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Fortress Global Enterprises reports Q3 2019 results ‘well below’ expectations

Fortress Global Enterprises has reported its 2019 third-quarter results, citing an operating EBITDA loss of $7.2 million compared to operating EBITDA loss of $9.5 million in the previous quarter and operating EBITDA of $7.5 million in the prior year comparative period.

Company management estimates that based on current market prices and its previously announced market downtime, it will not be able to sustain its cash flow through September 30, 2020, meaning the company would have to file for bankruptcy (see “Going concern,” below).

The dissolving pulp segment incurred operating EBITDA loss of $6.4 million. Development costs incurred in the bioproducts segment were $0.3 million, which was offset by $0.1 million of grants and funding. Corporate costs were $0.6 million in the third quarter of 2019.

Outlook

As a result of a lower realized sales price resulting from a softened demand for dissolving pulp, an inventory write-down and significantly reduced sales volumes, 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 October 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 proactively allocated resources to enable it to restart the FSC mill on an expedited basis in order to take advantage of any significant rebound in dissolving pulp pricing. Based on historic 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 was produced in the third quarter of 2019 and the FSC mill sold 16,517 ADMT of dissolving pulp in the same period, compared to 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 September 30, 2019.

Going concern

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 September 30, 2019, the company determined after conducting an impairment analysis that it was not in compliance with one of its financial covenants as at September 30, 2019. Accordingly, $119.9 million was recorded in current liabilities for the period ended September 30, 2019.

However, a waiver from compliance with the applicable covenant through to the period ended December 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 September 30, 2019. Accordingly, $31.7 million was recorded in current debt for the period ended September 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 September 30, 2019, the forecasted cash flows will not be sufficient to meet the company’s obligations, commitments and budgeted expenditures through September 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 September 3, 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 in order to execute on its strategic initiative. To date, the borrowers have drawn down an aggregate of $7 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.

Read the Q3 2019 Fortress Global Enterprises financial report.