Fortress International Group: virtue is sometimes rewarded

by PlanMaestro

Our decision to convert a sizeable portion of our note will not only reduce debt, improve cash flow and enhance the balance sheet of the company, but it should also serve as a demonstration of the complete confidence we have in our business model and ability to move from a period of slow backlog turnover to profitable quarters. Along with significant pay cuts taken by Gallagher and myself, the pay reduction of board members and additional overhead reduction measures, these actions will assist the company in recovering its EBITDA losses experienced in the past six quarters – CEO Tom Rosato

We commented in a previous FIGI write-up the possibility of substantial pent-up demand. Well, the company announced last week the closing of several large and small projects for $27 million during the first quarter. This event reinforces the announcement in October of $39.4 million in new contracts  showing a nice demand  recovery the last two quarters.

Another positive element has been management’s response to the ordeal: proactive and sharing the burden. Management has not been tempted to dilute the upside with unnecessary capital injections and has been very much aligned with the interest of shareholders.

  • Implemented a 10% salary reduction for substantially all of the Company’s employees.
  • CEO Thomas Rosato, President and COO Gerard Gallagher and CFO Timothy Dec agreed to further reduce their annual base salary to $150,000 last year. In compensation, they were awarded equity grants of an aggregate of 102,564, 102,564 and 48,410 restricted stock awards respectively.
  • Members of the board of directors took reductions in their annual compensation totaling $750,000, none of which was replaced in stock compensation.
  • In 2008, CEO Tom Rosato and President Jerry Gallagher converted $3,500,000 of seller’s notes to equity at the original $7.50 share price. This action eliminated the balance of the Rosato note in full on the balance sheet. Gallagher agreed to defer interest and principal payments on the balance of his note until the first quarter of 2010. These actions reduced $225k in 2008 and $2.3mm in 2009 in cash payments.
  • The balance of the Gallagher note was further renegotiated recently and 30% partially converted to equity at a price of $2 that was substantially higher than the stock price at the time of conversion
  • Simplified its contingencies by selling Rubicon to its management for $1,000,000 in cash, $235,714 in an outstanding promissory note, a release of the $104,711 Rubicon’s obligation for payment of certain bonus payments, a $534,574 promissory note, additional contingent earn-outs upon performance, and releasing FIGI from any obligations relating to earn-out payments from the original Rubicon acquisition
  • Reduced the size of the board from nine to six members responding to concerns on more cost reductions
  • Voluntarily delisted from Nasdaq to further reduce expenses
  • Recovered $1 million on previously written off bad debt

These measures had the healthy effect of stopping cash burn and give FIGI time to capture future demand. They are also a sign of management confidence on its company’s viability and prospects.

Why it was so cheap, what was the Variant Perception? I think the main reason is obvious: this is an ultra tinny micro cap so it is not like everyone was watching. Barry Kitt, a large shareholder, also dumped all of his shares into a weak stock market and FIGI is a thinly traded stock. Lucky for us he has finished selling and the story is much different now with orders coming in and the downside very well protected with the new lean and mean cost structure.

For more information in the industry, there are several write ups on major datacenter players at the Value Investors Club.