Avalon Holdings Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Avalon operates waste management services and golf, resort and related facilities. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net operating revenue | $18.375 | $14.309 |
| Operating loss | $(1.334) | $(1.166) |
| Loss before income taxes | $(1.768) | $(1.380) |
| Net loss attributable to Avalon common shareholders | $(1.677) | $(1.262) |
| Basic and diluted loss per share | $(0.43) | $(0.32) |
| Cash provided by (used in) operating activities | $0.246 | $(0.402) |
| Capital expenditures paid | $1.098 | $1.284 |
- Revenue grew 28.4%. Waste management services revenue rose to $12.652 million from $9.339 million, primarily from more continuous and event projects. Golf and related revenue increased to $5.723 million from $4.970 million.
- Operating loss widened despite higher sales; operating margin was approximately negative 7.3%, versus negative 8.1%. Net loss attributable to common shareholders increased, and loss per share rose to $0.43 from $0.32.
- Waste management segment pretax income increased to $0.949 million from $0.654 million. Its brokerage and management gross margin declined to approximately 18% from 19%, reflecting lower-margin event work. Golf and related operations’ pretax loss widened to $1.292 million from $0.836 million, driven by employee, food and other product costs.
- Interest expense increased to $0.515 million from $0.278 million; weighted-average borrowing rates were 6.10% and 5.00%, respectively. Depreciation and amortization was $0.940 million versus $0.829 million.
Cash, liquidity and debt
- At March 31, cash and cash equivalents were $1.270 million; restricted cash was $10.438 million, principally loan proceeds set aside for resort and club renovations. Combined cash, cash equivalents and restricted cash were $11.708 million.
- Working capital deficit was approximately $4.3 million, compared with $2.8 million at year-end 2022. Current assets were $18.670 million and current liabilities $23.001 million.
- Term debt was $30.682 million gross, or $30.133 million net of issuance costs; an additional $2.2 million was drawn on the $5.0 million line of credit, leaving approximately $2.8 million available. The line matures July 31, 2024, carried an 8.25% rate at quarter-end, and is subject to a receivables borrowing base above $1.0 million.
- Operating cash flow was positive $0.246 million, but investing outflow of $1.098 million and financing inflow of $0.510 million contributed to a $0.342 million decrease in cash, cash equivalents and restricted cash.
Outlook, risks and notable items
- Management expects 2023 capital expenditures of $3.5 million to $4.5 million, mainly for Grand Resort expansion and renovations, Avalon Field Club renovations, building improvements and equipment. Funding is expected from project-fund cash, the line of credit, operating cash and cash generated from operations.
- Management believes anticipated operating cash will meet operating requirements and scheduled term-loan payments; it may draw on the line of credit if needed. This outlook is subject to the filing’s forward-looking-statement risks.
- Management cited inflation, higher commodity and labor costs, competition for employees, customer credit and collection risk, economic uncertainty and dependence on discretionary resort and golf spending. Event-project revenue can fluctuate, and two waste-segment customers represented 22% of consolidated revenue in Q1 2023.
- The two saltwater injection wells generated no revenue. AWMS #2 remains subject to restrictive restart conditions related to seismic activity; an appeal of the state commission’s decision was pending, and separate litigation was appealed to the Ohio Supreme Court in January 2023. Management did not expect pending legal matters to have a material adverse financial effect, but outcomes are uncertain.
- The term loan bears a fixed 6.00% rate through its seventh anniversary, then resets subject to an 8.50% cap; a final balloon payment is due August 5, 2032. Both the term loan and line of credit have a 1.20 minimum fixed-charge coverage covenant tested annually beginning December 31, 2023. Avalon reported covenant compliance at March 31, 2023.
- After quarter-end, the CFO, Treasurer and Secretary resigned on April 26, 2023; the Corporate Controller was appointed interim CFO and Treasurer. The filing states disclosure controls were effective at a reasonable assurance level, with no material quarterly change in internal controls.
Important facts for investors to verify
- Whether event-driven waste revenue and customer concentration persist, and whether margins recover from lower-margin project work.
- Progress, remaining costs and funding for resort and club renovations, including use and availability of the $10.4 million restricted project fund.
- Working-capital and cash conversion trends, line-of-credit availability and compliance with debt covenants as annual testing begins.
- Developments in the injection-well regulatory and legal proceedings, including whether AWMS #2 can operate profitably under applicable restrictions.
- Effects of cost inflation, staffing and discretionary consumer demand on golf and resort profitability, and the impact of the CFO transition.