 92 240
Impairment of property, plant and equipment 31,739 44,869 -
Non-operating income - - (204)
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Operating EBITDA (loss) (7,246) (9,456) 7,545
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About Fortress Global Enterprises Inc.
Fortress Global Enterprises operates its dissolving pulp business at the FSC mill, located in Canada, which also operates in the renewable energy generation sector through its cogeneration facility.
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