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AWX Avalon

Filed: 12 Nov 20, 5:05pm
 

 

2020



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

__________________________________

 

FORM 10-Q

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2020

 

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from _______________ to ________________

 

Commission file number 1-14105

__________________________________

 

AVALON HOLDINGS CORPORATION

 (Exact name of registrant as specified in its charter)

 

  Ohio

 

 34-1863889

 (State or other jurisdiction

 of incorporation or organization)

 

 (I.R.S. Employer

Identification No.)

 

 

 

 One American Way, Warren, Ohio

 

 44484-5555

 (Address of principal executive offices)

 

 (Zip Code)

 

Registrant’s telephone number, including area code: (330) 856-8800

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value

AWX

NYSE American

 

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐     Accelerated filer ☐     Non-accelerated filer ☐     Smaller reporting company ☑    Emerging Growth Company ☐    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐    No ☑

 

The registrant had 3,263,647 shares of its Class A Common Stock and 611,784 shares of its Class B Common Stock outstanding as of November 6, 2020.



 

 

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

Page

PART I. FINANCIAL INFORMATION  

 

 

 

Item 1.    Financial Statements  

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2020 and 2019 (Unaudited) 

1

 

 

Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019 (Unaudited)

2

  

Condensed Consolidated Statements of Shareholders’ Equity for the Three months Ended September 30, 2020 and 2019 (Unaudited)

  3

  

Condensed Consolidated Statements of Shareholders’ Equity for the Nine months ended September 30, 2020 and 2019 (Unaudited)

      4

 

 

Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2020 and 2019 (Unaudited)

           5

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

41

 

 

Item 4.    Controls and Procedures

42

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.    Legal Proceedings

  43

 

 

Item 2.    Changes in Securities and Use of Proceeds

43

 

 

Item 3.    Defaults upon Senior Securities

43

 

 

Item 4.    Mine Safety Disclosures

43

 

 

Item 5.    Other Information

43

 

 

Item 6.    Exhibits and Reports on Form 8-K

43

 

 

SIGNATURE

44

 

 

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net operating revenues:

                

Waste management services

 $9,326  $11,572  $29,547  $35,908 

Food, beverage and merchandise sales

  2,851   2,587   5,247   6,027 

Other golf and related operations

  4,448   3,859   9,301   9,116 

Total golf and related operations

  7,299   6,446   14,548   15,143 

Total net operating revenues

  16,625   18,018   44,095   51,051 
                 

Costs and expenses:

                

Waste management services operating costs

  7,393   9,229   23,473   28,773 

Cost of food, beverage and merchandise

  1,092   1,169   2,184   2,683 

Golf and related operations operating costs

  4,270   4,266   9,777   10,361 

Depreciation and amortization expense

  741   630   2,152   1,848 

Selling, general and administrative expenses

  2,110   2,379   6,269   6,990 

Operating income

  1,019   345   240   396 
                 

Other income (expense):

                

Interest expense

  (302)  (222)  (913)  (600)

Other income, net

  83   41   264   257 

Income (loss) before income taxes

  800   164   (409)  53 
                 

Provision for income taxes

  27   38   95   135 

Net income (loss)

  773   126   (504)  (82)
                 

Less net loss attributable to non-controlling interest in subsidiary

  (8)  (18)  (37)  (67)

Net income (loss) attributable to Avalon Holdings Corporation common shareholders

 $781  $144  $(467) $(15)
                 
Income (loss) per share attributable to Avalon Holdings Corporation common shareholders:                

Basic net income (loss) per share

 $0.20  $0.04  $(0.12) $(0.00)

Diluted net income (loss) per share

 $0.20  $0.04  $(0.12) $(0.00)
                 

Weighted average shares outstanding - basic

  3,875   3,875   3,875   3,875 

Weighted average shares outstanding - diluted

  3,875   3,893   3,875   3,875 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except per share amounts)

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $4,667  $1,446 

Accounts receivable, less allowance for doubtful accounts of $276 at September 30, 2020 and $275 at December 31, 2019

  8,679   12,009 

Unbilled membership dues receivable

  866   602 

Inventories

  1,034   813 

Prepaid expenses

  810   725 

Other current assets

  15   15 

Total current assets

  16,071   15,610 
         

Property and equipment, net

  50,473   48,978 

Property and equipment under finance leases, net

  5,913   5,878 

Operating lease right-of-use assets

  1,280   1,466 

Restricted cash

  4,246   7,185 

Noncurrent deferred tax asset

  8   8 

Other assets, net

  36   39 

Total assets

 $78,027  $79,164 
         

Liabilities and Equity

        

Current liabilities:

        

Current portion of long-term debt

 $2,622  $1,015 

Current portion of obligations under finance leases

  343   295 

Current portion of obligations under operating leases

  533   513 

Accounts payable

  8,094   11,719 

Accrued payroll and other compensation

  956   961 

Accrued income taxes

  46   93 

Other accrued taxes

  362   434 

Deferred membership dues revenue

  4,041   3,153 

Other liabilities and accrued expenses

  1,125   839 

Total current liabilities

  18,122   19,022 
         

Long-term debt, net of current portion

  21,972   21,570 

Obligations under finance leases, net of current portion

  622   555 

Obligations under operating leases, net of current portion

  747   953 

Asset retirement obligation

  100   100 
         

Equity:

        

Avalon Holdings Corporation Shareholders' Equity:

        

Class A Common Stock, $.01 par value

  33   33 

Class B Common Stock, $.01 par value

  6   6 

Paid-in capital

  59,151   59,147 

Accumulated deficit

  (22,623)  (22,156)

Total Avalon Holdings Corporation Shareholders' Equity

  36,567   37,030 

Non-controlling interest in subsidiary

  (103)  (66)

Total equity

  36,464   36,964 

Total liabilities and equity

 $78,027  $79,164 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(in thousands, except for share data)

 

  

For the Three Months Ended September 30, 2020

 
                          


Total

         
  

Common Stock

          

Avalon

  

Non-controlling

     
  

Shares

  

Amount

  

Paid-in

  

Accumulated

  

Shareholders'

  

Interest in

     
  

Class A

  

Class B

  

Class A

  

Class B

  

Capital

  

Deficit

  

Equity

  

Subsidiary

  

Total

 
                                     

Balance at July 1, 2020

  3,263,647   611,784  $33  $6  $59,150  $(23,404) $35,785  $(95) $35,690 
                                     

Stock options - compensation costs

  -   -   -   -   1   -   1   -   1 
                                     

Net income (loss)

  -   -   -   -   -   781   781   (8)  773 
                                     

Balance at September 30, 2020

  3,263,647   611,784  $33  $6  $59,151  $(22,623) $36,567  $(103) $36,464 

 

  

For the Three Months Ended September 30, 2019

 
                          


Total

         
  

Common Stock

          

Avalon

  

Non-controlling

     
  

Shares

  

Amount

  

Paid-in

  

Accumulated

  

Shareholders'

  

Interest in

     
  

Class A

  

Class B

  

Class A

  

Class B

  

Capital

  

Deficit

  

Equity

  

Subsidiary

  

Total

 
                                     

Balance at July 1, 2019

  3,263,647   611,784  $33  $6  $59,144  $(21,860) $37,323  $(35) $37,288 
                                     

Stock options - compensation costs

  -   -   -   -   1   -   1   -   1 
                                     

Net income (loss)

  -   -   -   -   -   144   144   (18)  126 
                                     

Balance at September 30, 2019

  3,263,647   611,784  $33  $6  $59,145  $(21,716) $37,468  $(53) $37,415 

 

 See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(in thousands, except for share data)

 

  

For the Nine Months Ended September 30, 2020

 
                          

 

Total

         
  

Common Stock

          

Avalon

  

Non-controlling

     
  

Shares

  

Amount

  

Paid-in

  

Accumulated

  

Shareholders'

  

Interest in

     
  

Class A

  

Class B

  

Class A

  

Class B

  

Capital

  

Deficit

  

Equity

  

Subsidiary

  

Total

 
                                     

Balance at January 1, 2020

  3,263,647   611,784  $33  $6  $59,147  $(22,156) $37,030  $(66) $36,964 
                                     

Stock options - compensation costs

  -   -   -   -   4   -   4   -   4 
                                     

Net loss

  -   -   -   -   -   (467)  (467)  (37)  (504)
                                     

Balance at September 30, 2020

  3,263,647   611,784  $33  $6  $59,151  $(22,623) $36,567  $(103) $36,464 

 

  

For the Nine Months Ended September 30, 2019

 
                          


Total

         
  

Common Stock

          

Avalon

  

Non-controlling

     
  

Shares

  

Amount

  

Paid-in

  

Accumulated

  

Shareholders'

  

Interest in

     
  

Class A

  

Class B

  

Class A

  

Class B

  

Capital

  

Deficit

  

Equity

  

Subsidiary

  

Total

 
                                     

Balance at January 1, 2019

  3,263,647   611,784  $33  $6  $59,141  $(21,701) $37,479  $14  $37,493 
                                     

Stock options - compensation costs

  -   -   -   -   4   -   4   -   4 
                                     

Net loss

  -   -   -   -   -   (15)  (15)  (67)  (82)
                                     

Balance at September 30, 2019

  3,263,647   611,784  $33  $6  $59,145  $(21,716) $37,468  $(53) $37,415 

 

 See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands) 

 

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 
         

Cash flows from operating activities:

        

Net loss

 $(504) $(82)

Reconciliation of net loss to cash provided by operating activities:

        

Depreciation and amortization expense

  2,152   1,848 

Amortization of debt issuance costs

  31   25 

Compensation costs - stock options

  4   4 

Provision for losses on accounts receivable

  23   27 

(Gain) loss from disposal of equipment

  3   (45)

Change in operating assets and liabilities, net of effect of acquisition

        

Accounts receivable

  3,307   1,175 

Unbilled membership dues receivable

  (264)  (299)

Inventories

  (221)  (33)

Prepaid expenses

  (85)  (124)

Other assets

  3   (6)

Accounts payable

  (3,712)  (667)

Accrued payroll and other compensation

  (5)  152 

Accrued income taxes

  (47)  22 

Other accrued taxes

  (72)  (47)

Deferred membership dues revenue

  888   955 

Other liabilities and accrued expenses

  286   194 

Net cash provided by operating activities

  1,787   3,099 
         

Cash flows from investing activities:

        

Capital expenditures

  (3,207)  (5,689)

Payments related to acquisition of New Castle Country Club

  -   (90)

Proceeds from disposal of vehicle

  -   45 

Net cash used in investing activities

  (3,207)  (5,734)
         

Cash flows from financing activities:

        

Proceeds under term loan facility

  -   3,000 

Proceeds under Paycheck Protection Program

  2,765   - 

Payments of debt issuance costs

  -   (47)

Principal payments on term loan facilities

  (787)  (533)

Borrowings under line of credit facility

  -   575 

Repayment under line of credit facility

  -   (134)

Principal payments on finance lease obligations

  (276)  (192)

Net cash provided by financing activities

  1,702   2,669 
         

Increase in cash, cash equivalents and restricted cash

  282   34 

Cash, cash equivalents and restricted cash at beginning of period

  8,631   1,908 

Cash, cash equivalents and restricted cash at end of period

 $8,913  $1,942 
         

Supplemental disclosure of cash flow information:

        
         

Significant non-cash operating and investing activities:

        

Capital expenditures included in accounts payable

 $87  $743 

Significant non-cash investing and financing activities:

        

Operating lease right-of-use assets in exchange for lease obligations

 $266  $1,807 

Finance lease obligations incurred

 $391  $33 

Acquisition of New Castle Country Club real property in exchange for assumption of outstanding debt

 $-  $787 
         

Cash paid during the period for interest

 $873  $556 

Cash paid during the period for income taxes

 $142  $113 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

5

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020 

 

 

Note 1. Description of Business

 

Avalon Holdings Corporation (“Avalon” or the “Company”) was formed on April 30, 1998 as a subsidiary of American Waste Services, Inc. (“AWS”). On June 17, 1998, AWS distributed, as a special dividend, all of the outstanding shares of capital stock of Avalon to the holders of AWS common stock on a pro rata and corresponding basis.

 

Avalon provides waste management services to industrial, commercial, municipal and governmental customers in selected northeastern and midwestern U.S. markets, captive landfill management services and salt water injection well operations. In addition, Avalon owns Avalon Resorts and Clubs, Inc. (“ARCI”), which includes the operation and management of four golf courses and associated clubhouses, athletic and fitness centers, tennis courts, salon and spa services, dining and banquet facilities and a travel agency. ARCI also owns and operates a hotel and its related resort amenities including dining, banquet and conference facilities, fitness center, outdoor resort pool, Roman Bath, indoor junior Olympic size swimming pool and tennis courts.

 

 

Note 2. Basis of Presentation

 

The unaudited condensed consolidated financial statements of Avalon and related notes included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted consistent with such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in Avalon’s 2019 Annual Report to Shareholders.

 

The unaudited condensed consolidated financial statements include the accounts of Avalon, its wholly owned subsidiaries and those companies in which Avalon has managerial control. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of Avalon as of September 30, 2020, and the results of its operations and cash flows for the interim periods presented.

 

The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

The coronavirus/COVID-19 pandemic (collectively referred to herein as "COVID-19") has adversely impacted our financial position, results of operations, and cash flows for the first nine months of 2020. The unaudited Condensed Consolidated Financial Statements presented herein reflect our current estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods presented. Due to the ongoing uncertainty, we cannot predict the future impact that COVID-19 may have on our financial condition, results of operations or cash flows.

 

 

Note 3. Recent Accounting Pronouncements

 

Adopted Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement as either rental expense for operating leases and depreciation and interest expense for finance leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. On January 1, 2019, the Company adopted ASU 2016-02 under the modified retrospective method with the available practical expedients. As a result of adoption, on January 1, 2019, the Company recorded a ROU asset and related lease liability of approximately $1.7 million for its existing golf carts, machinery and equipment for the landfill operations, furniture and fixtures for The Grand Resort and office copiers under operating leases (See Note 7).

 

6

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduced an approach to estimate credit losses on certain types of financial instruments, including trade receivables, based on expected losses. ASU 2016-13, which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, required companies to make a cumulative-effect adjustment to retained earnings as of January 1, 2020. The Company adopted ASU 2016-13 effective January 1, 2020. The adoption of ASU 2016-13 did not have an impact on the Company’s financial position or results of operations (See Note 5).

 

 

Note 4. Cash, Cash Equivalents and Restricted Cash

 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents for purposes of the Condensed Consolidated Balance Sheets. Avalon maintains its cash balances in various financial institutions. These balances may, at times, exceed federal insured limits. Avalon has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk relating to its cash and cash equivalents.

 

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in restricted cash on the Condensed Consolidated Balance Sheets. Restricted cash consists of loan proceeds deposited into a project fund account to fund costs associated with the renovation and expansion of The Grand Resort and Avalon Field Club at New Castle in accordance with the provisions of the loan and security agreement (See Note 9).

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows. Cash, cash equivalents and restricted cash consist of the following at September 30, 2020 and December 31, 2019 (in thousands):

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Cash and cash equivalents

 $4,667  $1,446 

Restricted cash

  4,246   7,185 

Cash, cash equivalents and restricted cash

 $8,913  $8,631 

 

 

Note 5. Revenues

 

Revenue Recognition

 

The Company identifies a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when obligations under the terms of the contract with our customer are satisfied; generally this occurs with the transfer of control of the good or service to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The Company does not incur incremental costs to obtain contracts or costs to fulfill contracts that meet the criteria for capitalization. In addition, the Company does not have material significant payment terms as payment is received at or shortly after the point of sale.

 

Waste Management Services

 

Avalon’s waste management services provide hazardous and nonhazardous waste brokerage and management services, captive landfill management services and salt water injection well operations. Waste management services are provided to industrial, commercial, municipal and governmental customers primarily in selected northeastern and midwestern United States markets.

 

Avalon’s waste brokerage and management business assists customers with managing and disposing of wastes at approved treatment and disposal sites based upon a customer’s needs. Avalon provides a service to its customers whereby Avalon, arranges for, and accepts responsibility for the removal, transportation and disposal of waste on behalf of the customer.

 

7

 

Avalon’s landfill management business provides technical and operational services to customers owning captive disposal facilities. A captive disposal facility only disposes of waste generated by the owner of such facility. The Company provides turnkey services, including daily operations, facilities management and management reporting for its customers. Currently, Avalon manages one captive disposal facility located in Ohio. The net operating revenues of the captive landfill operations are almost entirely dependent upon the volume of waste generated by the owner of the landfill for whom Avalon manages the facility.

 

Avalon is a minority owner with managerial control over two salt water injection wells and its associated facility. Operations of the salt water injection wells have been suspended in accordance with the Chief of the Division of Oil and Gas Resources Management order (See Note 15). Due to the suspension of the salt water injection wells, there were no operating revenues for the three and nine months ended September 30, 2020 and 2019.

 

For the three months ended September 30, 2020 and 2019, the net operating revenues related to waste management services represented approximately 56% and 64%, respectively, of Avalon’s total consolidated net operating revenues. For the nine months ended September 30, 2020 and 2019, the net operating revenues related to waste management services represented approximately 67% and 70%, respectively, of Avalon’s total consolidated net operating revenues. For both the nine months ended September 30, 2020 and 2019, no one customer individually accounted for 10% or more of Avalon’s waste management services segment revenues.

 

For our waste management services contracts, the customer contracts with us to provide a series of distinct waste management services over time which integrates a set of tasks (i.e. removal, transportation and disposal of waste) into a single project. Avalon provides substantially the same service over time and the same method is used to measure the Company’s progress toward complete satisfaction of the performance obligation to transfer each distinct service in the series to the customer. The series of distinct waste management services, which are the same over time, meets the series provision criteria, and as such, the Company treats that series as a single performance obligation. The Company allocates the transaction price to the single performance obligation and recognizes revenue by applying a single measure of progress to that performance obligation. Avalon transfers control of the service over time and, therefore, satisfies the performance obligation and recognizes the revenue over time as the customer simultaneously receives and consumes the benefits provided by Avalon’s performance as we perform.

 

In addition, as the promise to provide services qualifies as a series accounted for as a single performance obligation, the Company applied the practical expedient guidance that allows an entity that is recognizing revenue over time by using an output method to recognize revenue equal to the amount that the entity has the right to invoice if the invoiced amount corresponds directly to the value transferred to the customer. The Company applied the standard's practical expedient that permits the omission of disclosures relating to unsatisfied performance obligations as most of the Company’s waste management service contracts (i) have an original expected length of one year or less and (ii) the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.

 

Avalon evaluated whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). Avalon reports waste management services on a gross basis, that is, amounts billed to our customers are recorded as revenues, and amounts paid to vendors for providing those services are recorded as operating costs. As principal, Avalon is primarily responsible for fulfilling the promise to provide waste management services for the customer. Avalon accepts credit risk in the event of nonpayment by the customer and is obligated to pay vendors who provide the service regardless of whether the customer pays the Company. Avalon does have a level of discretion in establishing the pricing for its service.

 

Our payment terms vary by the type and location of our customer and the service offered. Avalon does not have any financing arrangements with its customers. The term between invoicing and when payment is due is not significant.

 

The Company assesses each contract amendment individually. Typically, amendments made to our contracts do not materially change the terms of the agreement or performance obligation of the Company. The Company accounts for such contract amendments as if it were part of the existing contract as the material terms contained in the contract do not change. In cases where Avalon views there is a material change in the terms of the agreement, the Company will reevaluate and determine if the contract should be viewed as an entirely new contract, replacement contract or a continuation of the existing contract.

 

Consideration promised in our waste management contracts do not typically include material variable amounts such as discounts, rebates, refunds, credits, price concessions, incentives, penalties or other such items, and, as such, no estimate is made by the Company for such items.

 

8

 

Golf and Related Operations

 

Avalon’s golf and related operations include the operation and management of four golf courses and associated clubhouses, recreation and fitness centers, tennis courts, salon and spa services, dining and banquet facilities and a travel agency. The golf and related operations also include the operation of a hotel and its related amenities including dining, banquet and conference facilities, fitness center, indoor junior Olympic size swimming pool and tennis courts. Revenues for the golf and related operations consists primarily of food beverage and merchandise sales, membership dues, greens fees and associated cart rentals, room rentals, fitness activities, salon and spa services. Due to adverse weather conditions, net operating revenues relating to the golf courses, which are located in northeast Ohio and Pennsylvania, were minimal during the first three months of 2020 and 2019.

 

For the three months ended September 30, 2020 and 2019, the net operating revenues related to the golf and related operations represented approximately 44% and 36%, respectively, of Avalon’s total consolidated net operating revenues. For the nine months ended September 30, 2020 and 2019, the net operating revenues related to the golf and related operations represented approximately 33% and 30%, respectively, of Avalon’s total consolidated net operating revenues. For both the nine months ended September 30, 2020 and 2019, no one customer individually accounted for 10% or more of Avalon’s golf and related operations segment revenues.

 

For Avalon’s golf and related operations, the Avalon Golf and Country Club offers membership packages for use of the country club facilities and its related amenities. Membership agreements are a one year noncancellable commitment and pricing varies based on the membership type selected by the customer. Based on the terms and conditions of the membership contract, resignations received within the membership period do not relieve the member of their annual commitment. Memberships automatically renew on the member’s anniversary date unless the member resigns for the upcoming membership period prior to the renewal date.

 

Membership for the Avalon Golf and Country Club does not contain up-front initiation fees or require monthly minimum spending at the facilities. Annual membership dues do not cover the cost of food, beverage or any other ancillary paid services which are made available to the member nor do they typically provide for discounts on these goods or services. Members have no obligation to purchase or utilize any of these additional goods or services. Avalon is not required to provide such goods or services unless requested and paid for at the point of sale by the member.

 

Under the terms of the contract, Avalon will provide unlimited use and access to the country club facilities. Avalon’s performance obligation in the contract is the “stand ready obligation” to provide access to these facilities for the member for the entire membership term. Avalon providing the “stand ready obligation” for use of the facilities to the member over the entire term of the membership agreement represents a single performance obligation of which Avalon expects the member to receive and consume the benefits of its obligation throughout the membership term, and as such, the Company recognizes membership dues on a straight line basis over the term of the contract. The Company applied the standard's practical expedient that permits the omission of disclosures relating to unsatisfied performance obligations for contracts with an original expected length of one year or less as Avalon Golf and Country Club membership agreements are one year in length.

 

For our hotel operations, Avalon’s performance obligation is to provide lodging facilities. The separate components of providing these services (hotel room, toiletry items, housekeeping, and amenities) are not distinct within the context of the contract as they are all highly dependent and interrelated as part of the obligation to provide the lodging facility. Room sales are driven by a fixed fee charged to a hotel guest to stay at The Grand Resort for an agreed upon period. The Company agrees to provide a room to the hotel guest for a specified time period for that agreed-upon rate. Our hotel room reservations are performance obligations satisfied over time as the hotel guest simultaneously receives and consumes the benefits provided by the hotel. For performance obligations satisfied over time, our hotel operations measure the progress toward complete satisfaction of the performance obligation and recognize revenue proportionately over the course of the customer’s stay.

 

For food, beverage, and merchandise sales, greens fees and associated cart rental, fitness activities, salon and spa services and other ancillary services, the transaction price is the set price charged by the Company for those goods or services. Upon purchase of the good or service, the Company transfers control of the good or service to the customer and the customer immediately consumes the benefits of the Company’s performance and, as such, we recognize revenue at the point of sale. Amounts paid in advance, such as deposits on overnight lodging or for banquet or conferences facilities, are recorded as a liability until the goods or services are provided to the customer (see Contract Liabilities below).

 

9

 

The following table presents our net operating revenues disaggregated by revenue source for the three and nine months ended September 30, 2020 and 2019 (in thousands). Sales and other taxes are excluded from revenues.

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Waste management and brokerage services

 $8,792  $10,867  $27,818  $33,853 

Captive landfill management operations

  534   705   1,729   2,055 

Total waste management services revenues

  9,326   11,572   29,547   35,908 

Food, beverage and merchandise sales

  2,851   2,587   5,247   6,027 

Membership dues revenue

  1,522   1,474   4,540   4,220 

Room rental revenue

  1,132   814   1,725   1,808 

Greens fees and cart rental revenue

  1,332   1,098   1,998   1,755 

Other revenue

  462   473   1,038   1,333 

Total golf and related operations revenue

  7,299   6,446   14,548   15,143 

Total net operating revenues

 $16,625  $18,018  $44,095  $51,051 

 

Avalon does not have operations located outside the United States and, accordingly, geographical revenue information is not presented.

 

Receivables, Net

 

Receivables, net, include amounts billed and currently due from customers. The amounts due are stated at their net realizable value. At September 30, 2020 and December 31, 2019, accounts receivable, net, related to our waste management services segment were approximately $7.4 million and $11.0 million, respectively. At September 30, 2020, one customer of the waste management services segment accounted for 12% of Avalon’s waste management services segment’s receivables and 10% of the consolidated receivables. At December 31, 2019 one customer accounted for approximately 14% of the waste management services segment’s receivables and 13% of the consolidated receivables. Accounts receivable, net, related to our golf and related operations segment were approximately $1.3 million at September 30, 2020 and $1.0 million at December 31, 2019. No one customer of the golf and related operations segment accounted for 10% or more of Avalon’s golf and related operations segment or consolidated net receivables at September 30, 2020 or December 31, 2019.

 

The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. Customer accounts that are outstanding longer than the contractual payment terms are considered past due. Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, Avalon’s previous accounts receivable loss history, the customer’s current ability to pay its obligation to Avalon and the condition of the general economy and the industry as a whole. Avalon writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances. Allowance for doubtful accounts was approximately $0.3 million at both September 30, 2020 and December 31, 2019.

 

On January 1, 2020, the Company adopted the guidance under ASU 2016-13. ASU 2016-13 introduced a methodology for measuring estimated credit losses on certain types of financial instruments, including trade receivables, based on expected losses and the timing of when such losses are recorded. The adoption, which was applied on a modified retrospective basis, did not have an impact on the Company's financial condition and results of operations and therefore did not result in an adjustment to retained earnings as of January 1, 2020.

 

10

 

The following table presents changes in our allowance for doubtful accounts during the three and nine months ended September 30, 2020 and 2019 (in thousands):

 

      

Provision

  

Write-offs

     
  

Balance at

  

for Doubtful

  

less

  

Balance at

 
  

Beginning of Period

  

Accounts

  

Recoveries

  

End of Period

 

Allowance for doubtful accounts

                

Three months ended September 30, 2020

 $271  $9  $(4) $276 

Three months ended September 30, 2019

 $267  $9  $(3) $273 
                 

Nine months ended September 30, 2020

 $275  $23  $(22) $276 

Nine months ended September 30, 2019

 $255  $27  $(9) $273 

 

Contract Assets

 

Contract assets include unbilled membership dues receivables related to the Avalon Golf and Country Club for the customers membership commitment which are billed on a monthly basis over the course of the annual agreement. Such amounts are stated at their net realizable value. Contract assets related to unbilled membership dues are classified as current as revenue related to such agreements is recognized within the annual membership period. Unbilled membership receivables in our Condensed Consolidated Balance Sheets were approximately $0.9 million at September 30, 2020 and $0.6 million at December 31, 2019.

 

The following table presents changes in our contract assets during the three and nine months ended September 30, 2020 and 2019 (in thousands):

 

      

Unbilled

         
  

Balance at

  

Membership

      

Balance at

 
  

Beginning of Period

  

Dues

  

Billings

  

End of Period

 

Contract Assets:

                

Unbilled membership dues receivable

                

Three months ended September 30, 2020

 $1,109  $305  $(548) $866 

Three months ended September 30, 2019

 $1,101  $284  $(532) $853 
                 

Nine months ended September 30, 2020

 $602  $1,950  $(1,686) $866 

Nine months ended September 30, 2019

 $554  $1,813  $(1,514) $853 

 

Contract Liabilities

 

Contract liabilities include unrecognized or deferred revenues relating to membership dues and customer advance deposits. We record deferred revenue when cash payments are received in advance of satisfying our performance obligation. We classify deferred membership dues revenue as current based on the timing of when we expect to recognize revenue for the membership commitment based on the Company satisfying the stand ready performance obligation throughout the annual membership period. The unrecognized or deferred revenues related to membership dues in our Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019 were $4.0 million and $3.2 million, respectively. Customer advance deposits are recorded as a liability until the goods or services are provided to the customer. Generally, customer advances, and corresponding performance obligation are satisfied within 12 months of the date of receipt of advance payment. The unrecognized revenues related to customer advance deposits are recorded in “Other liabilities and accrued expenses” in our Condensed Consolidated Balance Sheets. Customer advance deposits were approximately $0.6 million at both September 30, 2020 and December 31, 2019.

 

11

 

The following table presents changes in our contract liabilities during the three and nine months ended September 30, 2020 and 2019 (in thousands):

 

  

Balance at

      

Revenue

  

Balance at

 
  

Beginning of Period

  

Billings

  

Recognized

  

End of Period

 

Contract Liabilities:

                

Deferred membership dues revenue

                

Three months ended September 30, 2020

 $4,776  $787  $(1,522) $4,041 

Three months ended September 30, 2019

 $4,497  $831  $(1,474) $3,854 
                 

Nine months ended September 30, 2020

 $3,153  $5,428  $(4,540) $4,041 

Nine months ended September 30, 2019

 $2,899  $5,175  $(4,220) $3,854 
                 

Customer advance deposits

                

Three months ended September 30, 2020

 $652  $261  $(301) $612 

Three months ended September 30, 2019

 $556  $438  $(487) $507 
                 

Nine months ended September 30, 2020

 $553  $656  $(597) $612 

Nine months ended September 30, 2019

 $453  $1,100  $(1,046) $507 

 

 

Note 6. Property and Equipment

 

Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the asset which varies from 10 to 30 years for land improvements; 5 to 50 years in the case of buildings and improvements; and from 3 to 10 years for machinery and equipment, vehicles and office furniture and equipment.

 

Major additions and improvements are charged to the property and equipment accounts while replacements, maintenance and repairs, which do not improve or extend the life of the respective asset, are expensed as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation is eliminated from the accounts in the year of disposal. Gains or losses resulting from disposals of property and equipment are credited or charged to operations. Interest costs are capitalized on significant construction projects.

 

Property and equipment at September 30, 2020 and December 31, 2019 consists of the following (in thousands):

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Land and land improvements

 $15,146  $14,823 

Buildings and improvements

  46,937   44,596 

Machinery and equipment

  5,287   5,005 

Office furniture and fixtures

  7,926   7,234 

Vehicles

  499   499 

Construction in progress

  169   581 
   75,964   72,738 

Less accumulated depreciation and amortization

  (25,491)  (23,760)

Property and equipment, net

 $50,473  $48,978 

 

At September 30, 2020, the Company did not have any significant fixed contractual commitments for construction projects.

 

Avalon reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If indicators of impairment exist, Avalon would determine whether the estimated undiscounted sum of the future cash flows of such assets and their eventual disposition is less than its carrying amount. If less, an impairment loss would be recognized if, and to the extent that the carrying amount of such assets exceeds their respective fair value. Avalon would determine the fair value by using quoted market prices, if available, for such assets; or if quoted market prices are not available, Avalon would discount the expected estimated future cash flows. During the first nine months of 2020 and 2019, no triggering events were present.

 

12

 

 

Note 7. Leases

 

Operating Leases

 

Avalon leases golf carts, machinery and equipment for the landfill operations, furniture and fixtures for The Grand Resort and office copiers under operating leases. On January 1, 2019, as a result of the adopted ASU 2016-02, the Company recorded a ROU asset and related lease liability of approximately $1.7 million. Our operating leases have remaining lease terms ranging from 1 to 5 years. The weighted average remaining lease term on operating leases was approximately 2.7 years at September 30, 2020.

 

In connection with the purchase of New Castle Country Club’s real property assets on May 13, 2019, the Company assumed the remaining term of New Castle Country Club’s golf cart operating lease. At acquisition, the Company recorded an operating lease right-of-use asset and corresponding obligation under operating leases of approximately $126,000. The golf cart operating lease had a remaining lease term of 3 years at the acquisition date (See Note 16). In addition, subsequent to the purchase, the Company entered into new operating lease agreements for golf and maintenance carts. The Company recorded an operating lease right-of-use asset and corresponding obligation under operating leases of approximately $194,000.

 

During the first nine months of 2020, the Company entered into a new operating lease agreement for hotel furniture. The Company recorded an operating lease right-of-use asset and corresponding obligation under the operating lease of approximately $266,000.

 

Leased property and associated obligations under operating leases at September 30, 2020 and December 31, 2019 consists of the following (in thousands):

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Operating lease right-of-use assets

 $1,280  $1,466 
         

Current portion of obligations under operating leases

 $533  $513 

Long-term portion of obligations under operating leases

  747   953 

Total obligations under operating leases

 $1,280  $1,466 

 

The weighted average discount rate on operating leases was 4.96% at September 30, 2020 and 5.01% at December 31, 2019.

 

Finance Leases

 

In November 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations. Based upon the amount of leasehold improvements already made, Avalon expects to exercise all its remaining renewal options. At September 30, 2020 there were approximately 33.1 years remaining on the golf course and related facilities finance lease.

 

In addition, the golf and related operations also entered into lease agreements for vehicles, golf course maintenance and restaurant equipment and the captive landfill operations entered into lease agreements for equipment which were determined to be finance leases. At September 30, 2020, the vehicles, golf course maintenance and restaurant equipment and the landfill operations equipment have remaining lease terms ranging from 1 to 5 years. The weighted average remaining lease term on the vehicles and equipment leases was approximately 3.1 years at September 30, 2020.

 

13

 

Leased property and associated obligations under finance leases at September 30, 2020 and December 31, 2019 consists of the following (in thousands):

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Leased property under finance leases

 $12,209  $11,758 

Less accumulated amortization

  (6,296)  (5,880)

Leased property under finace leases, net

 $5,913  $5,878 
         

Current portion of obligations under finance leases

 $343  $295 

Long-term portion of obligations under finance leases

  622   555 

Total obligations under finance leases

 $965  $850 

 

The weighted average discount rate on finance leases was 4.7% at September 30, 2020 and 5.2% at December 31, 2019.

 

For the three and nine months ended September 30, 2020 and 2019, components of lease expense were as follows (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Operating lease cost:

                

Rental expense

 $235  $298  $520  $586 
                 

Finance lease cost:

                

Depreciation expense

 $148  $124  $416  $376 

Interest expense

  9   11   30   33 

Total finance lease cost

 $157  $135  $446  $409 

 

Future commitments under long-term, operating and finance leases at September 30, 2020 are as follows (in thousands):

 

  

Finance

  

Operating

  

Total

 

2021

 $385  $586  $971 

2022

  207   432   639 

2023

  132   265   397 

2024

  107   91   198 

2025

  55   3   58 

Thereafter

  420   -   420 

Total lease payments

  1,306   1,377   2,683 

Less imputed interest

  341   97   438 

Total

  965   1,280   2,245 

Less: current portion of obligations under leases

  343   533   876 

Long-term portion of obligations under leases

 $622  $747  $1,369 

 

 

Note 8. Basic and Diluted Net Income (Loss) per Share

  

Basic net loss per share attributable to Avalon Holdings Corporation common shareholders is computed by dividing the net loss by the weighted average number of common shares outstanding. For both the three and nine months ended September 30, 2020 and 2019, the weighted average number of common shares outstanding was 3,875,431.

 

14

 

Diluted net income (loss) per share attributable to Avalon Holdings Corporation common shareholders is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus any weighted common equivalent shares determined to be outstanding during the period using the treasury method. The weighted common equivalent shares included in the calculation are related to stock options granted by Avalon where the weighted average market price of Avalon’s common stock for the period presented is greater than the option exercise price of the stock option.

 

For the three months ended September 30, 2020, the diluted per share amount reported is equal to the basic per share amount because the average market price of Avalon’s common shares during the period was less than the exercise price of the stock options outstanding. For the nine months ended September 30, 2020, the diluted per share amount reported is equal to the basic per share amount because Avalon was in a net loss position and as a result, such dilution would be considered anti-dilutive. Assuming dilution, the diluted per share amount is equal to the basic per share amount because the average market price of Avalon’s common shares during the period was less than the exercise price of the stock options outstanding.

 

For the three months ended September 30, 2019, the diluted weighted average number of shares outstanding was 3,892,948. For the nine months ended September 30, 2019, the diluted per share amount reported is equal to the basic per share amount because Avalon was in a net loss position and as a result, such dilution would be considered anti-dilutive. Assuming dilution, the weighted average number of common shares outstanding for the nine months ended September 30, 2019 was 3,909,706.

 

 

Note 9. Term Loans and Line of Credit Agreements

 

New Term Loan Agreement

 

On December 20, 2019, Avalon and certain direct and indirect wholly owned subsidiaries entered into a loan and security agreement (the “New Term Loan Agreement”) with Laurel Capital Corporation which provided for a $23.0 million term loan. The New Term Loan Agreement proceeds were utilized to pay off and refinance the Company’s existing term loan and commercial mortgage agreements, pay down the outstanding balance and associated interest on the Company’s line of credit agreement and pay related transaction costs. The remaining proceeds were deposited into a project fund account for which those proceeds are required to fund future costs of renovating and expanding both The Grand Resort and Avalon Field Club at New Castle.

 

At closing, $10.3 million of the proceeds were used to pay off and refinance amounts outstanding under our term loan agreement with Laurel Capital Corporation, dated December 20, 2016 (“2016 Term Loan Agreement”), $2.9 million of the proceeds were used to pay off and refinance amounts outstanding under our term loan agreement with Laurel Capital Corporation, dated March 29, 2019 (“2019 Term Loan Agreement”), $1.7 million of the proceeds were used to pay down the outstanding balance and associated interest on our existing line of credit agreement with Premier Bank (formerly Home Savings Bank), dated May 31, 2018, as amended, $0.6 million of the proceeds were used to pay off amounts outstanding under our commercial mortgage agreement with Mercer County State Bank, dated May 13, 2019 (“Commercial Mortgage”) and $0.3 million of the proceeds were utilized to pay transaction costs. The remaining proceeds of approximately $7.2 million were deposited into a project fund account. At September 30, 2020 and December 31, 2019, loan proceeds of $4.2 million and $7.2 million, respectively, are presented in the Condensed Consolidated Balance Sheets as “Restricted cash.”

 

The 2016 Term Loan Agreement, 2019 Term Loan Agreement and the Commercial Mortgage Agreement were terminated in conjunction with the New Term Loan Agreement.

 

The $23.0 million outstanding under the New Term Loan Agreement is payable in 119 equal monthly installments of principal and interest, based on a fifteen (15) year maturity schedule which commenced January 20, 2020 followed by one final balloon payment of all remaining principal, interest and fees due on the maturity date of December 20, 2029. Borrowings under the New Term Loan Agreement bear interest at a fixed rate of 5.00% until the fifth anniversary date of the closing at which time the interest rate will be reset to a fixed rate equal to the greater of (a) 5.00% per annum or (b) the sum of the five year treasury rate on the date two (2) business days prior to the reset date plus 3.60%, provided that the applicable rate shall in no event exceed 7.35% per annum.

 

15

 

Avalon has the right to prepay the amount outstanding under the New Term Loan Agreement, in whole or in part, at any time upon payment of the principal amount of the loan to be prepaid plus accrued unpaid interest thereon to the prepayment date, plus an applicable prepayment penalty. The prepayment penalty, expressed as a percentage of the principal of the loan being prepaid, is five percent (5%) on any prepayment in the first five years; four percent (4%) on any prepayment in the sixth and seventh year; three percent (3%) on any prepayment in the eighth and ninth year; and two percent (2%) on any prepayment in the tenth year.

 

Borrowings under the New Term Loan Agreement are secured by certain real property and related business assets as defined in the agreement. The New Term Loan Agreement contains a Fixed Charge Coverage Ratio requirement of at least 1.20 tested on an annual basis on December 31 of each year commencing December 31, 2020. The New Term Loan also contains other nonfinancial covenants, customary representations, warranties and events of default. Avalon was in compliance with the New Term Loan Agreement covenants at September 30, 2020 and December 31, 2019.

 

The Company capitalized approximately $0.4 million of debt issuance costs in connection with the New Term Loan Agreement. The Company will amortize these costs over the life of the New Term Loan Agreement. In accordance with ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, these costs are presented in the Condensed Consolidated Balance Sheets as a direct reduction from the carrying amount of the term loan liability.

 

Line of Credit Agreement

 

On May 31, 2018, Avalon entered into a business loan agreement with Premier Bank (formerly Home Savings Bank), (the “Line of Credit Agreement”) which provides for a line of credit of up to $5.0 million. On August 5, 2020, the Company amended the Line of Credit Agreement to extend the maturity date to July 31, 2022. Under the Line of Credit Agreement, borrowings in excess of $1.0 million are subject to a borrowing base which is calculated based off a specific level of eligible accounts receivable of the waste management business as defined in the agreement.

 

At December 20, 2019, the outstanding balance of $1.7 million under the Line of Credit Agreement was paid down with a portion of the proceeds from the New Term Loan Agreement. No amounts were drawn under the Line of Credit Agreement at September 30, 2020 and December 31, 2019. Outstanding borrowings under the Line of Credit Agreement bear interest at Prime Rate plus .25%. At September 30, 2020, the interest rate on the Line of Credit Agreement was 3.50%.

 

Borrowings under the Line of Credit Agreement are secured by certain business assets of the Company including accounts receivable, inventory and equipment. The Line of Credit Agreement contains a Fixed Charge Coverage Ratio requirement of at least 1.20 tested on an annual basis on December 31 of each year. The Line of Credit Agreement also contains other nonfinancial covenants, customary representations, warranties and events of default. Avalon was in compliance with the Line of Credit Agreements covenants at September 30, 2020 and December 31, 2019.

 

Paycheck Protection Program Loan

 

The Coronavirus Aid, Relief, and Economic Security Act, or (“CARES”) Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (the “Program”). The Program provides for 100% federally guaranteed loans to small businesses to allow employers to keep workers employed and maintain payroll during the pandemic and economic downturn. Under the Program, qualified companies are eligible for a loan in an amount equal to the lesser of $10 million or 2.5x the business’s average monthly payroll. Collateral or guarantor support is not required for the loan.

 

Under the Program, the borrower is eligible for loan forgiveness up to the amount the borrower spends on certain eligible costs during the 8 week period beginning on the date the proceeds were received on the loan. Eligible costs under the Program include payroll costs, interest on mortgage obligations incurred before the covered period, rent on leasing agreements and utility services. The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Under the Program, proceeds that are not forgiven convert to a loan bearing interest at a fixed rate of 1% payable in 18 equal monthly installments commencing after the forgiveness period. The Program was subsequently amended to allow the borrower to use an extended forgiveness period of 24 weeks beginning on the date the proceeds were received on the loan and to extend the repayment period to 54 months commencing after the 24 week forgiveness period.

 

16

 

In the second quarter of 2020, certain wholly-owned subsidiaries of Avalon entered into agreements and received a total of approximately $2.8 million in loans under the Program. The Company utilized the loan proceeds under the 24 week loan forgiveness period and subsequently applied for forgiveness in accordance with the Program’s guidelines. The Company is accounting for the loans in accordance with Accounting Standards Codification (“ASC”) 470 – Debt. Under ASC 470, the debt will be derecognized when the debt is extinguished in accordance with the guidance in ASC 405-20, Liabilities: Extinguishments of Liabilities. When the debt is forgiven in accordance with the Program, any amount that is forgiven will be recognized in the Condensed Consolidated Statements of Operations as a gain on debt extinguishment. The Company will repay amounts that are not forgiven.

 

During the three months ended September 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.57% and 5.53%, respectively. During the nine months ended September 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.74% and 5.48%, respectively.

 

Obligations under the Company’s debt agreements at September 30, 2020 and December 31, 2019 consist of the following (in thousands):

 

  

September 30, 2020

 
  

Gross Amount

  

Debt Issuance Costs

  

Net Amount

 

Term Loan Agreement

 $22,213  $(384) $21,829 

Paycheck Protection Program Loans

  2,765   -   2,765 

Total

  24,978   (384)  24,594 

Less current portion

  2,664   (42)  2,622 

Long-term debt

 $22,314  $(342) $21,972 

 

  

December 31, 2019

 
  

Gross Amount

  

Debt Issuance Costs

  

Net Amount

 

Term Loan Agreement

 $23,000  $(415) $22,585 

Less current portion

  1,057   (42)  1,015 

Long-term debt

 $21,943  $(373) $21,570 

 

At September 30, 2020, future maturities of long-term debt are as follows (in thousands):

 

2021

 $2,664 

2022

  2,351 

2023

  1,212 

2024

  1,274 

2025

  1,339 

Thereafter

  16,138 

Total

 $24,978 

 

 

Note 10. Income Taxes

 

During the three months ended September 30, 2020 and 2019, net income attributable to Avalon Holdings Corporation shareholders was $0.8 million and $0.1 million, respectively. During the nine months ended September 30, 2020 and 2019, net loss attributable to Avalon Holdings Corporation shareholders was $0.5 million and less than $0.1 million, respectively. Avalon recorded a state income tax provision in both the three and nine month periods ended September 30, 2020 and 2019, which was related entirely to the waste management and brokerage operations. Due to the recording of a full valuation allowance against the Company’s federal net deferred tax assets, the overall effective tax rate in both periods reflects taxes owed in certain U.S state jurisdictions. Avalon’s income tax on the income (loss) before taxes was offset by a change in the valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.

 

17

 

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryforwards generated in taxable years beginning after December 31, 2017, to offset 100% of taxable income for taxable years beginning before January 1, 2021, and 80% of taxable income in taxable years beginning after December 31, 2020. In addition, the CARES Act allows net operating losses incurred in taxable years beginning after December 31, 2017, and before January 1, 2021, to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the full impact of these provisions and recent IRS guidance, and we expect that it will not have a material impact on the Company’s financial position or results of operations.

 

 

Note 11. Long-Term Incentive Plan

 

On March 14, 2019, the Board of Directors of Avalon approved the renewal of the expired 2009 Long-term Incentive Plan (the “2009 Plan”), which is set to expire in October of 2019. The 2009 Plan provides for the granting of options which are intended to be non-qualified stock options (“NQSO’s”) for federal income tax purposes except for those options designated as incentive stock options (“ISO’s”) which qualify under Section 422 of the Internal Revenue Code.

 

The name of the plan was changed to the 2019 Long-term Incentive Plan (“the Option Plan”) to reflect the year of approval. The Option Plan represents the renewal of the 2009 Plan which had 1,300,000 shares of Class A Common Stock available for stock options to employees and non-employee directors. The Option Plan has 1,300,000 shares available for stock options, less any shares of stock issued pursuant to options exercised under the 2009 Plan. The total number of shares under the Option Plan and the 2009 Plan will not exceed 1,300,000. Shares of stock covered by options granted pursuant to the 2009 Plan which terminate or expire prior to exercise or have been surrendered or canceled shall be available for further option grants under the Option Plan. On April 25, 2019, at the Annual Meeting of Shareholders, the shareholders approved the Option Plan.

 

The purpose of the Avalon Holdings Corporation 2019 Long-term Incentive Plan (the “Plan”) is (a) to improve individual employee performance by providing long-term incentives and rewards to employees of Avalon, (b) to assist Avalon in attracting, retaining and motivating employees and non-employee directors with experience and ability, and (c) to associate the interests of such employees and directors with those of the Avalon shareholders.

 

At September 30, 2020, options to purchase 280,000 shares have been granted under the 2009 Plan. Of these, 12,000 shares have been exercised, and options for 268,000 shares remain outstanding. In March 2020, unexercised options to purchase 420,000 shares previously granted under the 2009 Plan expired as the options were not exercised within ten years after the grant date.

 

NQSO’s may be granted with an exercise price which is not less than 100% of the fair market value of the Class A Common Stock on the date of grant. Options designated as ISO’s shall not be less than 110% of fair market value for employees who are ten percent shareholders and not less than 100% of fair market value for other employees. The Board of Directors may, from time to time in its discretion, grant options to one or more outside directors, subject to such terms and conditions as the Board of Directors may determine, provided that such terms and conditions are not inconsistent with other applicable provisions of the Option Plan. Options shall have a term of no longer than ten years from the date of grant; except that for an option designated as an ISO which is granted to a ten percent shareholder, the option shall have a term no longer than five years.

 

No option shall be exercisable prior to one year after its grant, unless otherwise provided by the Option Committee of the Board of Directors (but in no event before 6 months after its grant), and thereafter options shall become exercisable in installments, if any, as provided by the Option Committee. Options must be exercised for full shares of common stock. To the extent that options are not exercised when they become initially exercisable, they shall be carried forward and be exercisable until the expiration of the term of such options. No option may be exercised by an optionee after his or her termination of employment for any reason with Avalon or an affiliate, except in certain situations provided by the Option Plan.

 

18

 

The stock options, vest ratably over a five year period and have a contractual term of ten years from the date of grant. At the end of each contractual vesting period, the share price of the Avalon common stock, traded on a public stock exchange (NYSE Amex), must reach a predetermined price within three years following such contractual vesting period before the stock options are exercisable (See table below). If the Avalon common stock price does not reach the predetermined price, the stock options will either be cancelled or the period will be extended at the discretion of the Board of Directors. In 2018, the Board of Directors extended the period of time for certain vested options that were not exercisable due to those options not meeting the predetermined stock price within the three years following the contractual vesting period.

 

The grant-date fair values of the stock option awards were estimated using the Monte Carlo Simulation. The Monte Carlo Simulation was selected to determine the fair value because it incorporates six minimum considerations; 1) the exercise price of the option, 2) the expected term of the option, taking into account both the contractual term of the option, the effects of employees’ expected exercise and post-vesting employment termination behavior, as well as the possibility of change in control events during the contractual term of the option agreements, 3) the current fair value of the underlying equity, 4) the expected volatility of the value of the underlying share for the expected term of the option, 5) the expected dividends on the underlying share for the expected term of the option and 6) the risk-free interest rate(s) for the expected term of the option.

 

The grant date fair value of the underlying equity was determined to be equal to Avalon’s publicly traded stock price as of the grant dates times the sum of the Class A and Class B common shares outstanding.

 

The expected term, or time until the option is exercised, is typically based on historical exercising behavior of previous option holders of a company’s stock.  Due to the fact that the Company has had no historical exercising activity, prior to 2018, the simplified method was applied.  Because of the nature of the vesting described above, the options are separated into five blocks, with each block having its own vesting period and expected term. 

 

For stock option awards, the expected volatility was based on the observed historical volatility of Avalon common stock. There were no expected dividends and the risk-free interest rate was based on yield data for U. S. Treasury securities over a period consistent with the expected term.

 

The following table is a summary of the stock option activity during 2020:                     

 

      

Weighted

  

Weighted

 
  

Number of

  

Average

  

Average

 
  

Options

  

Exercise

  

Fair Value at

 
  

Granted

  

Price

  

Grant Date

 

Outstanding at January 1, 2020

  688,000   2.52   1.00 

Options granted

  -   -   - 

Options exercised

  -   -   - 

Options expired

  (420,000)  2.48   1.02 

Options cancelled or forfeited

  -   -   - 

Outstanding at September 30, 2020

  268,000  $2.58  $0.97 

Options Vested

  250,000  $2.64  $1.02 

Exercisable at September 30, 2020

  214,000  $2.77  $1.11 

 

The stock options vest and become exercisable based upon achieving two critical metrics as follows:

1)

Contract Vesting Term: The stock options vest ratably over a five year period.

2)

The Avalon common stock price traded on a public stock exchange (NYSE Amex) must reach the predetermined vesting price within three years after the options become vested under the contractual vesting term.

 

19

 

The table below represents the period and predetermined stock price needed for vesting.

 

 

Begins

 

Ends

 

Predetermined

 
 

Vesting

 

Vesting

 

Vesting Price

 

Block 1

12 months after Grant Dates

 

48 months after Grant Dates

 $3.43 

Block 2

24 months after Grant Dates

 

60 months after Grant Dates

 $4.69 

Block 3

36 months after Grant Dates

 

72 months after Grant Dates

 $6.43 

Block 4

48 months after Grant Dates

 

84 months after Grant Dates

 $8.81 

Block 5

60 months after Grant Dates

 

96 months after Grant Dates

 $12.07 

 

Compensation costs were approximately $1,000 for both the three months ended September 30, 2020 and 2019, and $4,000 for both the nine months ended September 30, 2020 and 2019, based upon the estimated grant date fair value calculations. As of September 30, 2020, there was approximately $14,000 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.67 years.

 

 

Note 12. Legal Matters

 

In the ordinary course of conducting its business, Avalon becomes involved in lawsuits, administrative proceedings and governmental investigations, including those related to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, will have a material adverse effect on its liquidity, financial position or results of operations (See Note 15).

 

 

Note 13. Business Segment Information

 

In determining the segment information, Avalon considered its operating and management structure and the types of information subject to regular review by its “chief operating decision maker.” Using the criteria of FASB ASC 280 Segment Reporting, Avalon’s reportable segments include waste management services and golf and related operations. Avalon accounts for intersegment net operating revenues as if the transactions were to third parties. The segment disclosures are presented on this basis for all periods presented.

 

Avalon’s primary business segment, the waste management services segment, provides hazardous and nonhazardous brokerage and management services to industrial, commercial, municipal and governmental customers, captive landfill management for an industrial customer and salt water injection well operations.

 

Avalon’s golf and related operations segment consists of four golf courses and associated clubhouses which provide dining and banquet facilities, a hotel which provides lodging and resort related amenities including dining, banquet and conference facilities, a multipurpose recreation center and a travel agency. Revenue for the golf and related operations segment consists primarily of membership dues, greens fees, cart rentals, room rentals, merchandise sales, tennis and fitness activities, salon and spa services and food and beverage sales.

 

Avalon does not have significant operations located outside the United States and, accordingly, geographical segment information is not presented.

 

For both the nine months ended September 30, 2020 and 2019, no one customer accounted for 10% of Avalon’s consolidated or reportable segment net operating revenues.

 

The accounting policies of the segments are consistent with those described for the consolidated financial statements in the summary of significant accounting policies included in Avalon’s 2019 Annual Report to Shareholders. Avalon measures segment profit for internal reporting purposes as income (loss) before taxes.

 

20

 

Business segment information including the reconciliation of segment income before taxes to income (loss) before taxes is as follows (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net operating revenues from:

                

Waste management services:

                

External customer revenues

 $9,326  $11,572  $29,547  $35,908 

Intersegment revenues

  -   -   -   - 

Total waste management services

  9,326   11,572   29,547   35,908 
                 

Golf and related operations:

                

External customer revenues

  7,299   6,446   14,548   15,143 

Intersegment revenues

  7   10   37   45 

Total golf and related operations

  7,306   6,456   14,585   15,188 
                 

Segment operating revenues

  16,632   18,028   44,132   51,096 

Intersegment eliminations

  (7)  (10)  (37)  (45)

Total net operating revenues

 $16,625  $18,018  $44,095  $51,051 
                 

Income (loss) before income taxes:

                

Waste management services

 $855  $1,074  $2,710  $3,295 

Golf and related operations

  1,018   100   101   (363)

Segment income before income taxes

  1,873   1,174   2,811   2,932 

Corporate interest expense

  (293)  (203)  (883)  (551)

Corporate other income, net

  9   3   22   51 

General corporate expenses

  (789)  (810)  (2,359)  (2,379)

Income (loss) before income taxes

 $800  $164  $(409) $53 

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Identifiable assets:

        

Waste management services

 $29,787  $31,574 

Golf and related operations

  57,669   55,369 

Corporate

  59,693   58,638 

Subtotal

  147,149   145,581 

Elimination of intersegment receivables

  (69,122)  (66,417)

Total

 $78,027  $79,164 

 

In comparing the total assets at September 30, 2020 with those at December 31, 2019, the decrease in the total assets of the waste management services segment of $1.8 million is primarily a result of a decrease in accounts receivable partially offset by an increase in intersegment transactions, which are eliminated in consolidation. The increase in total assets of the golf and related operations segment of $2.3 million was primarily due to an increase in accounts receivable and capital expenditures related to the expansion of The Grand Resort partially offset by current year depreciation on property and equipment. The increase in corporate total assets of approximately $1.1 million is primarily due to an increase in operating cash and cash equivalents and intersegment transactions, which are eliminated in consolidation, partially offset by a decrease in restricted cash utilized for the expansion of The Grand Resort.

 

21

 

 

Note 14. Certain Relationships and Related Transactions

 

In August 2013, Avalon created a new Ohio limited liability company, AWMS Holdings, LLC, to act as a holding company to form and own a series of wholly owned subsidiaries that will own and operate Class II salt water injection wells and facilities (together the “facilities”). AWMS Holdings, LLC, offers investment opportunities to accredited investors by selling membership units of AWMS Holdings, LLC through private placement offerings. The monies received from these offerings, along with internally contributed capital, are used to construct the facilities necessary for the operation of salt water injection wells. AWMS Water Solutions, LLC, a wholly owned subsidiary of Avalon, manages all the salt water injection well operations, including the marketing and sales function and all decisions regarding the well operations for a percentage of the gross revenues.

 

In 2014 and 2013, Avalon, through a wholly owned subsidiary made capital contributions totaling approximately $3.4 million, which included cash and certain well assets, including the permits, in exchange for membership units of AWMS Holdings, LLC. Through a private placement offering for the purchase of membership units, AWMS Holdings, LLC raised approximately $3.8 million from accredited investors in 2014 and 2013. Management and outside directors of Avalon, who qualified as accredited investors, invested approximately $1.0 million in AWMS Holdings, LLC.

 

As a result of a private placement offering, Avalon is not the majority owner of AWMS Holdings, LLC. At September 30, 2020 and December 31, 2019, respectively, Avalon owns approximately 47% of AWMS Holdings, LLC. In accordance with ASC 810-10 and related amendment, due to the managerial control of American Water Solutions, LLC, AWMS Holdings, LLC is a variable interest entity, and the financial statements of AWMS Holdings, LLC and subsidiaries are included in Avalon’s consolidated financial statements. ASC 810-10 requires noncontrolling interests to be reported as a separate component of equity. The amount of net loss attributable to the noncontrolling interest is recorded in “net loss attributable to noncontrolling interest” in our Condensed Consolidated Statements of Operations.

 

 

Note 15. Injection Wells Suspension

 

As a result of a seismic event with a magnitude of 2.1 occurring on August 31, 2014, the Chief of the Division of Oil and Gas Resources Management (“Chief” or “Division”) issued Orders on September 3, 2014 to immediately suspend all operations of Avalon’s two saltwater injection wells until the Division could further evaluate the wells.  The Orders were based on the findings that the two saltwater injection wells were located in close proximity to an area of known seismic activity and that the saltwater injection wells pose a risk of increasing or creating seismic activity.

 

On September 5, 2014, Avalon submitted the information required by the Chief’s Order in regards to its AWMS #1 injection well, and the Chief lifted the suspension for that well on September 18, 2014. On September 19, 2014, Avalon submitted information and a written plan required by the Chief’s Order proposing the establishment of certain operations and management controls on injections for the AWMS #2 injection well. To date, the Division has not responded to that plan despite Avalon’s request for feedback.

 

On October 2, 2014, Avalon filed an appeal with the Ohio Oil and Gas Commission (the “Commission”) disputing the basis for suspending operations of AWMS #2 and also the authority of the Chief to immediately suspend such operations. On March 11, 2015, an appeal hearing was held. The Chief stated during the hearing that the suspension order is temporary, and he expects that AWMS #2 will be allowed to resume operations once the state’s final policymaking is complete. 

 

On August 12, 2015, the Commission upheld the temporary suspension of injection operations of AWMS #2 stating that the temporary suspension would allow the Chief more time to fully evaluate the facts in anticipation of the Division’s implementation of a comprehensive regulatory plan that will specifically address injection-induced seismicity. 

 

Avalon appealed that decision to the Franklin County Court of Common Pleas (the “Court”), and on November 1, 2016 an appeal hearing was held in that Court.  On December 23, 2016, the Court issued its Decision and Order in Avalon’s favor, and vacated the Commission’s decision.  The Court found that the Division’s suspension and refusal to work with the Company over the 26 month period was arbitrary and not in accordance with reason.  Subsequent to the ruling, and in accordance with the Court’s Decision and Order, both Avalon and the Division submitted their proposed restart plans to the Court.  Avalon’s plan sets forth both the initial volumes and pressures and increases in volume and pressure while continuously monitoring seismicity and addressing the concerns of public health and safety. 

 

22

 

On February 21, 2017, the Court issued its Final Decision and Order.  The Court’s Final Decision and Order set forth conditions for restarting the AWMS #2 salt water injection well in accordance with the proposed restart plans filed by Avalon with minor revisions.  On February 22, 2017, the Division appealed the Final Decision and Order and filed a Motion to Stay the Court Order.  The Motion to Stay was granted by the Ohio 10th District Court of Appeals on March 21, 2017.

 

On September 14, 2017, an appeal hearing was held in the Ohio 10th District Court of Appeals and on July 31, 2018 a decision was issued on the appeal. The decision reinstated the previous Ohio Oil and Gas Commission decision in this matter. 

 

On September 12, 2018, the Company appealed the Ohio 10th District Court of Appeals decision to the Supreme Court of Ohio. On November 21, 2018, the Company received notice from the Supreme Court of Ohio that the court would not accept for review the Company’s appeal of the Ohio 10th District Court of Appeals decision on the Division of Oil and Gas Resources Management’s appeal of the Franklin County Court of Common Pleas February 21, 2017 entry allowing restart of the Company’s AWMS Water Solutions, LLC #2 salt water injection well.    

 

On April 5, 2019, Avalon filed with the Oil and Gas Commission a motion to vacate its prior decisions in this matter.  There can be no guarantee that the salt water injection wells will resume operations, but the Company will continue to pursue all available avenues to allow the restart of the Company’s salt water injection well under reasonable conditions. Currently, there is no implemented state-wide policy on induced seismicity and the Ohio Department of Natural Resources (“ODNR”) has refused to communicate with the Company regarding the status and requirements of any policymaking. The operations of Company’s injection wells will remain suspended until that time. The Oil and Gas Commission scheduled a hearing on this motion for August 13, 2019.  Before the hearing began, and in response to the Division’s motion to dismiss the Company’s motion to vacate, the Commission dismissed the matter.  The Company appealed that decision to the Franklin County Court of Common Pleas.  In April 2020, the Division’s motion to dismiss and the Company’s opposition was reviewed by the Court.  The Company is currently awaiting judgment from the Court.

 

Concurrently with the filing of the appeal with the Franklin County Court of Common Pleas, the Company filed a writ of mandamus in the 10th District Court of Appeals on August 30, 2019 to compel the chief of the Division to issue restart orders, or alternative orders that would allow the Company to either restart the AWMS #2 well, or appeal said orders to the Oil and Gas Commission in accordance with Ohio Law.  On October 6, 2020 and in response to a motion from the Division, the Court dismissed this complaint for writ of mandamus.

 

In addition, on August 26, 2016, Avalon filed a complaint in the 11th Appellate District Court in Trumbull County, Ohio for a Peremptory Writ of Mandamus to compel the Director of the ODNR to initiate appropriations procedures to determine damages from the illegal regulatory taking of the Company’s property, or issue an alternative remedy at law. The Company believes that the actions, and lack of responsible actions, by the ODNR is a clear violation of the Company’s property rights and a violation of the Fifth and Fourteenth Amendments to the U.S. Constitution; Article I, Section 19 of the Ohio Constitution; and Ohio Revised Code Chapter 163. 

 

On March 18, 2019, Avalon received notice that the 11th Appellate District Court in Trumbull County, Ohio issued summary judgment in favor of the Ohio Department of Natural Resources in the writ of mandamus action that resulted from the suspension order of the Company’s salt water injection well.  The decision was appealed to the Supreme Court of Ohio on April 5, 2019.  Oral arguments in the case occurred on April 7, 2020.  On September 23, 2020, the Supreme Court of Ohio ruled in favor of the Company.  The Supreme Court of Ohio reversed the decision of the 11th Appellate District Court and remanded back to that court for a trial on the merits.  The Company is currently preparing for that trial.

 

 

Note 16. Asset Acquisition

 

New Castle Country Club property

 

On May 13, 2019, Havana Cigar Shop, Inc., a wholly owned subsidiary of Avalon, entered into an asset Purchase and Sale Agreement with New Castle Country Club (“the Club”) for the purchase of the real property assets associated with the Club. Havana Cigar Shop, Inc. concurrently entered into an Assignment and Assumption and Commercial Loan Modification Agreement with Mercer County State Bank for the outstanding debt under the Club’s Commercial Mortgage and Demand Line of Credit, as amended, (collectively the “Agreements”) at closing as consideration for the purchase of the real property of the Club. The total amount of outstanding debt under the Agreements assumed by Havana Cigar Shop, Inc., at closing was approximately $0.8 million which consisted of approximately $0.1 million under the Demand Line of Credit and $0.7 million under the Commercial Mortgage agreement.

 

23

 

The outstanding balance under the Commercial Demand Line of Credit was repaid in the second quarter of 2019 and in the fourth quarter of 2019 the Commercial Demand Line of Credit was terminated. The remaining outstanding balance under the Commercial Mortgage was refinanced and terminated in conjunction with the New Term Loan Agreement (See Note 9).

 

Subsequent to the asset Purchase and Sale Agreement, Havana Cigar Shop, Inc. was named The Avalon Field Club at New Castle. The Avalon Field Club at New Castle is currently in operation. The operating results are included in the Company’s Condensed Consolidated Statements of Operations and within Avalon’s golf and related operations segment from the date of acquisition. The net operating revenues and results of operations related to The Avalon Field Club at New Castle from the period of acquisition are not significant and, accordingly, are not provided.   

 

The acquisition is consistent with the Company’s golf operations business strategy as members of the Avalon Golf and Country Club have access to all the golf and related country club activities offered by The Avalon Field Club at New Castle. In addition, hotel guests at The Grand Resort can utilize the facility during their stay. The Avalon Field Club at New Castle earns revenue through membership dues, food, beverage and merchandise sales, greens fees and associated cart rentals.

 

The Company accounted for the acquisition of The Avalon Field Club at New Castle in accordance with ASU 2017-01, Business Combinations (“ASU 2017-01”). In accordance with ASU 2017-01, the Company evaluated whether to account for the transaction as either a business or asset acquisition. The Company determined that all of the fair value of the gross assets acquired was concentrated in the real property. In accordance with the guidance, assets that are attached to each other, such as land and a building residing on the land which cannot be physically removed and used separately from each other without incurring significant cost are considered to be a single identifiable asset. In accordance with ASU 2017-01, the Company accounted for the transaction as an asset acquisition as all of the value of the gross assets acquired resides in that single asset. The Company capitalized approximately $67,000 of transaction costs as a component of the cost of the real property assets acquired in accordance with ASU 2017-01.

 

The Avalon Field Club also assumed the remaining term of the Club’s golf cart operating lease. At acquisition the Company recorded an operating lease right-of-use asset and corresponding obligation under operating leases of approximately $126,000. The golf cart operating lease had a remaining lease term of 3 years at the acquisition date.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the transaction date (in thousands):

 

Assets acquired:

    

Building and land

 $854 

Operating lease right-of-use assets

  126 

Prepaid real estate taxes

  23 

Total assets acquired:

  1,003 

Liabilities assumed:

    

Commercial mortgage

  653 

Demand line of credit

  134 

Obligations under operating leases

  126 

Total liabilities assumed

  913 

Total consideration

 $90 

 

 

Note 17. COVID-19 Coronavirus Pandemic

 

In December 2019, a novel strain of coronavirus, COVID-19, emerged in Wuhan, Hubei Province, China. While initially concentrated in China, the outbreak spread to other countries and infections have been reported globally including in the United States. On March 11, 2020, the World Health Organization declared the COVID-19 viral disease a pandemic. The duration of the outbreak and new information which continually emerges concerning the severity of the illness and its treatment still remains unclear. As a result, the federal and state governmental bodies have taken unprecedented measures to try and control the spread of the virus.

 

24

 

In response to the COVID-19 pandemic, on March 15, 2020, the Governor of the State of Ohio announced that the Ohio Department of Health (“ODH”) issued a Director's Order (the “Order”) temporarily closing all Ohio bars and restaurants to in-house patrons. The Order stated that restaurants with take-out and delivery options could continue to operate those services, even as their dining rooms were temporarily closed. The Order also placed a limit on mass gatherings and large community events.

 

On March 19, 2020, the ODH issued a Director’s Order temporarily closing all salons and spas in the state of Ohio and also further limited the number of individuals for gatherings. On March 23, 2020, a “Stay at Home” order was issued by the ODH. The Stay at Home order stated that all individuals living within the State of Ohio are ordered to stay at home or at their place of residence. Under the order, individuals were only allowed to leave their home for essential activities including tasks related to their health and safety, obtaining necessary supplies and services and certain types of work. The Stay at Home Order required all non-essential businesses to cease operations. In March 2020 the Governor of the state of Pennsylvania issued a similar Stay at Home order. Under the order, all non-essential businesses were required to cease operations.

 

In accordance with the “Essential Critical Infrastructure Workforce” guidance issued by the U.S Department of Homeland Security, Cybersecurity & Infrastructure Agency (“CISA”) on March 19, 2020, the Company’s waste management services, restaurant carry-out, overnight lodging and outdoor golf courses remained in operation during the Order.

 

In late May and June 2020, the states of Ohio and Pennsylvania allowed the reopening of certain business operations that were temporarily closed under the Order. The Company’s dining rooms, fitness, athletic, pool, salon and spa services reopened under certain mandatory restrictions including mask protection for employees, decrease in occupancy and other measures to enforce social distancing.

 

During 2020, the governmental orders issued to control the spread of COVID-19 adversely impacted our operations and related financial results. During the Stay at Home order, our restaurant operations generated significantly lower revenue as a result of the restrictions that were placed on in-house dining. Our restaurant revenue increased during the third quarter of 2020 as certain restrictions on in-house dining were reduced or lifted. Food and beverages sales related to banquets and conferences were significantly lower during the second and third quarter of 2020 as a result of restrictions placed on gatherings and events. In addition, the Company had high levels of room and event cancellations during the Stay at Home Order with some subsequent re-bookings that occurred in the third quarter of 2020 and into the fourth quarter of 2020 and into 2021. Our fitness, athletics, salon and spa operations generated no revenue under the Stay at Home Order. In addition, our waste management brokerage business has experienced a decline in both continuous and project work due to government restrictions placed on its customers and associated shutdowns.

 

As government restrictions are reduced or lifted, we may continue to experience weakened demand in light of continued travel restrictions or warnings, consumer fears and reduced consumer discretionary spending and general economic uncertainty. In light of the foregoing, we are unable to determine when our operations will return to pre-pandemic demand or pricing. During the mandated shut-down, the Company engaged in aggressive efforts to reduce expenses, including reducing employee costs, through hiring freezes, headcount reductions and substantial furloughs of employees. The Company began the process of rehiring employees in late May to meet business needs as the government restrictions on certain of our business operations were reduced or lifted. Governmental bodies may impose additional restrictions, which could include additional shutdowns, to stop the spread of infection. These additional restrictions would have a negative impact on our financial condition, results of operations and cash flows.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion provides information which management believes is relevant to an assessment and understanding of the operations and financial condition of Avalon Holdings Corporation and its subsidiaries. As used in this report, the term “Avalon” or the “Company” means Avalon Holdings Corporation, its wholly owned subsidiaries and variable interest entities when it has been determined that Avalon is the primary beneficiary of those company’s operations, taken as a whole, unless the context indicates otherwise.

 

Statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations which are not historical in nature are intended to be, and are hereby identified as, “forward looking statements”. Avalon cautions readers that forward looking statements, including, without limitation, those relating to Avalon’s future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements, due to risks and factors identified herein and from time to time in Avalon’s reports filed with the Securities and Exchange Commission.

 

Liquidity and Capital Resources

 

For the nine months ended September 30, 2020, Avalon utilized existing cash, cash provided by operations and cash proceeds received under the Paycheck Protection Program to meet operating needs and make required monthly payments on our term loan facility. Cash in our project fund account was utilized to fund capital expenditures which included the continued renovation of The Grand Resort as further described below.

 

Financial Impact of COVID-19 Pandemic

 

During 2020, the governmental orders issued to control the spread of COVID-19 adversely impacted our operations and related financial results. During the Stay at Home order, our restaurant operations generated significantly lower revenue as a result of the restrictions that were placed on in-house dining. Our restaurant revenue increased during the third quarter of 2020 as certain restrictions on in-house dining were reduced or lifted. Food and beverages sales related to banquets and conferences were significantly lower during the second and third quarter of 2020 as a result of restrictions placed on gatherings and events. In addition, the Company had high levels of room and event cancellations during the Stay at Home Order with some subsequent re-bookings that occurred in the third quarter of 2020 and into the fourth quarter of 2020 and into 2021. Our fitness, athletics, salon and spa operations generated no revenue under the Stay at Home Order. In addition, our waste management brokerage business has experienced a decline in both continuous and project work due to government restrictions placed on its customers and associated shutdowns.

 

As government restrictions are reduced or lifted, we may continue to experience weakened demand in light of continued travel restrictions or warnings, consumer fears and reduced consumer discretionary spending and general economic uncertainty. In light of the foregoing, we are unable to determine when our operations will return to pre-pandemic demand or pricing. During the mandated shut-down, the Company engaged in aggressive efforts to reduce expenses, including reducing employee costs, through hiring freezes, headcount reductions and substantial furloughs of employees. The Company began the process of rehiring employees in late May to meet business needs as the government restrictions on certain of our business operations were reduced or lifted. Governmental bodies may impose additional restrictions, which could include additional shutdowns, to stop the spread of infection. These additional restrictions would have a negative impact on our financial condition, results of operations and cash flows.

 

Paycheck Protection Program Loan

 

The Coronavirus Aid, Relief, and Economic Security Act, or (“CARES”) Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (the “Program”). The Program provides for 100% federally guaranteed loans to small businesses to allow employers to keep workers employed and maintain payroll during the pandemic and economic downturn. Under the Program, qualified companies are eligible for a loan in an amount equal to the lesser of $10 million or 2.5x the business’s average monthly payroll. Collateral or guarantor support is not required for the loan.

 

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Under the Program, the borrower is eligible for loan forgiveness up to the amount the borrower spends on certain eligible costs during the 8 week period beginning on the date the proceeds were received on the loan. Eligible costs under the Program include payroll costs, interest on mortgage obligations incurred before the covered period, rent on leasing agreements and utility services. The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Under the Program, proceeds that are not forgiven convert to a loan bearing interest at a fixed rate of 1% payable in 18 equal monthly installments commencing after the forgiveness period. The Program was subsequently amended to allow the borrower to use an extended forgiveness period of 24 weeks beginning on the date the proceeds were received on the loan and to extend the repayment period to 54 months commencing after the 24 week forgiveness period.

 

In the second quarter of 2020, certain wholly-owned subsidiaries of Avalon entered into agreements and received a total of approximately $2.8 million in loans under the Program. The Company utilized the loan proceeds under the 24 week loan forgiveness period and subsequently applied for forgiveness in accordance with the Program’s guidelines. When the debt is forgiven in accordance with the Program, any amount that is forgiven will be recognized as a gain on debt extinguishment. The Company will repay amounts that are not forgiven.

 

New Castle Country Club Real Property Acquisition

 

On May 13, 2019, Havana Cigar Shop, Inc., a wholly owned subsidiary of Avalon, entered into an asset Purchase and Sale Agreement with New Castle Country Club (the “Club”) for the purchase of the real property assets associated with the Club. Havana Cigar Shop, Inc. concurrently entered into an Assignment and Assumption and Commercial Loan Modification Agreement with Mercer County State Bank for the outstanding debt under the Club’s Commercial Mortgage and Demand Line of Credit, as amended, (collectively the “Agreements”) at closing as consideration for the purchase of the real property of the Club. The total amount of outstanding debt under the Agreements assumed by Havana Cigar Shop, Inc., at closing was approximately $0.8 million.

 

The outstanding balance under the Commercial Demand Line of Credit was repaid in the second quarter of 2019 and in the fourth quarter of 2019 the Commercial Demand Line of Credit was terminated. The remaining outstanding balance under the Commercial Mortgage was refinanced and terminated in conjunction with the New Term Loan Agreement.

 

Subsequent to the asset Purchase and Sale Agreement, Havana Cigar Shop, Inc. was named Avalon Field Club at New Castle. Avalon Field Club at New Castle is currently in operation. The operating results are included in the Company’s Condensed Consolidated Statements of Operations and within Avalon’s golf and related operations segment from the date of acquisition.

 

The acquisition is consistent with the Company’s golf operations business strategy as members of the Avalon Golf and Country Club have access to all the golf and related country club activities offered by Avalon Field Club at New Castle. In addition, hotel guests at The Grand Resort can utilize the facility during their stay. Avalon Field Club at New Castle earns revenue through membership dues, food, beverage and merchandise sales, greens fees and associated cart rentals.

 

Capital Expenditures

 

During the nine months ended September 30, 2020, Avalon incurred capital expenditures of $3.7 million of which $3.2 million of such expenditures was paid to vendors during the period. Expenditures primarily related to the continued renovation and expansion of The Grand Resort. In addition, approximately $0.4 million of such expenditures related to golf course maintenance equipment acquired under new finance lease agreements. During the nine months ended September 30, 2019, Avalon incurred capital expenditures of $6.4 million of which $5.7 million of such expenditures was paid to vendors during the period. Expenditures primarily related to the continued renovation and expansion of The Grand Resort and, to a lesser extent, the renovation of the Avalon Athletic Club at Boardman. In 2020 and 2019, The Grand Resort was in operation but still in the process of being renovated and expanded. The renovations and expansion include the renovation of existing hotel rooms and the addition of a new restaurant, bars, salon and spa, outdoor resort pool and Roman Bath. Avalon’s aggregate capital expenditures in 2020 are expected to be in the range of $4.5 million to $5.0 million, funded with cash from our project fund account. Capital expenditures principally relate to the continued renovation and expansion of The Grand Resort, building improvements and equipment purchases.

 

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New Term Loan Agreement

 

On December 20, 2019, Avalon and certain direct and indirect wholly owned subsidiaries entered into a loan and security agreement (the “New Term Loan Agreement”) with Laurel Capital Corporation which provided for a $23.0 million term loan. The New Term Loan Agreement proceeds were utilized to pay off and refinance the Company’s existing term loan and commercial mortgage agreements, pay down the outstanding balance and associated interest on the Company’s line of credit agreement and pay related transaction costs. The remaining proceeds were deposited into a project fund account for which those proceeds are required to fund future costs of renovating and expanding both The Grand Resort and Avalon Field Club at New Castle.

 

At closing, $10.3 million of the proceeds were used to pay off and refinance amounts outstanding under our term loan agreement with Laurel Capital Corporation, dated December 20, 2016 (“2016 Term Loan Agreement”), $2.9 million of the proceeds were used to pay off and refinance amounts outstanding under our term loan agreement with Laurel Capital Corporation, dated March 29, 2019 (“2019 Term Loan Agreement”), $1.7 million of the proceeds were used to pay down the outstanding balance and associated interest on our existing line of credit agreement with Premier Bank (formerly Home Savings Bank), dated May 31, 2018, as amended, $0.6 million of the proceeds were used to pay off amounts outstanding under our commercial mortgage agreement with Mercer County State Bank, dated May 13, 2019 (“Commercial Mortgage”) and $0.3 million of the proceeds were utilized to pay transaction costs. The remaining proceeds of approximately $7.2 million were deposited into a project fund account. At September 30, 2020 and December 31, 2019, loan proceeds of $4.2 and $7.2 million, respectively, are presented in the Condensed Consolidated Balance Sheets as “Restricted cash.”

 

The 2016 Term Loan Agreement, 2019 Term Loan Agreement and the Commercial Mortgage Agreement were terminated in conjunction with the New Term Loan Agreement.

 

The $23.0 million outstanding under the New Term Loan Agreement is payable in 119 equal monthly installments of principal and interest, based on a fifteen (15) year maturity schedule which commenced January 20, 2020 followed by one final balloon payment of all remaining principal, interest and fees due on the maturity date of December 20, 2029. Borrowings under the New Term Loan Agreement bear interest at a fixed rate of 5.00% until the fifth anniversary date of the closing at which time the interest rate will be reset to a fixed rate equal to the greater of (a) 5.00% per annum or (b) the sum of the five year treasury rate on the date two (2) business days prior to the reset date plus 3.60%, provided that the applicable rate shall in no event exceed 7.35% per annum.

 

Avalon has the right to prepay the amount outstanding under the New Term Loan Agreement, in whole or in part, at any time upon payment of the principal amount of the loan to be prepaid plus accrued unpaid interest thereon to the prepayment date, plus an applicable prepayment penalty. The prepayment penalty, expressed as a percentage of the principal of the loan being prepaid, is five percent (5%) on any prepayment in the first five years; four percent (4%) on any prepayment in the sixth and seventh year; three percent (3%) on any prepayment in the eighth and ninth year; and two percent (2%) on any prepayment in the tenth year.

 

Borrowings under the New Term Loan Agreement are secured by certain real property and related business assets as defined in the agreement. The New Term Loan Agreement contains a Fixed Charge Coverage Ratio requirement of at least 1.20 tested on an annual basis on December 31 of each year commencing December 31, 2020. The New Term Loan also contains other nonfinancial covenants, customary representations, warranties and events of default. Avalon was in compliance with the New Term Loan Agreement covenants at September 30, 2020 and December 31, 2019.

 

Line of Credit Agreement

 

On May 31, 2018, Avalon entered into a business loan agreement with Premier Bank (formerly Home Savings Bank), (the “Line of Credit Agreement”) which provides for a line of credit of up to $5.0 million. On August 5, 2020, the Company amended the Line of Credit Agreement to extend the maturity date to July 31, 2022. Under the Line of Credit Agreement, borrowings in excess of $1.0 million are subject to a borrowing base which is calculated based off a specific level of eligible accounts receivable of the waste management business as defined in the agreement.

 

At December 20, 2019, the outstanding balance of $1.7 million under the Line of Credit Agreement was paid down with a portion of the proceeds from the New Term Loan Agreement. No amounts were drawn under the Line of Credit Agreement at September 30, 2020 and December 31, 2019. Outstanding borrowings under the Line of Credit Agreement bear interest at Prime Rate plus .25%. At September 30, 2020, the interest rate on the Line of Credit Agreement was 3.50%.

 

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Borrowings under the Line of Credit Agreement are secured by certain business assets of the Company including accounts receivable, inventory and equipment. The Line of Credit Agreement contains a Fixed Charge Coverage Ratio requirement of at least 1.20 tested on an annual basis on December 31 of each year. The Line of Credit Agreement also contains other nonfinancial covenants, customary representations, warranties and events of default. Avalon was in compliance with the Line of Credit Agreements covenants at September 30, 2020 and December 31, 2019.

 

During the three months ended September 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.57% and 5.53%, respectively. During the nine months ended September 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.74% and 5.48%, respectively.

 

Squaw Creek Country Club Lease Agreement

 

In November 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations. Based upon the amount of leasehold improvements already made, Avalon expects to exercise all of its remaining renewal options.

 

Working Capital

 

At September 30, 2020 and December 31, 2019, there was a working capital deficit of approximately $2.1 million and $3.4 million, respectively. Working capital was primarily positively impacted by an increase in cash and cash equivalents, unbilled membership dues receivable, inventory and a decrease in accounts payable. This increase was partially offset by a decrease in accounts receivable and an increase in deferred membership dues revenue and the current portion of the Payroll Protection Program loan.

 

Accounts receivable decreased to $8.7 million at September 30, 2020 compared with $12.0 million at December 31, 2019. The decrease was primarily the result of decreased sales related to the waste management services segment in the third quarter of 2020 compared with the fourth quarter of 2019 and the timing of receipt on those associated receivables. Net operating revenues related to the waste management segment were $9.3 million in the third quarter of 2020 compared with $12.8 million in the fourth quarter of 2019. This decrease was partially offset by an increase in accounts receivable related to the golf and related operations segment due to the timing of annual membership renewals.

 

Accounts payable was $8.1 million at September 30, 2020 compared to $11.7 million at December 31, 2019. The decrease in accounts payable was primarily due to a decrease in amounts due to disposal facilities and transportation carriers of the waste management services associated with the decrease in the net operating revenues in the third quarter of 2020 compared to the fourth quarter of 2019 and the associated timing of those vendor payments in the ordinary course of business. Accounts payable also decreased, to a lesser extent, by a decrease in unpaid construction invoices related to the golf and related operations segment at September 30, 2020 compared to December 31, 2019.

 

Deferred revenue relating to membership dues was approximately $4.0 million at September 30, 2020 compared to $3.2 million at December 31, 2019. The increase in deferred revenues was primarily due to the associated timing of annual membership renewals partially offset by a slight decrease in members at September 30, 2020. The number of members at September 30, 2020 was 4,931 compared to 5,051 at December 31, 2019.

 

Management believes that anticipated cash provided from future operations will be sufficient to meet operating requirements and make required monthly payments under our term loan facility. Depending on the continued duration the COVID-19 pandemic may have on our business, if business conditions warrant additional monies needed to fund operating requirements, Avalon will take all available actions including borrowing from our existing line of credit.

 

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Growth Strategy

 

Waste Management Segment

 

Our growth strategy for the waste management services segment focuses on increasing revenue, gaining market share and enhancing shareholder value through internal growth. Although we are a waste management services company, we do not own any landfills or provide waste collection services. However, because of our many relationships with various disposal facilities and transporters, we are able to be more flexible and provide alternative solutions to a customer’s waste disposal or recycling needs. We intend to capitalize on our management and sales staff which has extensive experience in all aspects of the waste business. As such, we intend to manage our internal growth as follows:

 

•    Sales and Marketing Activities. We will focus on retaining existing customers and obtaining new business through our well-managed sales and marketing activities. We seek to manage our sales and marketing activities to enable us to capitalize on our position in many of the markets in which we operate. We provide a tailored program to all of our customers in response to their particular needs. We accomplish this by centralizing services to effectively manage their needs, such as minimizing their procurement costs.

 

We currently have a number of professional sales and marketing employees in the field who are compensated using a commission structure that is focused on generating high levels of quality revenue. For the most part, these employees directly solicit business from existing and prospective customers. We emphasize our rate and cost structures when we train new and existing sales personnel. We intend to hire additional qualified professional sales personnel to expand into different geographical areas.

 

•    Development Activities. We will seek to identify opportunities to further position us as an integrated service provider in markets where we provide services. In addition, we will continue to utilize the extensive experience of our management and sales staff to bid on significant one-time projects and those that require special expertise. Where appropriate, we may seek to obtain permits that would provide vertically integrated waste services or expand the service offerings or leverage our existing volumes with current vendors to provide for long term, cost competitive strategic positioning within our existing markets.

 

Golf and Related Operations Segment

 

In August 2014, the Company acquired The Grand Resort which was integrated into the golf and related operations segment. The acquisition is consistent with the Company's business strategy in that The Grand Resort provides guests with a self-contained vacation experience, offering hotel guests golf packages to all of the golf courses of the Avalon Golf and Country Club and allows its guests to utilize the facilities at each of the clubhouses. Members of the Avalon Golf and Country Club also have access to all of the amenities offered by The Grand Resort. The Grand Resort is open year-round and provides a consistent, comfortable environment where our guests can enjoy our various amenities and activities. Avalon believes that the combination of its four golf facilities and The Grand Resort will result in additional memberships in the Avalon Golf and Country Club.

 

On May 13, 2019, Avalon acquired Avalon Field Club at New Castle which was integrated into the golf and related operations segment. The acquisition is consistent with the Company’s golf operations business strategy as members of the Avalon Golf and Country Club have access to all the golf and related country club activities offered by Avalon Field Club at New Castle. In addition, hotel guests of The Grand Resort can utilize the facility during their stay.

 

In addition, several private country clubs in the northeast Ohio area are experiencing economic difficulties. Avalon believes some of these clubs may represent an attractive investment opportunity. While Avalon has not entered into any pending agreements for acquisitions, it may do so at any time and will continue to consider acquisitions that make economic sense.

 

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Results of Operations

 

Avalon’s primary business segment, the waste management services segment, provides hazardous and nonhazardous waste brokerage and management services, captive landfill management services and salt water injection well operations. The golf and related operations segment includes the operation and management of four golf courses and related country clubs and facilities, a hotel and its associated resort amenities, a multipurpose recreation center and a travel agency.

 

Performance in the third quarter of 2020 compared with the third quarter of 2019

 

Overall Performance

 

Net operating revenues decreased to $16.6 million in the third quarter of 2020 compared with $18.0 million in the third quarter of 2019. This decrease was primarily due to a decrease in net operating revenues of the waste management services segment. Net operating revenues of the waste management services segment were $9.3 million in the third quarter of 2020 compared with $11.6 million in the third quarter of 2019. The decrease in net operating revenues of the waste management services segment was partially offset by an increase in net operating revenues of the golf and related operations segment. Net operating revenues of the golf and related operations segment were approximately $7.3 million in the third quarter of 2020 compared to $6.4 million in the third quarter of 2019.

 

Costs of operations related to the waste management segment decreased to $7.4 million in the third quarter of 2020 compared with $9.2 million in the third quarter of 2019. The decrease in the cost of operations between periods for the waste management segment is primarily due to the decreased net operating revenues as these costs vary directly with the associated revenues. Cost of operations related to the golf and related operations segment was approximately $5.4 million in both the third quarter of 2020 and 2019.

 

Depreciation and amortization expense was approximately $0.7 million in the third quarter of 2020 compared to $0.6 million in the third quarter of 2019. The increase is due to the higher depreciable asset base primarily due to the renovation and expansion of The Grand Resort.

 

Consolidated selling, general and administrative expenses were approximately $2.1 million in the third quarter of 2020 compared to $2.4 million in the third quarter of 2019. The decrease was primarily attributable to lower employee related costs, legal and professional costs and advertising costs.

 

Interest expense was approximately $0.3 million in the third quarter of 2020 compared to $0.2 million in the third quarter of 2019. The increase in interest expense is due to the higher average outstanding debt during the third quarter of 2020 compared to the prior period. This increase was partially offset by a lower weighted average interest rate on the outstanding borrowings. During the three month periods ended September 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.57% and 5.53%, respectively.

 

Net income attributable to Avalon Holdings Corporation common shareholders was $0.8 million, or $0.20 per share, in the third quarter of 2020 compared with net income attributable to Avalon Holdings Corporation common shareholders of approximately $0.1 million, or $0.04 per share, in the third quarter of 2019.

 

Segment Performance

 

Segment performance should be read in conjunction with Note 13 to the Condensed Consolidated Financial Statements.

 

Waste Management Services Segment

 

The net operating revenues of the waste management services segment decreased to $9.3 million in the third quarter of 2020 compared with $11.6 million in the third quarter of 2019. The waste management services segment includes waste disposal brokerage and management services, captive landfill management operations and salt water injection well operations.

 

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During the third quarter of 2020, our waste disposal brokerage business experienced a decline in both continuous and event work due to government restrictions placed on its customers and related shutdowns as a result of the COVID-19 pandemic. The net operating revenues of the waste disposal brokerage and management services business decreased to $8.8 million in the third quarter of 2020 from $10.9 million in the third quarter of 2019. Net operating revenues related to continuous work of the waste disposal brokerage business decreased approximately $1.3 million between periods as a result of decreased work from multiple customers. Net operating revenues related to continuous work were approximately $5.0 million in the third quarter of 2020 compared with $6.3 million in the third quarter of 2019. In addition, net operating revenues from event work related to multiple projects decreased by approximately $0.8 million during the third quarter of 2020 when compared to the third quarter of 2019. Event work is defined as bid projects under contract that occurs on a one-time basis over a short period of time. Such work can fluctuate significantly from year to year. Net operating revenues related to event work were approximately $3.7 million in the third quarter of 2020 compared with $4.5 million in the third quarter of 2019. Net operating revenues related to managerial, consulting and clerical services were approximately $0.1 million in the third quarter of 2020 and 2019. Net operating revenue relating to managerial, consulting and clerical services, which is performed for one customer, is entirely dependent on that customer’s needs.

 

The net operating revenues of the captive landfill management operations were approximately $0.5 million in the third quarter of 2020 compared to $0.7 million in the third quarter of 2019. The net operating revenues of the captive landfill operations are almost entirely dependent upon the volume of waste generated by the owner of the landfill for whom Avalon manages the facility.

 

Costs of operations related to the waste management segment decreased to $7.4 million in the third quarter of 2020 compared with $9.2 million in the third quarter of 2019. The decrease in the cost of operations between periods for the waste management segment is primarily due to the decreased net operating revenues as these costs vary directly with the associated revenues. The overall gross margin percentage of the waste brokerage and management services business was approximately 21% in the third quarter of 2020 compared to 20% in the third quarter of 2019. The increase in the overall gross margin percentage was attributable to the higher gross profit generated from continuous work during the third quarter of 2020.

 

Income before income taxes for the waste management services segment was approximately $0.9 million in the third quarter of 2020 compared to $1.1 million in the third quarter of 2019. Income before income taxes of the waste brokerage and management services business was approximately $0.8 million in the third quarter of 2020 compared to $1.0 million in the third quarter of 2019. The decreased income before income taxes was primarily attributable to lower revenues during the third quarter of 2020 compared to the third quarter of 2019. Income before income taxes of the captive landfill operations was approximately $0.1 million in both the third quarter of 2020 and 2019. During both the third quarter of 2020 and 2019 the salt water injection wells incurred a loss before income taxes of less than $0.1 million primarily due to legal and professional costs incurred relating to Avalon’s mandamus processes.

 

Golf and Related Operations Segment

 

Net operating revenues of the golf and related operations segment were approximately $7.3 million in the third quarter of 2020 compared to $6.4 million in the third quarter of 2019. Avalon’s golf and related operations segment consists of the operation and management of four golf courses and related country clubs which provide dining and banquet facilities, a hotel that provides lodging, dining, banquet and conference facilities and other resort related amenities, a multipurpose recreation center and a travel agency.

 

Food, beverage and merchandise sales increased to approximately $2.9 million in the third quarter of 2020 compared to $2.6 million in the third quarter of 2019. The increase was primarily due to an increase in food and beverage revenue generated from the new bars and restaurant at The Grand Resort.

 

Other net operating revenues related to the golf and related operations were approximately $4.4 million in the third quarter of 2020 compared to $3.8 million in the third quarter of 2019. Membership dues revenue was approximately $1.5 million in both the third quarter of 2020 and 2019. Greens fees and associated cart rentals were approximately $1.3 million in the third quarter of 2020 compared to $1.1 million in the third quarter of 2019. The increase in greens fees and associated cart rental net operating revenues was due to an increase in rounds played during the third quarter of 2020 compared to the third quarter of 2019. Net operating revenues related to room rental was approximately $1.1 million in the third quarter of 2020 compared to $0.8 million in the third quarter of 2019. The increase in room rental revenue was due to an increase in the average room rate which was slightly offset by a decrease in occupancy during the period. Other revenues consisting of athletic, fitness, travel agency, salon and spa related activities was approximately $0.5 million in the third quarter of 2020 compared to $0.4 million in the third quarter of 2019.

 

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Cost of operations for the golf and related operations segment was $5.4 million in both the third quarter of 2020 and 2019. Cost of food, beverage and merchandise was approximately $1.1 million in the third quarter of 2020 compared to $1.2 million in the third quarter of 2019. The decrease in food, beverage and merchandise costs between periods is primarily attributable to the lower product cost. The cost of food, beverage and merchandise sales was approximately 38% of associated revenue in the third quarter of 2020 compared to 45% in the third quarter of 2019. Golf and related operations operating costs increased to approximately $4.3 million in the third quarter of 2020 compared with $4.2 million in the third quarter of 2019. The increase in operating costs between periods, primarily employee related costs, was directly attributable to the increased business operations.

 

Income before income taxes for the golf and related operations was approximately $1.0 million in the third quarter of 2020 compared with $0.1 million in the third quarter of 2019. The change between periods was primarily a result of higher net operating revenues and associated gross profit generated in the third quarter of 2020.

 

General Corporate Expenses

 

General corporate expenses were $0.8 million in both the third quarter of 2020 and 2019.

 

Interest Expense

 

Interest expense was approximately $0.3 million in the third quarter of 2020 compared to $0.2 million in the third quarter of 2019. The increase in interest expense is due to the higher average outstanding debt during the third quarter of 2020 compared to the prior period. This increase was partially offset by a lower weighted average interest rate on the outstanding borrowings. During the three month periods ended September 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.57% and 5.53%, respectively.

 

Net Income

 

During the three months ended September 30, 2020 net income attributable to Avalon Holdings Corporation common shareholders was $0.8 million compared to net income attributable to Avalon Holdings Corporation common shareholders of $0.1 million for the three months ended September 30, 2019. Avalon recorded a state income tax provision in both the third quarter of 2020 and 2019, which was related entirely to the waste management and brokerage operations. Due to the recording of a full valuation allowance against the Company’s federal net deferred tax assets, the overall effective tax rate in both periods reflects taxes owed in certain U.S state jurisdictions. Avalon’s income tax on the income before taxes was offset by a change in the valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.

 

Performance in the first nine months of 2020 compared with the first nine months of 2019

 

Overall Performance

 

Net operating revenues decreased to $44.1 million in the first nine months of 2020 compared with $51.0 million in the first nine months of 2019. This decrease was primarily due to a decrease in net operating revenues of the waste management services segment. Net operating revenues of the waste management services segment were $29.5 million in the first nine months of 2020 compared with $35.9 million in the first nine months of 2019. In addition, net operating revenues of the golf and related operations segment decreased in the first nine months of 2020 compared to the first nine months of 2019. Net operating revenues of the golf and related operations segment were approximately $14.6 million in the first nine months of 2020 compared to $15.1 million in the first nine months of 2019.

 

Costs of operations related to the waste management segment decreased to $23.5 million in the first nine months of 2020 compared with $28.8 million in the first nine months of 2019. The decrease in the cost of operations between periods for the waste management segment is primarily due to the decreased net operating revenues as these costs vary directly with the associated revenues. Cost of operations related to the golf and related operations segment decreased to $12.0 million in the first nine months of 2020 compared to $13.0 million in the first nine months of 2019. The decrease was a result of lower employee related costs and food and beverage product costs during the first nine months of 2020 when compared to the first nine months of 2019 due to the decrease in net operating revenues as a result of the government mandated shut downs associated with the COVID-19 pandemic.

 

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Depreciation and amortization expense was approximately $2.2 million in the first nine months of 2020 compared to $1.8 million in the first nine months of 2019. The increase is due to the higher depreciable asset base primarily due to the renovation and expansion of The Grand Resort.

 

Consolidated selling, general and administrative expenses were approximately $6.3 million in the first nine months of 2020 compared to $7.0 million in the first nine months of 2019. The decrease was attributable to lower employee related costs, legal and professional costs and advertising costs.

 

Interest expense was approximately $0.9 million in the first nine months of 2020 compared to $0.6 million in the first nine months of 2019. The increase in interest expense is due to the higher average outstanding debt during the first nine months of 2020 compared to the prior period. This increase was partially offset by a lower weighted average interest rate on the outstanding borrowings. During the nine month periods ended September 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.74% and 5.48%, respectively.

 

Net loss attributable to Avalon Holdings Corporation common shareholders was $0.5 million, or $0.12 per share, in the first nine months of 2020 compared with a net loss attributable to Avalon Holdings Corporation common shareholders of less than $0.1 million, or $0.00 per share, in the first nine months of 2019.

 

Segment Performance

 

Segment performance should be read in conjunction with Note 13 to the Condensed Consolidated Financial Statements.

 

Waste Management Services Segment

 

The net operating revenues of the waste management services segment decreased to $29.5 million in the first nine months of 2020 compared with $35.9 million in the first nine months of 2019.

 

During the first nine months of 2020, our waste disposal brokerage business experienced a decline in both continuous and event work due to government restrictions placed on its customers and related shutdowns as a result of the COVID-19 pandemic. The net operating revenues of the waste disposal brokerage and management services business decreased to $27.8 million in the first nine months of 2020 from $33.9 million in the first nine months of 2019. Net operating revenues from event work related to multiple projects decreased by approximately $3.1 million during the first nine months of 2020 when compared to the first nine months of 2019. Event work is defined as bid projects under contract that occurs on a one-time basis over a short period of time. Such work can fluctuate significantly from year to year. Net operating revenues related to event work were approximately $11.1 million in the first nine months of 2020 compared with $14.2 million in the first nine months of 2019. In addition, continuous work of the waste disposal brokerage business decreased approximately $3.2 million between periods as a result of decreased work from multiple customers. Net operating revenues related to continuous work were approximately $15.8 million in the first nine months of 2020 compared with $19.0 million in the first nine months of 2019. Net operating revenues related to managerial, consulting and clerical services were approximately $0.9 million in the first nine months of 2020 compared to $0.7 million in the first nine months of 2019. Net operating revenue relating to managerial, consulting and clerical services, which is performed for one customer, is entirely dependent on that customer’s needs.

 

The net operating revenues of the captive landfill management operations were approximately $1.7 million in the first nine months of 2020 compared to $2.0 million in the first nine months of 2019. The net operating revenues of the captive landfill operations are almost entirely dependent upon the volume of waste generated by the owner of the landfill for whom Avalon manages the facility.

 

Costs of operations related to the waste management segment decreased to $23.5 million in the first nine months of 2020 compared with $28.8 million in the first nine months of 2019. The decrease in the cost of operations between periods for the waste management segment is primarily due to the decreased net operating revenues as these costs vary directly with the associated revenues. The overall gross margin percentage of the waste brokerage and management services business was approximately 21% in the first nine months of 2020 compared to 20% in the first nine months of 2019. The increase in the overall gross margin percentage was attributable to the higher gross profit generated from continuous work during the first nine months of 2020.

 

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Income before income taxes for the waste management services segment was approximately $2.7 million in the first nine months of 2020 compared to $3.3 million in the first nine months of 2019. Income before income taxes of the waste brokerage and management services business was approximately $2.6 million in the first nine months of 2020 compared to $3.1 million in the first nine months of 2019. The decreased income before income taxes was primarily attributable to lower revenues and associated decreased gross margin related to both continuous and event work during the first nine months of 2020 compared to the first nine months of 2019. Income before income taxes of the captive landfill operations was approximately $0.2 million in the first nine months of 2020 compared to $0.3 million in the first nine months of 2019. The decrease in primarily attributable to lower net operating revenue. During both the first nine months of 2020 and 2019 the salt water injection wells incurred a loss before income taxes of approximately $0.1 million primarily due to legal and professional costs incurred relating to Avalon’s mandamus processes.

 

Golf and Related Operations Segment

 

Net operating revenues of the golf and related operations segment were approximately $14.6 million in the first nine months of 2020 compared to $15.1 million in the first nine months of 2019.

 

Food, beverage and merchandise sales decreased to approximately $5.3 million in the first nine months of 2020 compared to $6.0 million in the first nine months of 2019. Our restaurant operations generated lower revenue in the first nine months of 2020 due to the government mandated restrictions placed on in-house dining as a result of The Ohio Department of Health and The Pennsylvania Department of Health Director's Orders which temporarily closed all bars and restaurants to in-house patrons in March 2020 in response to the COVID-19 pandemic. In accordance with the Orders, the Company continued to provide take-out, but revenues related to these services were not significant during that period. The Order also placed a limit on mass gatherings and large community events. Food and beverages sales related to banquets and conferences were significantly lower during the first nine months of 2020 compared to the first nine months of 2019 as a result of these government mandated restrictions. In late May and June 2020, the states of Ohio and Pennsylvania allowed for both the reopening of dining rooms and limited gatherings under mandated restrictions.

 

Other net operating revenues related to the golf and related operations were approximately $9.3 million in the first nine months of 2020 compared to $9.1 million in the first nine months of 2019. Membership dues revenue was approximately $4.6 million in the first nine months of 2020 compared to $4.2 million in the first nine months of 2019. The increase in membership dues revenue was attributable to both an increase in annual membership dues rates and an increase in the average number of members between periods. The average number of members during the first nine months of 2020 was 5,028 compared to 4,839 in the first nine months of 2019. Net operating revenues related to room rental was approximately $1.7 million in the first nine months of 2020 compared to $1.8 million in the first nine months of 2019. During the first nine months of 2020, the Company had significantly lower occupancy compared to the first nine months of 2019 due to customer cancellations of overnight stays in response to the COVID-19 pandemic. The decrease in room revenue as a result of the lower occupancy was partially offset by an increase in average room rates when compared to the prior period. Other revenues consisting of athletic, fitness, travel agency, salon and spa related activities decreased to approximately $1.0 million in the first nine months of 2020 compared to $1.3 million in the first nine months of 2019 due to the March 2020 Orders requiring all nonessential business activities, including athletic, fitness, salon and spa activities to temporarily cease operations. These business activities were allowed to resume operating in late May and early June 2020. Greens fees and associated cart rentals were approximately $2.0 million in the first nine months of 2020 compared to $1.8 million in the first nine months of 2019. The increase in greens fees and associated cart rental net operating revenues was due to an increase in rounds played during the first nine months of 2020 compared to the first nine months of 2019. Due to adverse weather conditions, net operating revenues relating to the golf courses, which are located in northeast Ohio and western Pennsylvania, were minimal during the first three months of 2020 and 2019.

 

Cost of operations for the golf and related operations segment was $12.0 million in the first nine months of 2020 compared with $13.0 million in the first nine months of 2019. Cost of food, beverage and merchandise was approximately $2.2 million in the first nine months of 2020 compared to $2.7 million in the first nine months of 2019. The decrease in food, beverage and merchandise costs between periods is attributable to both lower revenues and lower food and beverage product cost. The cost of food, beverage and merchandise sales was approximately 42% of associated revenue in the first nine months of 2020 compared to 45% in the first nine months of 2019. Golf and related operations operating costs decreased to approximately $9.8 million in the first nine months of 2020 compared with $10.3 million in the first nine months of 2019. The decrease in operating costs between periods was directly attributable to the decreased business operations under the Orders.

 

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The golf and related operations recorded income before income taxes of $0.1 million in the first nine months of 2020 compared with a loss before income taxes of $0.4 million in the first nine months of 2019. The change between periods was primarily a result of higher net operating revenues related to membership dues, greens fees and cart rentals and lower food and beverage products costs.

 

The ability to attract new members and retain members is very important to the success of the golf and related operations segment. Avalon is continually using different marketing strategies to attract and retain members, such as local television advertising and/or various membership promotions. A significant decline in members could adversely impact the financial results of the golf and related operations segment.

 

General Corporate Expenses

 

General corporate expenses were $2.4 million in the first nine months of 2020 and 2019.

 

Interest Expense

 

Interest expense was approximately $0.9 million in the first nine months of 2020 compared to $0.6 million in the first nine months of 2019. The increase in interest expense is due to the higher average outstanding debt during the first nine months of 2020 compared to the prior period. This increase was partially offset by a lower weighted average interest rate on the outstanding borrowings. During the nine month periods ended September 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.74% and 5.48%, respectively.

 

Net Loss

 

During the nine months ended September 30, 2020 net loss attributable to Avalon Holdings Corporation common shareholders was $0.5 million compared to a net loss attributable to Avalon Holdings Corporation common shareholders of less than $0.1 million for the nine months ended September 30, 2019. Avalon recorded a state income tax provision in both the first nine months of 2020 and 2019, which was related entirely to the waste management and brokerage operations. Due to the recording of a full valuation allowance against the Company’s federal net deferred tax assets, the overall effective tax rate in both periods reflects taxes owed in certain U.S state jurisdictions. Avalon’s income tax benefit on the loss before taxes was offset by a change in the valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.

 

Trends and Uncertainties

 

Financial impact of COVID-19 pandemic

 

In December 2019, a novel strain of coronavirus, COVID-19, emerged in Wuhan, Hubei Province, China. While initially concentrated in China, the outbreak spread to other countries and infections have been reported globally including in the United States. On March 11, 2020, the World Health Organization declared the COVID-19 viral disease a pandemic. The duration of the outbreak and new information which continually emerges concerning the severity of the illness and its treatment still remains unclear. As a result, the federal and state governmental bodies have taken unprecedented measures to try and control the spread of the virus.

 

In response to the COVID-19 pandemic, on March 15, 2020, the Governor of the State of Ohio announced that the Ohio Department of Health (“ODH”) issued a Director's Order (the “Order”) temporarily closing all Ohio bars and restaurants to in-house patrons. The Order stated that restaurants with take-out and delivery options could continue to operate those services, even as their dining rooms were temporarily closed. The Order also placed a limit on mass gatherings and large community events.

 

On March 19, 2020, the ODH issued a Director’s Order temporarily closing all salons and spas in the state of Ohio and also further limited the number of individuals for gatherings. On March 23, 2020, a “Stay at Home” order was issued by the ODH. The Stay at Home order stated that all individuals living within the State of Ohio are ordered to stay at home or at their place of residence. Under the order, individuals were only allowed to leave their home for essential activities including tasks related to their health and safety, obtaining necessary supplies and services and certain types of work. The Stay at Home Order required all non-essential businesses to cease operations. In March 2020 the Governor of the state of Pennsylvania issued a similar Stay at Home order. Under the order, all non-essential businesses were required to cease operations.

 

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In accordance with the “Essential Critical Infrastructure Workforce” guidance issued by the U.S Department of Homeland Security, Cybersecurity & Infrastructure Agency (“CISA”) on March 19, 2020, the Company’s waste management services, restaurant carry-out, overnight lodging and outdoor golf courses remained in operation during the Order.

 

In late May and June 2020, the states of Ohio and Pennsylvania allowed the reopening of certain business operations that were temporarily closed under the Order. The Company’s dining rooms, fitness, athletic, pool, salon and spa services reopened under certain mandatory restrictions including mask protection for employees, decrease in occupancy and other measures to enforce social distancing.

 

During 2020, the governmental orders issued to control the spread of COVID-19 adversely impacted our operations and related financial results. During the Stay at Home order, our restaurant operations generated significantly lower revenue as a result of the restrictions that were placed on in-house dining. Our restaurant revenue increased during the third quarter of 2020 as certain restrictions on in-house dining were reduced or lifted. Food and beverages sales related to banquets and conferences were significantly lower during the second and third quarter of 2020 as a result of restrictions placed on gatherings and events. In addition, the Company had high levels of room and event cancellations during the Stay at Home Order with some subsequent re-bookings that occurred in the third quarter of 2020 and into the fourth quarter of 2020 and into 2021. Our fitness, athletics, salon and spa operations generated no revenue under the Stay at Home Order. In addition, our waste management brokerage business has experienced a decline in both continuous and project work due to government restrictions placed on its customers and associated shutdowns.

 

As government restrictions are reduced or lifted, we may continue to experience weakened demand in light of continued travel restrictions or warnings, consumer fears and reduced consumer discretionary spending and general economic uncertainty. In light of the foregoing, we are unable to determine when our operations will return to pre-pandemic demand or pricing. During the mandated shut-down, the Company engaged in aggressive efforts to reduce expenses, including reducing employee costs, through hiring freezes, headcount reductions and substantial furloughs of employees. The Company began the process of rehiring employees in late May to meet business needs as the government restrictions on certain of our business operations were reduced or lifted. Governmental bodies may impose additional restrictions, which could include additional shutdowns, to stop the spread of infection. These additional restrictions would have a negative impact on our financial condition, results of operations and cash flows.

 

Paycheck Protection Program Loan

 

The Coronavirus Aid, Relief, and Economic Security Act, or (“CARES”) Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (the “Program”). The Program provides for 100% federally guaranteed loans to small businesses to allow employers to keep workers employed and maintain payroll during the pandemic and economic downturn. Under the Program, qualified companies are eligible for a loan in an amount equal to the lesser of $10 million or 2.5x the business’s average monthly payroll. Collateral or guarantor support is not required for the loan.

 

Under the Program, the borrower is eligible for loan forgiveness up to the amount the borrower spends on certain eligible costs during the 8 week period beginning on the date the proceeds were received on the loan. Eligible costs under the Program include payroll costs, interest on mortgage obligations incurred before the covered period, rent on leasing agreements and utility services. The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Under the Program, proceeds that are not forgiven convert to a loan bearing interest at a fixed rate of 1% payable in 18 equal monthly installments commencing after the forgiveness period. The Program was subsequently amended to allow the borrower to use an extended forgiveness period of 24 weeks beginning on the date the proceeds were received on the loan and to extend the repayment period to 54 months commencing after the 24 week forgiveness period.

 

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In the second quarter of 2020, certain wholly-owned subsidiaries of Avalon entered into agreements and received a total of approximately $2.8 million in loans under the Program. The Company utilized the loan proceeds under the 24 week loan forgiveness period and subsequently applied for forgiveness in accordance with the Program’s guidelines. When the debt is forgiven in accordance with the Program, any amount that is forgiven will be recognized as a gain on debt extinguishment. The Company will repay amounts that are not forgiven.

 

Government regulations

 

The federal government and numerous state and local governmental bodies are continuing to consider legislation or regulations to either restrict or impede the disposal and/or transportation of waste. A portion of Avalon’s waste management services revenues is derived from the brokerage of the disposal and/or transportation of out-of-state waste. Any law or regulation restricting or impeding the transportation of waste or the acceptance of out-of-state waste for disposal could have a negative effect on Avalon. Avalon’s waste brokerage and management services may also be affected by the trend toward laws requiring the development of waste reduction and recycling or other programs.

 

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryforwards generated in taxable years beginning after December 31, 2017, to offset 100% of taxable income for taxable years beginning before January 1, 2021, and 80% of taxable income in taxable years beginning after December 31, 2020. In addition, the CARES Act allows net operating losses incurred in taxable years beginning after December 31, 2017, and before January 1, 2021, to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the full impact of these provisions and recent IRS guidance, and we expect that it will not have a material impact on the Company’s financial position or results of operations.

 

Legal matters

 

In the ordinary course of conducting its business, Avalon becomes involved in lawsuits, administrative proceedings and governmental investigations, including those relating to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, management assesses the probability of loss and accrues a liability as appropriate. Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, will have a material adverse effect on its liquidity, financial position or results of operations.

 

Credit and collections

 

Economic challenges throughout the industries served by Avalon may result in payment defaults by customers. While Avalon continuously endeavors to limit customer credit risks, customer-specific financial downturns are not controllable by management. Significant customer payment defaults would have a material adverse impact upon Avalon’s future financial performance.

 

Competitive pressures

 

Avalon’s waste brokerage and management services business obtains and retains customers by providing services and identifying cost-efficient disposal options unique to a customer’s needs. Consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and may cause disposal pricing to increase. Avalon’s waste brokerage and management services business may not be able to pass these price increases onto some of its customers, which, in turn, may adversely impact Avalon’s future financial performance.

 

A majority of Avalon’s business is not subject to long-term contracts

 

A significant portion of Avalon’s business is generated from waste brokerage and management services provided to customers that are not subject to long-term contracts. In light of current economic, regulatory and competitive conditions, there can be no assurance that Avalon’s current customers will continue to transact business with Avalon at historical levels. Failure by Avalon to retain its current customers or to replace lost business could adversely impact the future financial performance of Avalon.

 

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Avalon’s captive landfill management business is dependent upon a single customer as its sole source of revenue. If the captive landfill management business is unable to retain this customer, Avalon’s future financial performance could be adversely impacted.

 

A significant source of the golf and related operations revenues is derived from the members of the Avalon Golf and Country Club. Members are obligated to pay dues for a one year period. As such, the golf and related operations is primarily dependent on the sale and renewal of memberships in the Avalon Golf and Country Club, on a year to year basis.

 

Avalon's loan and security agreement may obligate it to repay debt before its maturity

 

The Company’s loan and security agreement contains certain covenants and events of default. Should Avalon be unable to meet one or more of these covenants, its lender may require it to repay any outstanding balance prior to the expiration date of the agreement. Our ability to comply with the financial and other covenants in our loan and security agreement may be affected by worsening economic or business conditions, or other events that may be beyond our control. We cannot provide assurance that our business will generate sufficient cash flow from operating activities in amounts sufficient to enable us to service debt and meet these covenants. We may need to refinance all or a portion of our indebtedness, on or before maturity. The Company cannot assure that additional sources of financing would be available to pay off any long-term borrowings under the loan and security agreement, so as to avoid default. 

 

Saltwater disposal wells

 

Saltwater disposal wells are regulated by the Ohio Department of Natural Resources (“ODNR”), with portions of the disposal facilities regulated by the Ohio EPA. As exploitation of the Marcellus and Utica shale formations by the hydrofracturing process develops, regulatory and public awareness of the environmental risks of saltwater brine and its disposal in saltwater disposal wells is growing and consequently, it is expected that regulation governing the construction and operation of saltwater disposal wells will increase in scope and complexity. Increased regulation may result in increased construction and/or operating costs, which could adversely affect the financial results of Avalon.

 

There is a continuing risk during the saltwater disposal well’s operation of an environmental event causing contamination to the water tables in the surrounding area, or seismic events. The occurrence of a spill or contamination at a disposal well site could result in remedial expenses and/or result in the operations at the well site being suspended and/or terminated by the Ohio EPA or the ODNR. Incurring remedial expenses and /or a suspension or termination of Avalon’s right to operate one or more saltwater disposal wells at the well site could have an adverse effect on Avalon’s financial results.

 

As a result of a seismic event with a magnitude of 2.1 occurring on August 31, 2014, the Chief of the Division of Oil and Gas Resources Management (“Chief” or “Division”) issued Orders on September 3, 2014 to immediately suspend all operations of Avalon’s two saltwater injection wells until the Division could further evaluate the wells.  The Orders were based on the findings that the two saltwater injection wells were located in close proximity to an area of known seismic activity and that the saltwater injection wells pose a risk of increasing or creating seismic activity.

 

On September 5, 2014, Avalon submitted the information required by the Chief’s Order in regards to its AWMS #1 injection well, and the Chief lifted the suspension for that well on September 18, 2014. On September 19, 2014, Avalon submitted information and a written plan required by the Chief’s Order proposing the establishment of certain operations and management controls on injections for the AWMS #2 injection well. To date, the Division has not responded to that plan despite Avalon’s request for feedback.

 

On October 2, 2014, Avalon filed an appeal with the Ohio Oil and Gas Commission (the “Commission”) disputing the basis for suspending operations of AWMS #2 and also the authority of the Chief to immediately suspend such operations. On March 11, 2015, an appeal hearing was held. The Chief stated during the hearing that the suspension order is temporary, and he expects that AWMS #2 will be allowed to resume operations once the state’s final policymaking is complete. 

 

On August 12, 2015, the Commission upheld the temporary suspension of injection operations of AWMS #2 stating that the temporary suspension would allow the Chief more time to fully evaluate the facts in anticipation of the Division’s implementation of a comprehensive regulatory plan that will specifically address injection-induced seismicity. 

 

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Avalon appealed that decision to the Franklin County Court of Common Pleas (the “Court”), and on November 1, 2016 an appeal hearing was held in that Court.  On December 23, 2016, the Court issued its Decision and Order in Avalon’s favor, and vacated the Commission’s decision.  The Court found that the Division’s suspension and refusal to work with the Company over the 26 month period was arbitrary and not in accordance with reason.  Subsequent to the ruling, and in accordance with the Court’s Decision and Order, both Avalon and the Division submitted their proposed restart plans to the Court.  Avalon’s plan sets forth both the initial volumes and pressures and increases in volume and pressure while continuously monitoring seismicity and addressing the concerns of public health and safety. 

 

On February 21, 2017, the Court issued its Final Decision and Order.  The Court’s Final Decision and Order set forth conditions for restarting the AWMS #2 salt water injection well in accordance with the proposed restart plans filed by Avalon with minor revisions.  On February 22, 2017, the Division appealed the Final Decision and Order and filed a Motion to Stay the Court Order.  The Motion to Stay was granted by the Ohio 10th District Court of Appeals on March 21, 2017.

 

On September 14, 2017, an appeal hearing was held in the Ohio 10th District Court of Appeals and on July 31, 2018 a decision was issued on the appeal. The decision reinstated the previous Ohio Oil and Gas Commission decision in this matter. 

 

On September 12, 2018, the Company appealed the Ohio 10th District Court of Appeals decision to the Supreme Court of Ohio. On November 21, 2018, the Company received notice from the Supreme Court of Ohio that the court would not accept for review the Company’s appeal of the Ohio 10th District Court of Appeals decision on the Division of Oil and Gas Resources Management’s appeal of the Franklin County Court of Common Pleas February 21, 2017 entry allowing restart of the Company’s AWMS Water Solutions, LLC #2 salt water injection well.    

 

On April 5, 2019, Avalon filed with the Oil and Gas Commission a motion to vacate its prior decisions in this matter.  There can be no guarantee that the salt water injection wells will resume operations, but the Company will continue to pursue all available avenues to allow the restart of the Company’s salt water injection well under reasonable conditions. Currently, there is no implemented state-wide policy on induced seismicity and the Ohio Department of Natural Resources (“ODNR”) has refused to communicate with the Company regarding the status and requirements of any policymaking. The operations of Company’s injection wells will remain suspended until that time. The Oil and Gas Commission scheduled a hearing on this motion for August 13, 2019.  Before the hearing began, and in response to the Division’s motion to dismiss the Company’s motion to vacate, the Commission dismissed the matter.  The Company appealed that decision to the Franklin County Court of Common Pleas.  In April 2020, the Division’s motion to dismiss and the Company’s opposition was reviewed by the Court.  The Company is currently awaiting judgment from the Court.

 

Concurrently with the filing of the appeal with the Franklin County Court of Common Pleas, the Company filed a writ of mandamus in the 10th District Court of Appeals on August 30, 2019 to compel the chief of the Division to issue restart orders, or alternative orders that would allow the Company to either restart the AWMS #2 well, or appeal said orders to the Oil and Gas Commission in accordance with Ohio Law.  On October 6, 2020 and in response to a motion from the Division, the Court dismissed this complaint for writ of mandamus.

 

In addition, on August 26, 2016, Avalon filed a complaint in the 11th Appellate District Court in Trumbull County, Ohio for a Peremptory Writ of Mandamus to compel the Director of the ODNR to initiate appropriations procedures to determine damages from the illegal regulatory taking of the Company’s property, or issue an alternative remedy at law. The Company believes that the actions, and lack of responsible actions, by the ODNR is a clear violation of the Company’s property rights and a violation of the Fifth and Fourteenth Amendments to the U.S. Constitution; Article I, Section 19 of the Ohio Constitution; and Ohio Revised Code Chapter 163. 

 

On March 18, 2019, Avalon received notice that the 11th Appellate District Court in Trumbull County, Ohio issued summary judgment in favor of the Ohio Department of Natural Resources in the writ of mandamus action that resulted from the suspension order of the Company’s salt water injection well.  The decision was appealed to the Supreme Court of Ohio on April 5, 2019.  Oral arguments in the case occurred on April 7, 2020.  On September 23, 2020, the Supreme Court of Ohio ruled in favor of the Company.  The Supreme Court of Ohio reversed the decision of the 11th Appellate District Court and remanded back to that court for a trial on the merits.  The Company is currently preparing for that trial.

 

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Golf memberships and liquor licenses

 

The Avalon Golf and Country Club operates four golf courses and related country clubs and a multipurpose recreation center. The Avalon Golf and Country Club facilities also offer swimming pools, fitness centers, tennis courts, dining and banquet facilities, salon and spa services. In addition, The Grand Resort provides guests with a self-contained vacation experience, offering hotel guests golf packages to all of the golf courses of the Avalon Golf and Country Club and allows its guests to utilize the facilities at each of the clubhouses. Members of the Avalon Golf and Country Club also have access to all of the amenities offered by The Grand Resort. The Avalon Golf and Country Club competes with many public courses and country clubs in the area. Although the golf courses continue to be available to the general public, the primary source of revenues is derived from the members of the Avalon Golf and Country Club. Avalon believes that the combination of its three facilities and The Grand Resort will result in additional memberships in the Avalon Golf and Country Club. The ability to retain current members and attract new members has been an ongoing challenge. Although Avalon was able to increase the number of members of the Avalon Golf and Country Club, as of September 30, 2020, Avalon has not attained its membership goals. There can be no assurance as to when such goals will be attained and when the golf and related operations will ultimately become profitable. Avalon is continually using different marketing strategies to attract new members, such as local television advertising and various membership promotions. A significant decline in members could adversely affect the future financial performance of Avalon.

 

Avalon’s golf course operations, The Grand Resort and multipurpose recreation center currently hold liquor licenses for their respective facilities. If, for some reason, any one of these facilities were to lose their liquor license, the financial performance of the golf and related operations would be adversely affected.

 

Seasonality

 

Avalon’s operations are somewhat seasonal in nature since a significant portion of those operations are primarily conducted in selected northeastern and midwestern states. Additionally, Avalon’s golf courses are located in northeast Ohio and western Pennsylvania and are significantly dependent upon weather conditions during the golf season. As a result, Avalon’s financial performance is adversely affected by adverse weather conditions.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Avalon does not have significant exposure to changing interest rates.

 

Borrowings under our Term Loan Agreement bear interest at a fixed rate of 5.00% until the fifth anniversary date of the closing at which time the interest rate will be reset to a fixed rate equal to the greater of (a) 5.00% per annum or (b) the sum of the five year treasury rate on the date two (2) business days prior to the reset date plus 3.60%, provided that the applicable rate shall in no event exceed 7.35% per annum.

 

Outstanding borrowings under our Line of Credit Agreement bear interest at Prime Rate plus .25%. At September 30, 2020, the interest rate on the Line of Credit Agreement was 3.50%. No amounts were outstanding under the Line of Credit Agreement at September 30, 2020.

 

Borrowings under the Paycheck Protection Program that are not forgiven convert to a loan bearing interest at a fixed rate of 1.00% payable in 18 equal monthly installments commencing after the forgiveness period.

 

Avalon does not undertake any specific actions to cover its exposure to interest rate risk and Avalon is not a party to any interest rate risk management transactions. Avalon does not purchase or hold any derivative financial instruments.

 

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Item 4. Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), Avalon’s management conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020. For purposes of the foregoing, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Avalon’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as outlined above. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that they believe that, as of September 30, 2020, our disclosure controls and procedures were effective at a reasonable assurance level.

 

Changes in Internal Controls over Financial Reporting.

 

There were no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Reference is made to “Item 3. Legal Proceedings” in Avalon’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of legal proceedings.

 

Item 2. Changes in Securities and Use of Proceeds 

 

None

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures  

 

None

 

Item 5. Other Information 

 

None

 

Item 6. Exhibits and Reports on Form 8-K  

 

(a)

Exhibits

  

 

Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 101.INS XBRL Instance

 

 

 

Exhibit 101.SCH XBRL Taxonomy Extension Schema

 

 

 

Exhibit 101.CAL XBRL Taxonomy Extension Calculation

 

 

 

Exhibit 101.DEF XBRL Taxonomy Extension Definition

 

 

 

Exhibit 101.LAB XBRL Taxonomy Extension Labels

 

 

 

Exhibit 101.PRE XBRL Taxonomy Extension Presentation

 

 

(b)

Reports on Form 8-K

  
 

On August 5, 2020, Avalon reported that on August 5, 2020 the Company entered into an amendment to its existing Line of Credit Agreement with Premier Bank (formerly Home Savings Bank) to extend the maturity date of May 31, 2021 to July 31, 2022.

  
 

On November 9, 2020, Avalon reported that on November 6, 2020, the Company accepted the resignation of Mr. David G. Bozanich as a member of the Company’s Board of Directors (the “Board”). Mr. Bozanich also resigned from his positions on the Company’s Audit Committee, Executive Committee and Option Plan Committee. On November 9, 2020, the Company also reported that on November 6, 2020, Avalon appointed Timothy C. Coxson to the Company’s Board of Directors. Mr. Coxson was also appointed to the Company’s Audit Committee, Executive Committee and Option Plan Committee.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

AVALON HOLDINGS CORPORATION

 

 

(Registrant)

 

   

 

   

 

Date:        November 12, 2020                     

By:

/s/ Bryan P. Saksa

 

 

Bryan P. Saksa, Chief Financial Officer and

 

 

Treasurer (Principal Financial and Accounting

 

 

Officer and Duly Authorized Officer)

 

 

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