Avalon Holdings Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Avalon provides waste-management services and operates golf, country-club and hotel facilities, primarily in the northeastern and midwestern United States. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net operating revenue | $11.0 million | $10.7 million |
| Operating loss | $(976,000) | $(1.279) million |
| Loss before income taxes | $(991,000) | $(1.212) million |
| Net loss attributable to Avalon shareholders | $(908,000) | $(1.040) million |
| Basic and diluted loss per share | $(0.24) | $(0.27) |
| Net cash used in operating activities | $(567,000) | $(1.096) million |
| Capital expenditures paid | $(494,000) | $(1.876) million |
Revenue rose about 3%. Operating loss narrowed by $303,000, while the shareholder net loss narrowed by $132,000. Waste-management revenue declined to $8.3 million from $8.4 million; the segment reported pretax income of $373,000 versus $179,000. Golf and related revenue increased to $2.7 million from $2.3 million, but the segment remained loss-making, with a pretax loss of $516,000 versus $601,000. The company’s consolidated operating margin was approximately negative 8.9%, compared with negative 12.0% a year earlier.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $1.248 million, total assets $61.1 million and total equity $40.8 million.
- Revolving credit borrowings were $8.485 million, with $0.5 million of the $9 million facility available. The facility is secured by business assets, bears interest at prime plus 0.25% (3.75% at quarter-end), and matures March 31, 2017, subject to a conditional 90-day extension option. The company reported compliance with covenants.
- Working capital was a deficit of approximately $8.6 million, versus a $0.6 million surplus at December 31, 2015. The principal driver was classifying the full revolving balance as current; cash also fell from $1.814 million to $1.248 million.
- Operating cash use improved from the prior-year quarter. Financing provided $495,000, including $510,000 of additional line-of-credit borrowings. Cash declined by $566,000 during the quarter.
Drivers, outlook and significant matters
- Golf and related revenue growth reflected Avalon Inn revenue of about $700,000 versus $200,000 a year earlier, including increased room and food-and-beverage sales. The Inn still incurred a pretax loss of about $400,000, twice the prior-year loss, with higher employee costs and depreciation cited.
- Waste brokerage revenue was affected by lower one-time event work, partly offset by growth in continuous work. Brokerage gross margin improved to about 18% from 17%. The company reported no injection-well revenue in Q1 2016 because operations remained suspended.
- Management expected 2016 capital expenditures of $1 million to $2 million, principally for continued Avalon Inn renovation and expansion, building improvements and equipment. It anticipated refinancing the credit facility before maturity but cautioned that refinancing was not assured; alternative financing also could not be guaranteed.
- Both saltwater injection wells had been suspended following a 2014 seismic event. Avalon temporarily suspended AWMS #1 in 2015 in connection with the AWMS #2 matter; AWMS #2 remained suspended. The filing states that, on May 5, 2016, an appellate court reversed the lower court’s judgment in the appeal, but the operating suspension remained in effect and Avalon intended to continue challenging it.
- Management said the wells’ carrying value remained recoverable under its estimates, but warned that if the suspension is determined to be other than temporary and the assets are not recoverable, an impairment charge of up to $4.7 million could result.
- Other disclosed risks include waste-industry consolidation and disposal-price increases, customer retention and credit risk, dependence of the captive landfill business on one customer, increasing injection-well regulation and environmental/seismic risks, golf membership and weather seasonality, and competition. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Refinancing progress, terms and timing for the $8.485 million credit balance, and the company’s ability to address its working-capital deficit.
- Status of the injection-well suspension and appeals, potential restart timing, and any change in impairment assumptions for the well assets.
- Avalon Inn renovation spending, operating performance and path toward profitability.
- Trends in waste brokerage event work, continuous-work margins, customer concentration and golf-club membership.
- Whether cash generation improves sufficiently to fund operations and planned capital expenditures without additional borrowing.