Avalon Holdings Corporation (NYSE American: AWX) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. Avalon operates waste management services and golf, resort and related businesses.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net operating revenue | $14.403 | $14.608 |
| Operating loss | $(0.557) | $(0.518) |
| Loss before income taxes | $(0.786) | $(0.613) |
| Net loss | $(0.830) | $(0.653) |
| Net loss attributable to Avalon common shareholders | $(0.813) | $(0.638) |
| Basic and diluted loss per share | $(0.21) | $(0.16) |
| Net cash used in operating activities | $(0.400) | $(0.129) |
| Capital expenditures paid | $(0.977) | $(0.369) |
- Revenue declined by $0.205 million. Waste management revenue fell to $11.133 million from $11.434 million; golf and related revenue increased to $3.270 million from $3.174 million.
- Waste management segment pretax income was approximately $1.0 million in both periods. Its brokerage and management business reported a 20% gross margin versus 19% in Q1 2019. Golf and related operations’ pretax loss widened to $0.731 million from $0.644 million.
- Operating cash use increased year over year, while investing cash use was $0.977 million. Financing activities used $0.283 million, versus $2.803 million provided in Q1 2019, when Avalon drew $3.0 million under a term loan. Cash, cash equivalents and restricted cash totaled $6.971 million at quarter-end, including $5.523 million of restricted project funds; unrestricted cash was $1.448 million.
- At March 31, 2020, total assets were $77.676 million and equity was $36.135 million. Current assets of $15.162 million were below current liabilities of $18.631 million; management reported a working-capital deficit of approximately $3.5 million.
- Debt included $22.741 million gross term-loan principal ($22.336 million net of issuance costs), including $1.070 million gross current principal. No amounts were drawn on the $5.0 million revolving credit line. Finance and operating lease obligations totaled $2.272 million.
Material changes and management commentary
- Revenue and common-shareholder results weakened versus Q1 2019. Management attributed the waste-segment decline to lower event-project and continuous-work revenue. Higher employee and food costs contributed to a larger golf-segment loss; increased interest expense also weighed on results.
- COVID-19 restrictions began affecting operations in March. Waste services, lodging, outdoor golf and restaurant takeout continued, while in-house dining, fitness, athletics, salon and spa activities were restricted or closed. Avalon reported significant room and event cancellations through Q3, with some tentative re-bookings in Q4 2020 and 2021. Management could not predict when demand or pricing would recover and reduced costs through hiring freezes, headcount reductions and furloughs.
- In Q2 2020, subsidiaries entered into agreements for approximately $2.8 million of Paycheck Protection Program loans. Forgiveness depends on meeting program requirements; amounts not forgiven or used as required are repayable. Management said it expected operating cash and PPP proceeds to support operations and debt service, and could draw on the revolver if needed.
- Management expected 2020 capital expenditures of $2.0–$2.5 million, principally for The Grand Resort renovation and expansion, funded from the restricted project account. Q1 incurred $1.3 million of capital expenditures, of which $1.0 million was paid during the quarter.
- The December 2019 term loan provides $23.0 million of financing, bears a fixed 5.00% rate through its fifth anniversary, and matures December 20, 2029 with a balloon payment. The loan is secured by certain property and business assets; Avalon reported compliance with its covenants at quarter-end. Management anticipated amending the revolver maturity in Q2 2020.
- Avalon’s two saltwater injection wells remain suspended; there was no related operating revenue in either comparative quarter. Litigation and regulatory proceedings continued, with court decisions pending as described in the filing. Management said it would continue pursuing restart options.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect, while noting outcomes cannot be predicted. Other identified risks include COVID-19 uncertainty, customer credit and retention, disposal pricing and regulation, seasonal weather, golf membership levels, and debt-covenant and refinancing risks.
Important facts for investors to verify
- Whether COVID-related restrictions, cancellations and reduced consumer demand materially affect subsequent revenue, cash flow and the ability to restore operations.
- The timing and terms of PPP loan forgiveness, and whether any remaining balances must be repaid.
- Cash availability and use restrictions on the $5.523 million project fund, alongside the working-capital deficit and ongoing debt service needs.
- Progress and cost of resort renovation and expansion, actual capital spending against the $2.0–$2.5 million outlook, and the status of the revolver maturity extension.
- Developments in the injection-well proceedings and any potential financial consequences; the wells have remained suspended for years and generate no revenue.
- Future golf membership retention and renewals, and waste-segment customer volumes, event work and collections.