10-K
AVALON HOLDINGS CORP (AWX)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
☐ 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 |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐****No ☒
Indicate by 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 check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of Class A Common Stock held by non-affiliates of the registrant on March 6, 2020 was $5.3 million. Assuming that the market value of Avalon Holdings Corporation’s Class B Common Stock was the same as its Class A Common Stock by reason of its one-to-one conversion rights, the market value of Class B Common Stock held by non-affiliates of the registrant on March 6, 2020 was approximately $937. 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 March 6, 2020.
Documents Incorporated by Reference
| 1. | Portions of the Avalon Holdings Corporation Annual Report to Shareholders for the year ended December 31, 2019 (Parts I and II of Form 10-K). |
|---|---|
| 2. | Portions of the Avalon Holdings Corporation Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference herein into Part III. |
| --- | --- |
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
_________________________________
As used in this report, the terms “Avalon,” “Company,” and “Registrant” mean 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.
_________________________________
TABLE OF CONTENTS
| Part I | Page | |
|---|---|---|
| Item 1. | Business | 1 |
| Item 1A. | Risk Factors | 6 |
| Item 1B. | Unresolved Staff Comments | 11 |
| Item 2. | Properties | 12 |
| Item 3. | Legal Proceedings | 12 |
| Item 4. | Mine Safety Disclosures | 12 |
| Part II | ||
| Item 5. | Market for the Registrant’s Common Equity and Related Stockholder Matters | 13 |
| Item 6. | Selected Financial Data | 13 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 13 |
| Item 8. | Financial Statements and Supplementary Data | 13 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 14 |
| Item 9A. | Controls and Procedures | 14 |
| Item 9B. | Other Information | 15 |
| Part III | ||
| Item 10. | Directors and Executive Officers of the Registrant | 16 |
| Item 11. | Executive Compensation | 17 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management | 17 |
| Item 13. | Certain Relationships and Related Transactions | 17 |
| Item 14. | Principal Accountant Fees and Services | 17 |
| Part IV | ||
| Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 18 |
| Item 16. | Form 10-K Summary | 21 |
| Signatures | 22 |
Note on Incorporation by Reference
Throughout this report various information and data are incorporated by reference from Avalon’s 2019 Annual Report to Shareholders (hereinafter referred to as the “Annual Report to Shareholders”). Any reference in this report to disclosures in the Annual Report to Shareholders shall constitute incorporation by reference of that specific material into this Form 10-K.
PART 1
| ITEM 1. | BUSINESS |
|---|
General
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 (the “Spin-off”). The history and organization of the remaining operations, some of which were contributed to Avalon as a result of the Spin-off, are described below.
In June 1990, AWS purchased approximately 5.6 acres of real estate located in Warren, Ohio on which it constructed Avalon’s corporate headquarters. In connection with the acquisition of such property, Avalon Lakes Golf, Inc. (“ALGI”), a former subsidiary of AWS and now an indirect wholly owned subsidiary of Avalon, acquired the real and personal property associated with the Avalon Lakes Golf Course, an 18-hole golf course adjacent to the office property. The corporate headquarters and ALGI were contributed to Avalon by AWS. The Avalon corporate headquarters building includes a clubhouse, restaurant, golf simulators and a pro shop for the Avalon Golf and Country Club at Avalon Lakes Golf Course.
In 1995, American Waste Management Services, Inc. (“AWMS”) commenced its waste disposal brokerage and management operations and in 1997, American Landfill Management, Inc. (“ALMI”) started its captive landfill management operations. Both companies were contributed to Avalon by AWS and now are wholly owned subsidiaries of Avalon.
In November 2003, TBG, Inc. (“TBG”), a subsidiary of ALGI, entered into a long-term lease agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. As a result of the transaction, Avalon created a newly organized subsidiary, Avalon Golf and Country Club, Inc. (“AGCC”) which manages all the golf courses and related operations.
In October 2006, Avalon, through a newly created subsidiary, Avalon Country Club at Sharon, Inc. (“Sharon”), completed the acquisition of the Sharon Country Club assets. The primary assets of the Sharon club include the golf course and clubhouse. Avalon renovated the clubhouse and constructed additional recreational facilities and operates the Sharon facilities as part of its Avalon Golf and Country Club.
In June 2011, AWMS Water Solutions, LLC was formed to acquire options on properties for the purpose of operating 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 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 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. As a result of the private placement offering, Avalon is not the majority owner of AWMS Holdings, LLC; however, due to the managerial control of AWMS Water Solutions, LLC, AWMS Holdings, LLC is a variable interest entity (“VIE”), and the financial statements of AWMS Holdings, LLC and subsidiaries are included in Avalon’s consolidated financial statements.
In August 2013, AWMS Holdings, LLC formed its first wholly owned subsidiary, AWMS Rt. 169, LLC, to own and operate two salt water injection wells. AWMS Rt. 169, LLC leases 5.2 acres on which the salt water injection wells are located. As further described below, based on the Chief of the Division of Oil and Gas Resources Management’s decision, the operations of the two salt water injection wells are currently suspended.
In August 2014, Avalon, through a newly created subsidiary, The Avalon Resort and Spa LLC, completed the acquisition of The Magnuson Grand Hotel in Howland, Ohio. Subsequent to the acquisition, The Magnuson Grand Hotel was renamed The Avalon Inn. In 2019, The Avalon Inn was renamed and now operates as The Grand Resort. The primary assets of The Grand Resort include the hotel, indoor junior Olympic size swimming pool, outdoor resort pool, Roman Bath, fitness center, restaurants, bars, salon and spa, banquet and conference facilities and adjoining recreation and tennis center. The Grand Resort is located adjacent to Avalon’s corporate headquarters and the Avalon Lakes Golf Course. In 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, addition of a new restaurant, bars, salon and spa, outdoor resort pool and Roman Bath. The Grand Resort operates in conjunction with the Avalon Golf and Country Club.
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In July 2016, the Company formed Avalon Resorts and Clubs, Inc. (“ARCI”), a wholly owned subsidiary of Avalon, the purpose of which is to hold the corporate activity of Avalon Clubs, Inc. and Avalon Resorts, Inc., both formed concurrently with ARCI. Avalon Clubs, Inc. was formed to hold the wholly owned subsidiaries of the Avalon Golf and Country Club, while Avalon Resorts, Inc. holds the operations of The Grand Resort.
In March 2018, Avalon, through a newly created subsidiary, Avalon Mahoning Sports Center, Inc., completed the acquisition of the Boardman Tennis Center property in Boardman, Ohio. Subsequent to the acquisition, the Boardman Tennis Center property was renamed the Avalon Athletic Club at Boardman. The primary assets of the Avalon Athletic Club at Boardman include the acquired real property consisting of the building and associated land. The Avalon Athletic Club at Boardman facility is a multipurpose recreation center including indoor tennis, basketball, volleyball and pickleball courts and a fitness area. The Avalon Athletic Club at Boardman operates as part of its Avalon Golf and Country Club.
In May 2019, Havana Cigar Shop, Inc., a wholly owned subsidiary of Avalon, completed the acquisition of the New Castle Country Club real property assets located in New Castle, Pennsylvania. Subsequent to the acquisition, Havana Cigar Shop, Inc. was named Avalon Field Club at New Castle. The primary assets of Avalon Field Club at New Castle include the acquired real property consisting of the golf course and associated clubhouse. Avalon Field Club at New Castles operates as part of its Avalon Golf and Country Club. In 2020, Avalon will begin renovating the existing clubhouse.
Business Segments Information
Avalon’s business segments are waste management services and golf and related operations. The waste management services segment includes waste disposal brokerage and management services, captive landfill management operations and salt water injection well operations. The golf and related operations segment includes the operation and management of three golf courses and related clubhouses, a hotel, fitness centers, tennis courts, salon and spa services, dining, banquet and conference facilities and a travel agency. In 2019 and 2018, no customer individually accounted for 10% or more of the waste management services segment’s net operating revenues to external customers.
Waste Management Services
Avalon’s waste management subsidiaries provide hazardous and nonhazardous waste disposal 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. For the years 2019 and 2018, the net operating revenues of the waste management services segment represented approximately 71% and 72%, respectively, of Avalon’s total consolidated net operating revenues.
AWMS assists customers with managing and disposing of wastes at approved treatment and disposal sites based upon a customer’s needs.
Because waste generators remain liable for their waste, both before and after disposal, they require assurance that their waste will be safely and properly transported, treated and disposed of. To give customers this confidence, as well as to limit its own potential liability, AWMS has instituted procedures designed to minimize the risks of improper handling or disposal of waste.
Before AWMS will provide waste brokerage or management services, a potential customer must complete a detailed waste profile setting forth the amount, chemical composition and any unique characteristics for each type of waste to be handled. Representative samples of the waste are analyzed by a state or federally certified laboratory. In addition, an AWMS representative generally inspects the process generating the waste, the location where the waste may be temporarily stored or the site of the remediation project producing the waste, and interviews representatives of the generator familiar with the waste. This inspection, along with the laboratory results, allows AWMS to determine whether the waste is within acceptable parameters for disposal and, if so, what special handling and treatment procedures must be instituted. If the waste is continuously generated, new representative samples are tested on a periodic basis.
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These procedures are important to both AWMS and its customers because the key to proper handling of waste is accurate identification. Hazardous waste which is not identified as such, and thus, improperly disposed of can result in substantial liability to the waste generator, the disposal facility, AWMS and potentially to all other waste generators that have used the disposal site. Conversely, waste that could safely and legally be disposed of in a solid waste landfill, but is instead sent to a hazardous waste facility for treatment and disposal, will result in substantial and unnecessary expense to the generator.
ALMI is a landfill management company that 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. ALMI provides turnkey services, including daily operations, facilities management and management reporting for its customers. Currently, ALMI manages one captive disposal facility located in Ohio. In addition, American Construction Supply, Inc., a wholly owned subsidiary of ALMI, sells construction mats.
AWMS Holdings, LLC, is a holding company that was created to form and own a series of wholly owned subsidiaries that own and operate salt water injection wells and 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 the operations, including the marketing and sales function and all the decisions regarding the well operations for a percentage of the gross revenues. As a result of the private placement offering, Avalon is not the majority owner of AWMS Holdings, LLC; however, due to the managerial control of AWMS Water Solutions, LLC, AWMS Holdings, LLC is a VIE, and the financial statements of AWMS Holdings, LLC and subsidiaries are included in Avalon’s consolidated financial statements.
AWMS Holdings, LLC formed its first wholly owned subsidiary, AWMS Rt. 169, LLC, to own and operate two salt water injection wells. AWMS Rt. 169, LLC leases 5.2 acres on which the salt water injection wells are located. As further described below, based on the Chief of the Division of Oil and Gas Resources Management’s decision, the operations of the two salt water injection wells are currently suspended.
Golf and Related Operations
Avalon’s 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, an athletic center and a travel agency. For the years 2019 and 2018, the net operating revenues of the golf and related operations segment represented approximately 29% and 28%, respectively, of Avalon’s total consolidated net operating revenues.
ALGI owns and operates a Pete Dye designed championship golf course located in Warren, Ohio. ALGI generates revenue from membership dues, greens fees, cart rentals, merchandise, and food and beverage sales.
TBG, a subsidiary of ALGI, entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease, which commenced on November 1, 2003, has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by TBG. In addition to a championship golf course, the Squaw Creek facilities include a swimming pool, tennis courts and a clubhouse that includes a fitness center, dining and banquet facilities. TBG generates its revenue in the same manner as ALGI, but also generates revenues from tennis and swimming.
Avalon Travel, Inc., a subsidiary of ALGI, owns and operates a travel agency which generates its revenue from booking travel reservations.
In October 2006, Avalon, through its subsidiary, Avalon Country Club of Sharon, Inc., completed the acquisition of the Sharon Country Club assets. The primary assets of Sharon include the golf course and clubhouse which includes, dining and banquet facilities, a swimming pool, salon and spa services and a fitness center. Sharon generates its revenue in the same manner as ALGI and TBG, but also generates revenues from its fitness center and salon and spa services. ****
In November 2003, Avalon formed the Avalon Golf and Country Club to manage its golf courses and the related operations. Members of the Avalon Golf and Country Club are entitled to privileges at all the facilities. Membership requires payment of annual dues. Members receive several benefits including reduced greens fees, preferential tee times and discounts on merchandise. In addition, 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 golf 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 December 31, 2019, 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.
3
In August 2014, Avalon, through a newly created subsidiary, The Avalon Resort and Spa LLC, completed the acquisition of The Magnuson Grand Hotel in Howland, Ohio. Subsequent to the acquisition, The Magnuson Grand Hotel was renamed The Avalon Inn. In 2019, The Avalon Inn was renamed and now operates as The Grand Resort. The primary assets of The Grand Resort include the hotel, indoor junior Olympic size swimming pool, outdoor resort pool, Roman Bath, fitness center, restaurants, bars, salon and spa, banquet and conference facilities and adjoining tennis center. The Grand Resort is located adjacent to Avalon’s corporate headquarters and the Avalon Lakes Golf Course. 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 earns revenues through room rentals, food and beverage sales, merchandise sales, salon and spa services, tennis and fitness activities. In 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, addition of a new restaurant, bars, salon and spa, outdoor resort pool and Roman Bath. The Grand Resort operates in conjunction with the Avalon Golf and Country Club.
In July 2016, the Company formed ARCI, a wholly owned subsidiary of Avalon, the purpose of which is to hold the corporate activity of Avalon Clubs, Inc. and Avalon Resorts, Inc., both formed concurrently with ARCI. Avalon Clubs, Inc. was formed to hold the wholly owned subsidiaries of the Avalon Golf and Country Club, while Avalon Resorts, Inc. holds the operations of The Grand Resort.
In March 2018, Avalon, through a newly created subsidiary, Avalon Mahoning Sports Center, Inc., completed the acquisition of the Boardman Tennis Center property in Boardman, Ohio. Subsequent to the acquisition, the Boardman Tennis Center property was renamed the Avalon Athletic Club at Boardman. The primary assets of the Avalon Athletic Club at Boardman include the acquired real property consisting of the building and associated land. The Avalon Athletic Club at Boardman facility is a multipurpose recreation center including indoor tennis, basketball, volleyball and pickleball courts and a fitness area. Members of the Avalon Golf and Country Club have access to the facility and all the athletic and fitness related activities offered by the Avalon Athletic Club at Boardman. In addition, hotel guests at The Grand Resort can utilize the facility during their stay. The Avalon Athletic Club at Boardman earns revenue through membership fees, athletic and fitness related activities. The Avalon Athletic Club at Boardman operates as part of its Avalon Golf and Country Club.
In May 2019, Havana Cigar Shop, Inc., a wholly owned subsidiary of Avalon, completed the acquisition of the New Castle Country Club assets located in New Castle, Pennsylvania. Subsequent to the acquisition, Havana Cigar Shop, Inc. was named Avalon Field Club at New Castle. The primary assets of Avalon Field Club at New Castle include the acquired real property consisting of the golf course and associated clubhouse. Avalon Field Club at New Castle generates revenue from membership dues, greens fees, cart rentals, merchandise, and food and beverage sales. Avalon Field Club at New Castles operates as part of its Avalon Golf and Country Club. In 2020, Avalon will begin renovating the existing clubhouse.
The golf courses are significantly dependent upon weather conditions during the golf season as a result of being located in northeast Ohio and western Pennsylvania. Avalon’s financial performance is adversely affected by adverse weather conditions.
Governmental r egulations
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 brokerage and management services revenues is derived from 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.
Avalon’s golf course operations and The Grand Resort 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.
4
On December 22, 2017, legislation commonly known as the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act changes existing U.S. tax law and includes numerous provisions that will affect Avalon, including our income tax accounting, disclosure and tax compliance. The most impactful changes within the Tax Act are those that will reduce the U.S. corporate tax rates, business-related exclusions and deductions and credits. Avalon valued all deferred tax assets and liabilities at the newly enacted Corporate U.S income tax rate. Avalon has a full valuation allowance on its federal deferred tax assets.
Sales and marketing
Avalon’s sales and marketing approach is decentralized, with each business segment being responsible for its own sales and marketing efforts. Each business segment employs its own sales force which concentrates on expanding its business.
Competition
The hazardous and nonhazardous waste disposal brokerage and management business is highly competitive and fragmented. Avalon’s waste disposal brokerage and management business competes with other brokerage companies, as well as, with companies which own treatment and disposal facilities. In addition to price, knowledge and service are key factors when competing for waste disposal brokerage and management business. Avalon’s waste disposal brokerage and management operations obtain and retain 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 a reduction in the number of disposal options available to waste generators and may cause disposal pricing to increase. Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time.
Avalon’s golf courses are located in Warren, Ohio, Vienna, Ohio, Sharon, Pennsylvania and New Castle, Pennsylvania and compete with many public courses and country clubs in the area.
The Grand Resort’s principal competitors are operators of full service, select service and extended stay properties, including major hospitality chains with well-established and recognized brands. We also compete against small chains and independent and local owners and operators. We compete for guests based primarily on the resort complex and country club experience created through the combination of the resort and country club operations.
Insurance
Avalon carries $11,000,000 of liability insurance coverage. This insurance includes coverage for comprehensive general liability, automobile liability and other customary coverage. In addition, Avalon also carries $6,000,000 of separate liability insurance coverage for the golf courses and related operations. Avalon carries comprehensive property damage coverage and, also, professional liability insurance for its fitness, swimming, salon and spa activities. No assurance can be given that such insurance will be available in the future or, if available, that the premiums for such insurance will be reasonable.
If Avalon were to incur a substantial liability for damages not covered by insurance or in excess of its policy limits or at a time when Avalon no longer is able to obtain appropriate liability insurance, its financial condition could be materially adversely affected.
Employees
As of December 31, 2019, Avalon had 521 employees, 33 of whom were employed by the waste management services segment, 465 of whom were employed by the golf and related operations and 23 of whom were employed in financial and administrative activities. Avalon believes that it has a good relationship with its employees.
Other business factors
None of Avalon’s business segments is materially dependent on patents, trademarks, licenses, franchises or concessions, other than permits, licenses and approvals issued by regulatory agencies. Avalon does not sponsor significant research and development activities.
5
| ITEM 1A. | RISK FACTORS |
|---|
The following factors, as well as, factors described elsewhere in the Form 10-K, or in other filings by Avalon with the Securities and Exchange Commission, could adversely affect Avalon’s consolidated financial position, results of operations or cash flows. Other factors not presently known to us or that we presently believe are not material could also affect our business operations and financial results.
Voting control by m anagement
Avalon has two classes of common stock, Class A and Class B. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes on all matters submitted to a vote of the shareholders. Except for the election of Avalon’s Board of Directors, the Class A Common Stock and the Class B Common Stock vote together as a single class on all matters presented for a vote to the shareholders. The holders of the Avalon Class B Common Stock, which consists principally of the management of Avalon, have approximately 66 percent of the aggregate voting power of the outstanding Avalon Common Stock. Currently, the holders of the Avalon Class A Common Stock will not, either alone or acting collectively, be able to elect a majority of the members of Avalon’s Board of Directors (the “Avalon Board”) or control many corporate actions. However, the holders of the Avalon Class A Common Stock, voting as a separate class, have the right to elect the number of directors equal to at least 25 percent of the total Board of Directors of Avalon until the outstanding Avalon Class B Common Stock constitutes less than 50 percent of the total voting power of the outstanding Avalon Common Stock, after which time the holders of the Avalon Class A and Class B Common Stock will vote as a single class for the election of directors and all matters presented for a vote to the shareholders. The holders of a majority of all outstanding shares of Class A Common Stock or Class B Common Stock, voting as separate classes, must also approve amendments to the Articles of Incorporation that adversely affect the shares of their class.
Each share of Class B Common Stock is convertible, at any time, at the option of the shareholder, into one share of Class A Common Stock. Shares of Class B Common Stock are also automatically converted into shares of Class A Common Stock on the transfer of such shares to any person other than Avalon, another holder of Class B Common Stock or a Permitted Transferee, as defined in Avalon’s Articles of Incorporation.
Certain anti-takeover p rovisions of Articles **** of Incorporation, Code of Regulations and Ohio Law
The Articles of Incorporation and Code of Regulations of Avalon, as well as, Ohio statutory law, contain provisions that may have the effect of discouraging an acquisition of control of Avalon not approved by the Avalon Board. Such provisions may also have the effect of discouraging third parties from making proposals involving an acquisition or change of control of Avalon, even though such proposals, if made, might be considered desirable by a majority of the Avalon stockholders. Such provisions could also have the effect of making it more difficult for third parties to cause the replacement of the current management of Avalon without the concurrence of the Avalon Board. These provisions have been designed to enable Avalon to develop its business and foster its long-term growth without disruptions caused by the threat of a takeover not deemed by the Avalon Board to be in the best interest of Avalon and its stockholders.
Dividend p olicy
The dividend policy of Avalon is determined by the Avalon Board. Avalon intends to retain earnings for use in the operation and expansion of its business and, therefore, does not anticipate paying cash dividends in the foreseeable future.
Avalon’s market for shares may be subject to greater volatility and limited daily activity
Market fluctuations, as well as economic conditions, may adversely affect the market price of the Avalon Class A Common Stock. Given the relatively small market capitalization of Avalon, the market for its Class A Common Stock may be subject to greater volatility than would be the case for a large company. In addition, the selling and buying of shares on a daily basis may be limited because of the relatively small capitalization of Avalon.
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 and is 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.
L ong-lived asset impairment
Certain events or changes in circumstances may indicate that the recoverability of the carrying value of long-lived assets should be assessed. Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, or a current-period operating or cash flow loss combined with historical losses or projected future losses. If an event occurs or changes in circumstances are present, Avalon estimates the future cash flows expected to result from the use of the applicable groups of long-lived assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value, Avalon would recognize an impairment loss to the extent the carrying value of the groups of long-lived assets exceeds their 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.
The ability to accurately predict future cash flows may impact the determination of fair value. Avalon’s assessments of cash flows represent management’s best estimate at the time of the impairment review. Avalon estimates the future cash flows expected to result from the use and, if applicable, the eventual disposition of the assets. The key variables that management must estimate include, among other factors, sales, costs, inflation and capital spending. Significant management judgment is involved in estimating these variables, and they include inherent uncertainties. If different cash flows had been estimated in the current period, the value of the long-lived assets could have been materially impacted. Furthermore, Avalon’s accounting estimates may change from period to period as conditions in markets change, and this could materially impact financial results in future periods.
In the fourth quarter of 2018, Avalon recorded a non-cash, pre-tax impairment charge of approximately $3.3 million representing the full carrying value of the Company’s salt water injection wells property and equipment. The conclusion was made in connection with the Company’s annual impairment testing and the overall uncertainty that the Company’s salt water injection wells will resume operations and generate future cash flows, as further discussed below.
The impairment charge is included in the operations related to the waste management service’s segment for the fiscal year ended December 31, 2018. No cash expenditures were recorded as a result of the impairment charge. The impairment charge did not affect Avalon’s compliance with debt covenants under its Term Loan or Line of Credit agreements.
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 could be adversely affected by adverse weather conditions.
7
Saltwater disposal w ells
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.
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 10^th^ District Court of Appeals on March 21, 2017.
On September 14, 2017, an appeal hearing was held in the Ohio 10^th^ 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.
8
On September 12, 2018, the Company appealed the Ohio 10^th^ District Court of Appeals decision to the Supreme Court of Ohio. On November 21, 2018, Avalon, received notice from the Supreme Court of Ohio that the court would not accept for review the Company’s appeal of the Ohio 10^th^ 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.
Based on the Supreme Court of Ohio’s decision not to accept the Company’s appeal for review and the economically unfeasible conditions required by the Division of Oil & Gas Resources Management proposed restart plan, management of Avalon and its Board of Directors concluded that the injection wells would not resume operations in the near future and that the carrying value of the salt water injection wells was not recoverable. In the fourth quarter of 2018, the Company recorded an impairment charge of approximately $3.3 million, the full carrying value of the Company’s salt water injection wells.
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, which is pending.
Concurrently with the filing of the appeal with the Franklin County Court of Common Pleas, the Company filed a writ of mandamus in the 10^th^ 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.
In addition, on August 26, 2016, Avalon filed a complaint in the 11^th^ 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 11^th^ 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 have been scheduled to commence in April 2020.
Environmental l iabilities
Avalon may be subject to liability for environmental contamination caused by pollutants, the transportation, treatment or disposal of which was arranged for by Avalon or one of its predecessors.
Although Avalon has compliance guidelines for its waste brokerage and management services business, Avalon could still incur a substantial liability for environmental damage not covered by or in excess of its insurance policy limits and, as such, its financial condition could be adversely affected.
Competitive pressures
The hazardous and nonhazardous waste disposal brokerage and management business is highly competitive and fragmented. Avalon’s waste disposal brokerage and management business competes with other brokerage companies, as well as, with companies which own treatment and disposal facilities. In addition to price, knowledge and service are key factors when competing for waste disposal brokerage and management business. Avalon’s waste disposal brokerage and management 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 companies offering disposal options available to waste generators and may cause disposal pricing to increase. Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time.
9
Golf **** m embership s and liquor l icenses
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 four golf 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 December 31, 2019, 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 and The Grand Resort 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.
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 December 22, 2017, legislation commonly known as the Tax Act was signed into law. The Tax Act changes existing U.S. tax law and includes numerous provisions that will affect Avalon, including our income tax accounting, disclosure and tax compliance. The most impactful changes within the Tax Act are those that will reduce the U.S. corporate tax rates, business-related exclusions and deductions and credits. Consequently, as of the date of enactment, Avalon valued all deferred tax assets and liabilities at the newly enacted Corporate U.S income tax rate. Avalon has a full valuation allowance on its federal deferred tax assets.
Changes in laws, regulations and accounting standards
Our implementation of new accounting rules and interpretations or compliance with changes in existing accounting rules could adversely affect our balance sheet or results of operations or cause unanticipated fluctuations in our results of operations in future periods.
A ccounting estimates and judgments
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and subsequent adjustments could have a material adverse effect on operating results for the period or periods in which the change is identified.
10
C ybersecurity risks and security breaches
Our business involves the storage of members’ information, and security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. We are entirely dependent on the secure operation of our systems. While we have incurred no cyber-attacks or security breaches to date, a number of other companies have disclosed cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be targeted at us, our members, or both. Although we devote significant resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our computer systems, software, networks and the confidentiality, integrity and availability of information belonging to us and our members, our security measures may not provide absolute security. A cybersecurity breach could have a material adverse effect on our business, results of operations, financial condition or cash flows.
Public health epidemics or outbreaks could adversely impact our business
In December 2019, a novel strain of coronavirus, COVID-19, emerged in Wuhan, Hubei Province, China. While initially concentrated in China, the outbreak has now spread to other countries and infections have been reported globally including in the United States. The extent to which the coronavirus, like any other rapidly spreading contagious illness, may impact our operations will depend on the evolution of the outbreak, which is highly speculative at this time and cannot be predicted with any level of confidence. The duration of the outbreak, new information which emerges concerning the severity of the illness and the actions to be taken to contain the spread of the virus or its treatment remains unclear. We believe that the continued spread of the coronavirus could adversely impact our operations and our financial results.
Inflation
Avalon has not entered into any long-term fixed price contracts that could have a material adverse impact upon its financial performance in periods of inflation. In general, management believes that rising costs resulting from price inflation could be passed on to customers; however, Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
|---|
There were no unresolved comments from the Staff of the U. S. Securities and Exchange Commission at December 31, 2019.
11
| ITEM 2. | PROPERTIES |
|---|
Avalon owns a 37,000 square foot headquarters building located on approximately 5.6 acres of property in Warren, Ohio adjacent to the Avalon Lakes Golf Course. The corporate and administrative offices of ALMI, AWMS and all the golf operations are located at the headquarters building of Avalon in Warren, Ohio. Avalon’s corporate headquarters building also includes a clubhouse, restaurant, golf simulators and a pro shop for the Avalon Golf and Country Club at Avalon Lakes Golf Course.
ALGI owns an 18-hole golf course and practice facility on approximately 200 acres, a maintenance and storage building of approximately 12,000 square feet and a restaurant building of approximately 10,400 square feet. All of ALGI’s facilities are located in Warren, Ohio.
TBG, Inc. leases and operates the Avalon Golf and Country Club at Squaw Creek in Vienna, Ohio, which includes an 18-hole golf course and practice facility on approximately 224 acres, an outdoor swimming pool, 4 outdoor tennis courts, 4 indoor tennis courts and a 67,000 square foot clubhouse that includes a pro shop, fitness center, restaurants and banquet facilities.
Avalon Country Club at Sharon, Inc. owns an 18-hole golf course on approximately 130 acres in Hermitage, Pennsylvania. The clubhouse and recreational facilities are approximately 80,000 square feet and include a pro shop, dining and banquet facilities, an outdoor swimming pool, a salon and spa and fitness center.
The Avalon Resort and Spa LLC owns a 146,000 square foot hotel that includes an indoor junior Olympic size swimming pool, outdoor resort pool, Roman Bath, fitness center, salon and spa, dining, banquet and conference facilities, a separate banquet facility of approximately 7,000 square feet, and 3 indoor tennis courts of approximately 4,500 square feet. The Grand Resort is located on approximately 9.3 acres in Warren, Ohio adjacent to the Avalon Lakes Golf Course.
Havana Cigar Shop, Inc. owns an 18-hole golf course located on approximately 200 acres in New Castle, Pennsylvania. The clubhouse is approximately 20,000 square feet and includes a pro shop, dining and banquet facilities and an outdoor swimming pool.
The Avalon Mahoning Sports Center, Inc. owns a 55,000 square foot tennis and athletic facility that includes 6 indoor tennis, basketball, volleyball and pickelball courts and a fitness area, on approximately 3.5 acres in Youngstown, Ohio.
The captive landfill management operations use four pieces of equipment (bulldozers, excavators and backhoes) and two pieces of rolling stock, all of which are owned or leased by ALMI.
AWMS Rt. 169, LLC leases 5.2 acres on which the salt water injection wells and related facilities are located.
Generally, Avalon’s fixed assets are in good condition and are satisfactory for the purposes for which they are intended.
| ITEM 3. | LEGAL PROCEEDINGS |
|---|
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, would have a material adverse effect on its liquidity, financial position or results of operations. See Item 1. “Business—Insurance.”
| ITEM 4. | MINE SAFETY DISCLOSURES |
|---|
Not applicable.
12
PART II
Information with respect to the following items can be found on the indicated pages of Exhibit 13.1, the 2019 Annual Report to Shareholders, if not otherwise included herein.
| ITEM 5 . | MARKET FOR REGISTRAN T’S COMMON EQUITY, RELATED STOCKHOLDER matters and issuer purchases of equity securities **** **** |
|---|---|
| Page(s) | |
| --- | --- |
| Common stock information | 53 |
| Dividend policy | 53 |
| ITEM 6 . | SELECTED FINANCIAL DATA |
| --- | --- |
Not required for Smaller Reporting Company
| ITEM 7 . | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|---|---|
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3-16 |
| --- | --- |
| ITEM 7 A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES **** ABOUT MARKET RISK |
| --- | --- |
Not required for Smaller Reporting Company.
| ITEM 8 . | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
|---|
| Reports of Independent Registered Public Accounting Firms | 48-49 |
|---|---|
| Financial Statements: | |
| Consolidated Balance Sheets as of December 31, 2019 and 2018 | 17 |
| Consolidated Statements of Operations for the years ended December 31, 2019 and 2018 | 18 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018 | 19 |
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019 and 2018 | 20 |
| Notes to Consolidated Financial Statements | 21-47 |
Information regarding financial statement schedules is contained in Item 15(a) of Part IV of this report.
The consolidated financial statements and schedule listed in items 15(a)(1) and (a)(2) hereof are incorporated herein by reference and are filed as part of this report.
13
| ITEM 9 . | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON accounting and FINANCIAL DISCLOSURE |
|---|
Previous independent registered public accounting firm
In May 2019, the Audit Committee of the Board of Directors of Avalon Holdings Corporation notified BDO USA, LLP (“BDO”) that it was dismissing BDO as its independent registered public accounting firm.
The reports of BDO on the financial statements of Avalon Holdings Corporation for the years ended December 31, 2018 and 2017 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle.
During the fiscal years ended December 31, 2018 and 2017 and through May 20, 2019, there have been no:
(i) disagreements with BDO on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO, would have caused them to make reference to the subject matter of the disagreement(s) in connection with its reports on the financial statements for such years; or
(ii) “reportable events,” as that term is described in Item 304(a)(1)(v) of Regulation S-K.
New independent registered public accounting firm
In May 2019, the Audit Committee of the Board of Directors of the Company engaged Grant Thornton LLP (“Grant Thornton”) as the Registrant's independent registered public accounting firm. In deciding to select Grant Thornton, the Audit Committee reviewed auditor independence issues and existing commercial relationships with Grant Thornton and concluded that Grant Thornton had no commercial relationship with the Company that would impair its independence for the fiscal year ended December 31, 2019. During the Registrant's two most recent fiscal years prior to 2019 and the subsequent interim period through May 20, 2019, the Registrant did not consult Grant Thornton with respect to any of the matters or events listed in Regulation S-K Item 304(a)(2).
| item 9A. | controls and procedures |
|---|
Evaluation of Disclosure 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 the end of the period covered by the 2019 Annual Report. 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 December 31, 2019, our disclosure controls and procedures were effective at a reasonable assurance level.
14
Management's Report on Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting is set forth on page 50 of our 2019 Annual Report, which is incorporated herein by reference.
Changes in Internal Control over Financial Reporting
During the fourth fiscal quarter ended December 31, 2019, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | Other INFORMATION |
|---|
None
15
PART III
| ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
|---|
The information required by Item 10 regarding Directors is contained under the caption “Election of Directors” in the Registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Shareholders (the “Proxy Statement”) which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year, which information under such caption is incorporated herein by reference. The following information with respect to the Executive Officers of Avalon is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K:
| Name | Age | Position |
|---|---|---|
| Ronald E. Klingle | 72 | Chairman of the Board, Chief Executive Officer and a Director |
| Bryan P. Saksa | 43 | Chief Financial Officer, Treasurer, Secretary and a Director |
| Frances R. Klingle | 73 | Chief Administrative Officer |
| Clifford P. Davis | 57 | Chief Technology Officer |
| Kenneth J. McMahon | 67 | Chief Executive Officer and President of American Waste Management Services, Inc. |
The above-listed individuals have been elected to the offices set opposite their names to hold office at the discretion of the Board of Directors of Avalon or its subsidiaries, as the case may be.
Ronald E. Klingle has been a director and Chairman of the Board of the Company since June 1998. He was Chief Executive Officer from June 1998 until December 2002. He reassumed and held the position of Chief Executive Officer from March 15, 2004 until February 28, 2010. On February 16, 2011 he again assumed the position of Chief Executive Officer. Mr. Klingle has over 40 years of environmental experience and received his Bachelor of Engineering degree in Chemical Engineering from Youngstown State University. Mr. Klingle is the spouse of Frances R. Klingle who is the Chief Administrative Officer of the Company.
Bryan P. Saksa was appointed Chief Financial Officer and Treasurer of the Company in December 2014. He has been a director of the Company since April 2015 and was appointed Secretary in November 2015. Mr. Saksa has been a Certified Public Accountant since 2001 and previously worked for a national public accounting firm and publicly owned companies in financial accounting and reporting roles. He received a Bachelor of Business Administration degree in Accounting from Cleveland State University.
Frances R. Klingle has been Chief Administrative Officer since June 1998. She was Controller of Avalon from June 1998 to April 2002. Ms. Klingle received a Bachelor of Arts degree in French from Kent State University and has completed postgraduate work in accounting at Youngstown State University. Mrs. Klingle is the spouse of Ronald E. Klingle who is Chairman of the Board and a director of Avalon.
Clifford P. Davis was appointed Chief Technology Officer in August 2016. Mr. Davis had previously been Director of Information Technology of the Company from November 1999 to July 2016. Mr. Davis received a Bachelor of Science degree in Electrical Engineering from Kent State University.
Kenneth J. McMahon has been Chief Executive Officer and President of American Waste Management Services, Inc. since June 1998. Mr. McMahon had previously been Executive Vice President, Sales and a director of American Waste Services, Inc. from September 1996 to June 1998. Mr. McMahon received a Bachelor of Business Administration degree in finance and his Master of Business Administration degree from Youngstown State University.
CODE OF ETHICS
Avalon has adopted a Code of Ethics in the form of Standards of Business Ethics and Conduct. Such code applies to all employees of Avalon including its principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. The Code of Ethics is posted on our website at http://www.avalonholdings.com.
Copies of Avalon’s Code of Ethics may be obtained without charge by any shareholder. Written requests for copies should be directed to the Secretary of Avalon Holdings Corporation, One American Way, Warren, Ohio 44484.
16
| ITEM 1 1 . | EXECUTIVE COMPENSATION |
|---|
The information required by Item 11 is contained under the captions “Executive Compensation,” and “Compensation of Directors and Executive Officers” in the Proxy Statement. The information under such captions is incorporated herein by reference.
| ITEM 1 2 . | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
|---|
The information required by Item 12 is contained under the captions “Voting Securities and Principal Holders Thereof” and “Stock Ownership of Management” in the Proxy Statement which information under such captions is incorporated herein by reference.
| ITEM 1 3 . | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
|---|
The information required by Item 13 is contained under the captions “Certain Relationships and Related Transactions” in the Proxy Statement which information under such captions is incorporated herein by reference.
| item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
|---|
The information required by Item 14 is contained under the caption “Independent Public Accountants” in the Proxy Statement which information under such captions is incorporated herein by reference.
17
PART IV
18
19
On December 23, 2019, Avalon reported that on December 20, 2019, Avalon Holdings Corporation 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 to fund future costs of renovating and expanding both The Grand Resort and The Avalon Field Club at New Castle.
| (c) | Reference is made to Item 15 (a)(3) above for the index of Exhibits. |
|---|---|
| (d) | Reference is made to Item 15 (a)(2) above for the index to the financial statements and financial statement schedules. |
| --- | --- |
20
ITEM 16. Form 10-K Summary
None
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 12^th^ day of March, 2020.
| AVALON HOLDINGS CORPORATION |
|---|
| (Registrant) |
| /s/ Bryan P. Saksa |
| Bryan P. Saksa - Chief Financial Officer and Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on the 12^th^ day of March, 2020.
| Signatures | Title |
|---|---|
| /s/ Ronald E. Klingle | Chairman of the Board, Chief Executive Officer |
| Ronald E. Klingle | and Director |
| /s/ Bryan P. Saksa | Chief Financial Officer, Treasurer, Secretary |
| Bryan P. Saksa | and Director |
| /s/ Kurtis D. Gramley | Director |
| Kurtis D. Gramley | |
| /s/ Stephen L. Gordon | Director |
| Stephen L. Gordon | |
| /s/ David G. Bozanich | Director |
| David G. Bozanich |
22
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2019 **** AND 2018
(in thousands )
| **** | **** | Additions | **** | **** | **** | **** | **** | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| DESCRIPTION | Balance at<br><br> <br>Beginning of<br><br> <br>Year | Charged<br><br> <br>(Credited) to<br><br> <br>Costs and<br><br> <br>Expenses | Charged to<br><br> <br>Other Accounts | Deductions /<br><br> <br>(Recoveries) | Balance at<br><br> <br>End of Year | |||||||
| Year ended December 31, 2019 | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Allowance for doubtful accounts | $ | 255 | $ | 33 | $ | - | $ | 13 | ^(1)^ | $ | 275 | |
| Deferred tax asset valuation allowance | $ | 1,881 | $ | 162 | ^(2)^ | $ | - | $ | - | $ | 2,043 | |
| Year ended December 31, 2018 | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Allowance for doubtful accounts | $ | 237 | $ | 42 | $ | - | $ | 24 | ^(1)^ | $ | 255 | |
| Deferred tax asset valuation allowance | $ | 1,313 | $ | 568 | ^(2)^ | $ | - | $ | - | $ | 1,881 | |
| ^(1)^Accounts receivable written-off as uncollectible, net of recoveries. | ||||||||||||
| --- | ||||||||||||
| ^(2)^Change in valuation allowance primarily for deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. |
23
AVALON HOLDINGS CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
__________________________
Exhibit
| 13.1 | 2019 Annual Report to Shareholders |
|---|---|
| 21.1 | Subsidiaries of Avalon Holdings Corporation |
| --- | --- |
| 23.1 | Consent of Independent Registered Public Accounting Firm –Grant Thornton LLP |
| 23.2 | Consent of Independent Registered Public Accounting Firm –BDO USA, LLP |
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| --- | --- |
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| --- | --- |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| --- | --- |
| 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 | |
| 24 | |
| --- |
ex_174449.htm
Exhibit 13.1
Financial Highlights
(in thousands, except for per share amounts)
| For the year | 2019 | 2018 | ||||
|---|---|---|---|---|---|---|
| Net operating revenues | $ | 68,357 | $ | 62,234 | ||
| Loss before income taxes | (375 | ) | (3,089 | ) | ||
| Net loss attributable to | ||||||
| Avalon Holdings Corporation common shareholders | (455 | ) | (1,144 | ) | ||
| Net loss per share attributable to | ||||||
| Avalon Holdings Corporation common shareholders | (0.12 | ) | (0.30 | ) | ||
| At year-end | 2019 | 2018 | ||||
| --- | --- | --- | --- | --- | --- | --- |
| Working capital deficit | $ | (3,412 | ) | $ | (691 | ) |
| Total assets | 79,164 | 64,769 | ||||
| Avalon Holdings Corporation Shareholders' Equity | 37,030 | 37,479 |
The Company
Avalon Holdings Corporation 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. Avalon Holdings Corporation also owns Avalon Resorts and Clubs Inc., which includes the operation of a hotel and its associated resort amenities, four golf courses and related country clubs and a multipurpose recreation center.
1
Contents
| Financial Highlights | 1 |
|---|---|
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Consolidated Balance Sheets | 17 |
| Consolidated Statements of Operations | 18 |
| Consolidated Statements of Cash Flows | 19 |
| --- | --- |
| Consolidated Statements of Shareholders’ Equity | 20 |
| --- | --- |
| Notes to Consolidated Financial Statements | 21 |
| Reports of Independent Registered Public Accounting Firms | 48 |
| Management’s Annual Report on Internal Controls over Financial Reporting | 50 |
| Company Location Directory | 51 |
| Directors and Officers | 52 |
| Shareholder Information | 53 |
2
Avalon Holdings Corporation and Subsidiaries
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 (collectively “Avalon” or the “Company”). 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. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes.
Statem ents included in Management’s Di scussion 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 w ith the Securities and Exchange Commission.
Liquidity and Capital Resources
For the year ended December 31, 2019, Avalon utilized existing cash and cash provided by operations to meet operating needs, make required monthly payments on our term loan facilities and to fund capital expenditures which included the renovation of the Avalon Athletic Club at Boardman and the continued renovation and expansion of The Grand Resort (formerly The Avalon Inn) as further described below. In the third quarter of 2019, The Avalon Inn, which includes the hotel and related resort amenities was renamed The Grand Resort.
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.
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 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.
On March 7, 2018, Avalon, through a newly created subsidiary, Avalon Mahoning Sports Center, Inc., completed the acquisition of the Boardman Tennis Center property in Boardman, Ohio for approximately $1.3 million in cash. In accordance with our Term Loan Agreement, the Company withdrew funds from the restricted cash account for reimbursement for capital expenditures incurred in 2017 related to The Grand Resort that were paid with operating cash to fund the acquisition of the Boardman Tennis Center property. Subsequent to the acquisition, the Boardman Tennis Center property was named the Avalon Athletic Club at Boardman. The primary assets of the Avalon Athletic Club at Boardman include the acquired real property consisting of the building and associated land.
3
Avalon Holdings Corporation and Subsidiaries
In the third quarter of 2018, the Company began renovating the facility. The renovations include the conversion of the facility into a multipurpose recreation center including indoor tennis, basketball, volleyball and pickleball courts and a fitness area. The facilities interior renovations were completed in the first quarter of 2019.
The Avalon Athletic Club at Boardman is currently in operation. The operating results are included in the Company’s Consolidated Statements of Operations and within Avalon’s golf and related operations segment from the date of acquisition.
The acquisition of the facility and its associated subsequent renovation is consistent with the Company’s athletics and fitness business strategy. Members of the Avalon Golf and Country Club have access to the facility and all the athletic and fitness related activities offered by the Avalon Athletic Club at Boardman. In addition, hotel guests at The Grand Resort can utilize the facility during their stay. The Avalon Athletic Club at Boardman earns revenue through membership fees, athletic and fitness related activities.
In 2019, Avalon incurred capital expenditures of $7.9 million of which $7.2 million of such expenditures was paid to vendors in 2019. In addition, approximately $0.2 million of such expenditures related to equipment acquired under new capital lease agreements. Such expenditures primarily related to the continued renovation and expansion of The Grand Resort and, to a lesser extent, renovation of the Avalon Athletic Club at Boardman facility. In 2018, Avalon incurred capital expenditures of $3.9 million of which $3.1 million of such expenditures was paid to vendors in 2018. Such expenditures primarily related to the continued renovation and expansion of The Grand Resort and the renovation of the Avalon Athletic Club at Boardman. In addition, approximately $0.1 million of such expenditures related to a vehicle acquired under a new capital lease agreement. In 2019 and 2018, 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 recreation center 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 $4.0 million to $5.0 million, funded primarily with cash from our project fund account. Capital expenditures principally relate to the continued renovation and expansion of The Grand Resort, renovation of the Avalon Field Club at New Castle facility, building improvements and equipment purchases.
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 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 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.
The 2016 Term Loan Agreement, 2019 Term Loan Agreement and the Commercial Mortgage Agreement were terminated in conjunction with the New Term Loan Agreement.
4
Avalon Holdings Corporation and Subsidiaries
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 commencing 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 also contains certain financial and other covenants, customary representations, warranties and events of default. Avalon was in compliance with the New Term Loan Agreement covenants at December 31, 2019.
Line of Credit Agreement
On May 31, 2018, Avalon entered into a new business loan agreement with Home Savings Bank, (the “Line of Credit Agreement”) which provides for a line of credit of up to $5.0 million with an original maturity date of May 31, 2020. On June 17, 2019, the Company amended the Line of Credit Agreement to extend the maturity date to May 31, 2021. 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. The existing line of credit agreement with Home Savings Bank, dated December 20, 2016, as amended, which was entered into concurrently with the 2016 Term Loan Agreement, was terminated in conjunction with the new Line of Credit Agreement. No amounts were outstanding under the existing line of credit agreement at termination.
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 December 31, 2019 and 2018. Outstanding borrowings under the Line of Credit Agreement bear interest at Prime Rate plus .25%. At December 31, 2019, the interest rate on the Line of Credit Agreement was 5.00%.
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 also contains certain financial and other covenants, customary representations, warranties and events of default. Avalon was in compliance with the line of credit agreements covenants at December 31, 2019 and December 31, 2018.
During the years ended December 31, 2019 and 2018, the weighted average interest rate on outstanding borrowings was 5.46% and 5.35%, respectively.
5
Avalon Holdings Corporation and Subsidiaries
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 December 31, 2019 and December 31, 2018, there was a working capital deficit of approximately $3.4 million and $0.7 million, respectively. Working capital was primarily negatively impacted by an increase in accounts payable, deferred membership dues revenue, an increase in the current portion of obligations under operating leases and long-term debt obligations and a decrease in accounts receivable.
Accounts receivable decreased to $12.0 million at December 31, 2019 compared with $12.2 million at December 31, 2018. This decrease was due to a decrease in accounts receivable related to the waste management services segment as a result of the timing of receipt of receivables.
Accounts payable was $11.7 million at December 31, 2019 compared to $10.5 million at December 31, 2018. The increase in accounts payable was primarily due to an increase in amounts due to disposal facilities and transportation carriers of the waste management services associated with the increase in the net operating revenues in the fourth quarter of 2019 compared to the fourth quarter of 2018 and the associated timing of those vendor payments in the ordinary course of business.
Deferred revenue relating to membership dues was approximately $3.2 million at December 31, 2019 compared to $2.9 million at December 31, 2018. The increase in deferred revenues was primarily due to an increase in members during 2019. The number of members at December 31, 2019 was 5,051 compared to 4,606 at December 31, 2018.
Accrued payroll and other compensation increased to approximately $1.0 million at December 31, 2019 compared to $0.9 million at December 31, 2018. The increase was primarily the result of timing of payment of certain accrued bonuses related to the waste management services segment.
Management believes that anticipated cash provided from future operations, will be, for the foreseeable future, sufficient to meet operating requirements and make required monthly payments under our term loan and commercial mortgage facilities. If business conditions warrant additional monies needed to fund capital expenditure programs, Avalon will take actions such as refinancing or restructuring our current debt agreements, incurring additional indebtedness, issuance of common stock or issuance of a security with characteristics of both debt and equity.
6
Avalon Holdings Corporation and Subsidiaries
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 (formerly The Avalon Inn) 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 March 7, 2018, Avalon acquired the Avalon Athletic Club at Boardman which was integrated into the golf and related operations segment. The acquisition and subsequent renovation is consistent with the Company’s athletics and fitness business strategy. Members of the Avalon Golf and Country Clubs have access to the facility and all the tennis, athletic and fitness related activities offered by the Avalon Athletic Club at Boardman. In addition, hotel guests of The Grand Resort can utilize the facility during their stay.
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.
7
Avalon Holdings Corporation and Subsidiaries
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 2019 compared with 2018
Overall Performance
Net operating revenues increased to $68.3 million in 2019 compared with $62.2 million in 2018. This increase was due to an increase in net operating revenues of both the waste management services and golf and related operations segments. Net operating revenues of the waste management services segment were $48.7 million in 2019 compared with $44.5 million in 2018. Net operating revenues of the golf and related operations segment were approximately $19.6 million in 2019 compared to $17.7 million in 2018.
Costs of operations related to the waste management segment increased to $39.2 million in 2019 compared with $35.2 million in 2018. The increase in the cost of operations between years for the waste management segment is primarily due to the increased net operating revenues as these costs vary directly with the associated revenues. Cost of operations related to the golf and related operations segment increased to $17.1 million in 2019 compared to $14.6 million in 2018. The increase was a result of operating costs associated with Avalon Field Club at New Castle, which was acquired on May 13, 2019, higher employee related costs, and to a lesser extent, an increase in golf course maintenance and repair costs and other operating expenses.
Depreciation and amortization expense was approximately $2.5 million in 2019 compared to $2.9 million in 2018. The decrease is due to the impairment of the property and equipment in the fourth quarter of 2018 related to the Company’s salt water injection wells partially offset by additional depreciation recorded on capital expenditures incurred during 2019.
Consolidated selling, general and administrative expenses were approximately $9.4 million in 2019 compared to $9.0 million in 2018. The increase was attributable to higher employee related costs partially offset by lower legal and professional costs.
Impairment of property and equipment was approximately $3.3 million in 2018 representing the impairment loss for the full carrying value of the Company’s salt water injection wells associated property and equipment.
Interest expense was approximately $0.8 million in 2019 compared to $0.7 million in 2018. The increase in interest expense is due to the higher outstanding average debt, and to a lesser extent, an increase in the weighted average interest rate during 2019 compared to the prior period. During the years ended December 31, 2019 and 2018, the weighted average interest rate on outstanding borrowings was 5.46% and 5.35%, respectively.
Net loss attributable to Avalon Holdings Corporation common shareholders was $0.5 million, or $0.12 per share, in 2019 compared with a net loss attributable to Avalon Holdings Corporation common shareholders of $1.1 million, or $0.30 per share, in 2018.
Segment Performance
Segment performance should be read in conjunction with Note 15 to the Consolidated Financial Statements.
8
Avalon Holdings Corporation and Subsidiaries
Waste Management Services Segment
The net operating revenues of the waste management services segment increased to $48.7 million in 2019 compared with $44.5 million in 2018. The waste management services segment includes waste disposal brokerage and management services, captive landfill management operations and salt water injection well operations.
The net operating revenues of the waste disposal brokerage and management services business increased to $46.0 million in 2019 from $42.2 million in 2018. This increase was primarily due to an increase in net operating revenues relating to event work related from multiple projects. 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 $20.6 million in 2019 compared with $16.1 million in 2018. The increase was partially offset by a decrease in continuous work. Continuous work of the waste disposal brokerage business decreased approximately $0.1 million between periods as a result of decreased work from multiple customers. Net operating revenues related to continuous work were approximately $24.7 million in 2019 compared with $24.8 million in 2018. Net operating revenues related to managerial, consulting and clerical services decreased to approximately $0.7 million in 2019 compared to $1.3 million in 2018. 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 $2.7 million in 2019 compared to $2.3 million in 2018. 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.
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. Due to the suspension of the salt water injections wells, there were no operating revenues during 2019 and 2018. In 2018, in connection with the Company’s annual impairment testing, management of Avalon and its Board of Directors concluded that the injection wells would not resume operations in the near future and generate future cash flows and that the carrying value of the salt water injection wells was not recoverable. The Company determined that any remaining salvage value on the associated assets was not significant based on market prices for similar assets. As a result, in the fourth quarter of 2018, Avalon recorded a non-cash, pre-tax impairment charge of approximately $3.3 million representing the full carrying value of the Company’s salt water injection wells property and equipment.
Costs of operations related to the waste management segment increased to $39.2 million in 2019 compared with $35.2 million in 2018. The increase in the cost of operations between periods for the waste management segment is primarily due to the increased 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 20% in 2019 compared to 21% in 2018. The decrease in the overall gross margin percentage was attributable to the lower gross profit generated from both the continuous and event work projects during 2019.
Income before income taxes for the waste management services segment was approximately $4.4 million in 2019 compared to $0.7 million in 2018. Income before income taxes of the waste brokerage and management services business was approximately $4.1 million in 2019 compared to $4.3 million in 2018. Although net operating revenues increase between periods, the decreased income before taxes was primarily attributable to the decreased gross margin related to both continuous and event work during 2019. Income before income taxes of the captive landfill operations was approximately $0.4 million in both 2019 and 2018. The additional revenues generated during 2019 were offset by machine rental costs to manage the additional waste generated by the owner of the landfill. During 2019 and 2018, the salt water injection wells incurred a loss before income taxes of approximately $0.1 million and $4.0 million, respectively. During 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. In 2018, as previously noted above, in the fourth quarter of 2018, the Company recorded an impairment charge of approximately $3.3 million, the full carrying value of the Company’s salt water injection wells. In addition the Company recorded a loss due to depreciation expense recorded on the facility and legal and professional costs incurred relating to Avalon’s appeal and mandamus processes.
9
Avalon Holdings Corporation and Subsidiaries
Golf and Related Operations Segment
Net operating revenues of the golf and related operations segment were approximately $19.6 million in 2019 compared to $17.7 million in 2018. 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 which 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 were approximately $7.9 million in 2019 compared to $7.1 million in 2018. The increase was primarily due to food and beverage revenue related to Avalon Field Club at New Castle, which was acquired on May 13, 2019, and, to a lesser extent, an overall increase in food and beverage revenue related to both The Grand Resort and the other clubs between periods.
Other net operating revenues related to the golf and related operations were $11.7 million in 2019 compared to $10.6 million in 2018. Net operating revenues related to room rental was approximately $2.3 million in both 2019 in and 2018. Membership dues revenue was approximately $5.7 million in 2019 compared to $5.2 million in 2018. The increase in membership dues revenue is attributable to the increase in members between periods. The average number of members during 2019 was 4,881 compared to 4,454 in the prior period. Greens fees and associated cart rentals were $1.9 million in 2019 compared to $1.5 million in 2018. The increase in greens fees and associated cart rentals was primarily attributable to Avalon Field Club at New Castle. Other revenues consisting of athletic, fitness, travel agency, salon and spa related activities were approximately $1.8 million in 2019 compared to $1.6 million in 2018. The increase was due to increased revenue related to tennis lessons, pool and the salon and spa. 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 2019 and 2018.
Cost of operations for the golf and related operations segment was $17.1 million in 2019 compared with $14.6 million in 2018. Cost of food, beverage and merchandise was approximately $3.5 million in 2019 compared to $3.2 million in 2018. The increase in food, beverage and merchandise costs between periods is attributable to an increase in food revenue, primarily related to Avalon Field Club at New Castle. The cost of food, beverage and merchandise sales was approximately 44% of the associated net operating revenues in both 2019 and 2018. Golf and related operations operating costs increased to approximately $13.6 million in 2019 compared with $11.4 million in 2018. The increase was primarily a result of operating costs associated with Avalon Field Club at New Castle, which was acquired on May 13, 2019, higher employee related costs and, to a lesser extent, golf course maintenance and repair costs and other operating costs.
In 2019, the golf and related operations recorded a loss before income taxes of $0.8 million in 2019 compared to a slight loss in 2018. The change between periods was primarily due to higher employee related costs, and to a lesser extent, an increase in golf course maintenance and repair costs and other various operating 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 $3.3 million in 2019 compared to $3.1 million in 2018. The increase was attributable to higher employee related costs partially offset by lower legal and professional costs.
Impairment of Property and Equipment
Impairment of property and equipment was approximately $3.3 million in 2018 representing the impairment loss for the full carrying value of the Company’s salt water injection wells property and equipment.
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Avalon Holdings Corporation and Subsidiaries
Interest Expense
Interest expense was approximately $0.8 million in 2019 compared to $0.7 million in 2018. The increase in interest expense is due to the higher outstanding average debt, and to a lesser extent, an increase in the weighted average interest rate during 2019 compared to the prior period. During the years ended December 31, 2019 and 2018, the weighted average interest rate on outstanding borrowings was 5.46% and 5.35%, respectively.
Net Loss
Net loss attributable to Avalon Holdings Corporation common shareholders was $0.5 million in 2019 compared to a net loss attributable to Avalon Holdings Corporation common shareholders of $1.1 million in 2018. Avalon recorded a state income tax provision in both 2019 and 2018, 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
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.
On December 22, 2017, legislation commonly known as the Tax Act was signed into law. The Tax Act changes existing U.S. tax law and includes numerous provisions that will affect Avalon, including our income tax accounting, disclosure and tax compliance. The most impactful changes within the Tax Act are those that will reduce the U.S. corporate tax rates, business-related exclusions and deductions and credits. Avalon valued all deferred tax assets and liabilities at the newly enacted Corporate U.S income tax rate. Avalon has a full valuation allowance on its federal deferred tax assets.
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 brokerage and management services revenues is derived from 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 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.
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Avalon Holdings Corporation and Subsidiaries
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.
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.
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 Holdings Corporation and Subsidiaries
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 10^th^ District Court of Appeals on March 21, 2017.
On September 14, 2017, an appeal hearing was held in the Ohio 10^th^ 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 10^th^ District Court of Appeals decision to the Supreme Court of Ohio. On November 21, 2018, Avalon, received notice from the Supreme Court of Ohio that the court would not accept for review the Company’s appeal of the Ohio 10^th^ 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.
Based on the Supreme Court of Ohio’s decision not to accept the Company’s appeal for review and the economically unfeasible conditions required by the Division of Oil & Gas Resources Management proposed restart plan, management of Avalon and its Board of Directors concluded that the injection wells would not resume operations in the near future and that the carrying value of the salt water injection wells was not recoverable. In the fourth quarter of 2018, the Company recorded an impairment charge of approximately $3.3 million, the full carrying value of the Company’s salt water injection wells.
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, which is pending.
Concurrently with the filing of the appeal with the Franklin County Court of Common Pleas, the Company filed a writ of mandamus in the 10^th^ 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.
In addition, on August 26, 2016, Avalon filed a complaint in the 11^th^ 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.
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Avalon Holdings Corporation and Subsidiaries
On March 18, 2019, Avalon, received notice that the 11^th^ 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 have been scheduled to commence in April 2020.
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.
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 December 31, 2019, 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 and The Grand Resort 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.
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.
Inflation Impact
Avalon has not entered into any long-term fixed price contracts that could have a material adverse impact upon its financial performance in periods of inflation. In general, management believes that rising costs resulting from inflation could be passed on to customers; however, Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time.
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Avalon Holdings Corporation and Subsidiaries
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions, and estimates that affect reported amounts. Significant accounting policies used in the preparation of Avalon’s Consolidated Financial Statements are described in Note 2 to the consolidated financial statements. Estimates are used when accounting for, among other things, the allowance for doubtful accounts, estimated useful lives of property and equipment used to depreciate and amortize the assets, asset impairments, compensation costs relating to stock options granted, contingencies and administrative proceedings, environmental matters and taxes.
The majority of Avalon’s accounts receivable is due from industrial and commercial customers. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. The amounts due are stated at their net realizable value. 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. Bankruptcy or economic challenges of a particular customer represent uncertainties that are not controllable by management. If management’s assessments change due to different assumptions or if actual collections differ from management’s estimates, future operating results could be impacted. 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.
Avalon recognizes share-based compensation expense related to stock options issued to employees and directors. Avalon estimates the fair value of the stock options granted using a 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 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, we estimated the expected term using the simplified method.
Avalon amortizes the fair value of the stock options over the expected term which approximates the requisite service period. If accelerated vesting occurs based on the market performance of Avalon’s common stock, the compensation costs related to the vested stock options that have not previously been amortized are recognized upon vesting.
Certain events or changes in circumstances may indicate that the recoverability of the carrying value of long-lived assets should be assessed. Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, or a current-period operating or cash flow loss combined with historical losses or projected future losses. If an event occurs or changes in circumstances are present, Avalon estimates the future cash flows expected to result from the use of the applicable groups of long-lived assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value, Avalon would recognize an impairment loss to the extent the carrying value of the groups of long-lived assets exceeds their 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.
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Avalon Holdings Corporation and Subsidiaries
The ability to accurately predict future cash flows may impact the determination of fair value. Avalon’s assessments of cash flows represent management’s best estimate at the time of the impairment review. Avalon estimates the future cash flows expected to result from the use and, if applicable, the eventual disposition of the assets. The key variables that management must estimate include, among other factors, sales, costs, inflation and capital spending. Significant management judgment is involved in estimating these variables and they include inherent uncertainties. If different cash flows had been estimated in the current period, the value of the long-lived assets could have been materially impacted. Furthermore, Avalon’s accounting estimates may change from period to period as conditions in markets change, and this could materially impact financial results in future periods.
When Avalon concludes that it is probable that an environmental liability has been incurred, a provision is made in Avalon’s financial statements for Avalon’s best estimate of the liability based on management’s judgment and experience, information available from regulatory agencies, and the number, financial resources and relative degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of that site, as well as, the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no amount within the range appears to be a better estimate than any other, then Avalon provides for the minimum amount within the range, in accordance with generally accepted accounting principles. The liability is recognized on an undiscounted basis. Avalon’s estimates are revised, as deemed necessary, as additional information becomes known. Such revisions may impact future operating results. Although Avalon is not currently aware of any environmental liability, there can be no assurance that in the future an environmental liability will not occur.
Avalon recognizes deferred tax assets and liabilities based on differences between financial statement carrying amounts and the tax bases of assets and liabilities. Avalon also records tax benefits when it believes that it is more likely than not that the benefit will be sustained by the tax authority. Avalon regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences to reduce its deferred assets to the amount that it believes is more likely than not to be realized. Avalon has considered future taxable income in assessing the need for the valuation allowance. The $1,572,000 of deferred tax liabilities will reverse in the same period and jurisdiction and is of the same character as the temporary differences giving rise to the $1,580,000 of deferred tax assets. Avalon has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized. Should Avalon ascertain in the future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets, all or a portion of the $2,043,000 valuation allowance as of December 31, 2019, would be reversed as a benefit to the provision for income taxes in the period such determination was made.
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Avalon Holdings Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for share data)
| 2018 | |||||
| Assets | **** | **** | **** | **** | **** |
| Current Assets: | |||||
| Cash and cash equivalents | 1,446 | $ | 1,406 | ||
| Accounts receivable, less allowance for doubtful accounts of 275 at December 31, 2019 and 255 at December 31, 2018 | 12,009 | 12,197 | |||
| Unbilled membership dues receivable | 602 | 554 | |||
| Inventories | 813 | 820 | |||
| Prepaid expenses | 725 | 622 | |||
| Other current assets | 15 | 31 | |||
| Total current assets | 15,610 | 15,630 | |||
| Property and equipment, net | 48,978 | 42,534 | |||
| Property and equipment under finance leases, net | 5,878 | 6,068 | |||
| Operating lease right-of-use assets | 1,466 | - | |||
| Restricted cash | 7,185 | 502 | |||
| Noncurrent deferred tax asset | 8 | 8 | |||
| Other assets, net | 39 | 27 | |||
| Total assets | 79,164 | $ | 64,769 | ||
| Liabilities and Equity | **** | **** | **** | **** | **** |
| Current liabilities: | |||||
| Current portion of long-term debt | 1,015 | $ | 578 | ||
| Current portion of obligations under finance leases | 295 | 236 | |||
| Current portion of obligations under operating leases | 513 | - | |||
| Accounts payable | 11,719 | 10,454 | |||
| Accrued payroll and other compensation | 961 | 872 | |||
| Accrued income taxes | 93 | 84 | |||
| Other accrued taxes | 434 | 405 | |||
| Deferred membership dues revenue | 3,153 | 2,899 | |||
| Other liabilities and accrued expenses | 839 | 793 | |||
| Total current liabilities | 19,022 | 16,321 | |||
| Long-term debt, net of current portion | 21,570 | 10,167 | |||
| Obligations under finance leases, net of current portion | 555 | 688 | |||
| Obligations under operating leases, net of current portion | 953 | - | |||
| Asset retirement obligation | 100 | 100 | |||
| Equity: | |||||
| Avalon Holdings Corporation Shareholders' Equity: | |||||
| Class A Common Stock, .01 par value, one vote per share: authorized 10,500,000 shares; issued and outstanding 3,263,647 shares at December 31, 2019 and 2018 | 33 | 33 | |||
| Class B Common Stock, .01 par value, ten votes per share: authorized 1,000,000 shares; issued and outstanding 611,784 shares at December 31, 2019 and 2018 | 6 | 6 | |||
| Paid-in capital | 59,147 | 59,141 | |||
| Accumulated deficit | (22,156 | ) | (21,701 | ) | |
| Total Avalon Holdings Corporation Shareholders' Equity | 37,030 | 37,479 | |||
| Non-controlling interest in subsidiary | (66 | ) | 14 | ||
| Total equity | 36,964 | 37,493 | |||
| Total liabilities and equity | 79,164 | $ | 64,769 |
All values are in US Dollars.
See accompanying notes to consolidated financial statements.
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Avalon Holdings Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except for per share amounts)
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| Net operating revenues: | ||||||
| Waste management services | $ | 48,731 | $ | 44,535 | ||
| Food, beverage and merchandise sales | 7,893 | 7,149 | ||||
| Other golf and related operations | 11,733 | 10,550 | ||||
| Total golf and related operations | 19,626 | 17,699 | ||||
| Total net operating revenues | 68,357 | 62,234 | ||||
| Costs and expenses: | ||||||
| Waste management services operating costs | 39,191 | 35,181 | ||||
| Cost of food, beverage and merchandise | 3,494 | 3,165 | ||||
| Golf and related operations operating costs | 13,587 | 11,448 | ||||
| Depreciation and amortization expense | 2,522 | 2,877 | ||||
| Selling, general and administrative expenses | 9,430 | 9,000 | ||||
| Impairment of property and equipment | - | 3,261 | ||||
| Operating income (loss) | 133 | (2,698 | ) | |||
| Other income (expense): | ||||||
| Interest expense | (837 | ) | (675 | ) | ||
| Other income, net | 329 | 284 | ||||
| Loss before income taxes | (375 | ) | (3,089 | ) | ||
| Provision for income taxes | 160 | 167 | ||||
| Net loss | (535 | ) | (3,256 | ) | ||
| Less net loss attributable to non-controlling interest in subsidiary | (80 | ) | (2,112 | ) | ||
| Net loss attributable to Avalon Holdings Corporation common shareholders | $ | (455 | ) | $ | (1,144 | ) |
| Loss per share attributable to Avalon Holdings Corporation common shareholders: | ||||||
| Basic and diluted net loss per share | $ | (0.12 | ) | $ | (0.30 | ) |
| Weighted average shares outstanding - basic and diluted | 3,875 | 3,814 |
See accompanying notes to consolidated financial statements.
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Avalon Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| Cash flows from operating activities: | ||||||
| Net loss | $ | (535 | ) | $ | (3,256 | ) |
| Reconciliation of net loss to cash provided by operating activities: | ||||||
| Depreciation and amortization expense | 2,522 | 2,877 | ||||
| Amortization of debt issuance costs | 31 | 27 | ||||
| Impairment of property and equipment | - | 3,261 | ||||
| Compensation costs - stock options | 6 | 6 | ||||
| Deferred rental income | - | - | ||||
| Provision for losses on accounts receivable | 33 | 42 | ||||
| Gain from disposal of vehicle | (45 | ) | (16 | ) | ||
| Change in operating assets and liabilities, net of effect of acquisition: | ||||||
| Accounts receivable | 155 | (2,333 | ) | |||
| Unbilled membership dues receivable | (48 | ) | 26 | |||
| Inventories | 7 | 30 | ||||
| Prepaid expenses | (83 | ) | (106 | ) | ||
| Other assets, net | 4 | 26 | ||||
| Accounts payable | 675 | 1,966 | ||||
| Accrued payroll and other compensation | 89 | 133 | ||||
| Accrued income taxes | 9 | 58 | ||||
| Other accrued taxes | 29 | 20 | ||||
| Deferred membership dues revenue | 254 | 161 | ||||
| Other liabilities and accrued expenses | 46 | 135 | ||||
| Net cash provided by operating activities | 3,149 | 3,057 | ||||
| Cash flows from investing activities: | ||||||
| Capital expenditures | (7,159 | ) | (3,137 | ) | ||
| Acquisition of Boardman Tennis Center property | - | (1,269 | ) | |||
| Payments related to acquisition of New Castle Country Club property | (90 | ) | - | |||
| Proceeds from disposal of vehicle | 45 | 28 | ||||
| Net cash used in investing activities | (7,204 | ) | (4,378 | ) | ||
| Cash flows from financing activities: | ||||||
| Proceeds under term loan facilities | 26,000 | - | ||||
| Principal payments on term loan facilities | (14,551 | ) | (566 | ) | ||
| Principal payments on finance lease obligations | (247 | ) | (222 | ) | ||
| Borrowings under line of credit facilities | 1,705 | - | ||||
| Repayment under line of credit facilities | (1,839 | ) | - | |||
| Proceeds from exercise of employee stock options | - | 171 | ||||
| Payments of debt issuance costs | (290 | ) | (5 | ) | ||
| Net cash provided by (used in) financing activities | 10,778 | (622 | ) | |||
| Increase (decrease) in cash, cash equivalents and restricted cash | 6,723 | (1,943 | ) | |||
| Cash, cash equivalents and restricted cash at beginning of year | 1,908 | 3,851 | ||||
| Cash, cash equivalents and restricted cash at end of year | $ | 8,631 | $ | 1,908 | ||
| Supplemental disclosure of cash flow information: | ||||||
| Significant non-cash operating and investing activities: | ||||||
| Capital expenditures included in accounts payable | $ | 590 | $ | 656 | ||
| Significant non-cash investing and financing activities: | ||||||
| Operating lease right-of-use assets in exchange for lease obligations | $ | 2,002 | $ | - | ||
| Finance lease obligations incurred | $ | 173 | $ | 77 | ||
| Acquisition of New Castle Country Club real property in exchange for the assumption of outstanding debt | $ | 787 | $ | - | ||
| Cash paid during the year for interest | $ | 790 | $ | 648 | ||
| Cash paid during the year for income taxes | $ | 151 | $ | 109 | ||
| For supplemental cash flow information regarding income taxes, see Note 10. |
See accompanying notes to consolidated financial statements
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Avalon Holdings Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(in thousands , except for share data )
| For the Years Ended December 31, 2019 and 2018 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | 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, 2018 | 3,191,100 | 612,231 | $ | 32 | $ | 6 | $ | 58,965 | $ | (20,557 | ) | $ | 38,446 | $ | 2,126 | $ | 40,572 | ||||||
| Stock options - compensation costs | - | - | - | - | 6 | - | 6 | - | 6 | ||||||||||||||
| Exercise of employee stock options | 72,000 | - | 1 | - | 170 | - | 171 | - | 171 | ||||||||||||||
| Common stock issued | - | 100 | - | - | - | - | - | - | - | ||||||||||||||
| Conversion of common stock | 547 | (547 | ) | - | - | - | - | - | - | - | |||||||||||||
| Net loss | - | - | - | - | - | (1,144 | ) | (1,144 | ) | (2,112 | ) | (3,256 | ) | ||||||||||
| Balance at December 31, 2018 | 3,263,647 | 611,784 | 33 | 6 | 59,141 | (21,701 | ) | 37,479 | 14 | 37,493 | |||||||||||||
| Stock options - compensation costs | - | - | - | - | 6 | - | 6 | - | 6 | ||||||||||||||
| Net loss | - | - | - | - | - | (455 | ) | (455 | ) | (80 | ) | (535 | ) | ||||||||||
| Balance at December 31, 2019 | 3,263,647 | 611,784 | $ | 33 | $ | 6 | $ | 59,147 | $ | (22,156 | ) | $ | 37,030 | $ | (66 | ) | $ | 36,964 |
See accompanying notes to co nsolidated financial statements.
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Avalon Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Description of the 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. In 2019, The Avalon Inn, which includes the hotel and its related resort amenities was renamed The Grand Resort.
Note 2. Summary of Significant Accounting Policies
The significant accounting policies of Avalon, which are summarized below, are consistent with accounting principles generally accepted in the United States and reflect practices appropriate to the businesses in which they operate. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of C onsolidation
The 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.
Subsequent E vents
Avalon evaluated subsequent events for potential recognition and disclosure through the date the financial statements were issued.
Cash and Cash Equivalents
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 Consolidated Statements of Cash Flows and 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 (See Note 4).
Restricted C ash
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 Consolidated Balance Sheets. Restricted cash of $7.2 million and $0.5 million at December 31, 2019 and 2018, respectively, 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 Notes 4 and 9).
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost of inventories is determined by the average cost method. If necessary, a provision for potentially obsolete or slow-moving inventory is made based on management’s analysis of inventory levels and future sales forecasts.
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Avalon Holdings Corporation and Subsidiaries
Financial Instruments
The Company follows the guidance included in the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, for its financial assets and liabilities. The fair value of financial instruments consisting of cash, cash equivalents, restricted cash, accounts receivable, and accounts payable at December 31, 2019 and 2018 approximates carrying value due to the relative short maturity of these financial instruments.
The fair value of the Company’s term loan approximates carrying value at December 31, 2019 and 2018, as neither the Company’s credit rating nor market credit conditions have changed substantially since the debt was refinanced.
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 (See Note 6).
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.
D ebt I ssuance C osts
Debt issuance costs are capitalized and amortized over the life of the related debt. Amortization of deferred financing costs is included in interest expense in the Consolidated Statements of Operations. Debt issuance costs incurred related to the loan and security agreement is presented in the Consolidated Balance Sheets as a direct deduction from the carrying amount of the debt. Debt issuance costs incurred related to the line of credit agreement is presented in the Consolidated Balance Sheets as “other current assets.”
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against net deferred tax assets when management believes it is more likely than not that such deferred tax assets will not be realized. Avalon recognizes any interest and penalty assessed by taxing authorities as a component of interest expense and other expense, respectively.
The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. Avalon does not have any unrecognized tax benefits that would affect its financial position.
Revenue Recognition
The Company recognizes revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606, Avalon 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 (See Note 5).
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Avalon Holdings Corporation and Subsidiaries
Accounts Receivable
Receivables, net, include amounts billed and currently due from customers. The majority of Avalon’s accounts receivable is due from industrial and commercial customers. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. The amounts due are stated at their net realizable value. 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 (See Note 5).
Leases
Avalon applies FASB Accounting Standards Update (“ASU”) 2016-02, Leases. The 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 (See Note 7).
Nonc ontrolling I nterest
Under FASB ASC 810-10, Consolidations – Over all (“ASC 810-10”), a company must determine whether it has a variable interest in a legal entity being evaluated for consolidation. A variable interest entity (“VIE”) is consolidated in the financial statements if the company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
As a result of a private placement offering, Avalon is not the majority owner of AWMS Holdings, LLC. At December 31, 2019 and 2018, respectively, Avalon owns approximately 47% of AWMS Holdings, LLC. In accordance ASC 810-10*,* due to the managerial control of AWMS Water Solutions, LLC, AWMS Holdings, LLC is a VIE, 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 Consolidated Statements of Operations (See Note 16).
Share -Based C ompensation
Avalon recognizes share-based compensation expense related to stock options issued to employees and directors. Avalon estimates the fair value of the stock options granted using a 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.
Avalon amortizes the grant date fair value of the stock options over the expected term which approximates the requisite service period. If accelerated vesting occurs based on the market performance of Avalon’s common stock, the compensation costs related to the vested stock options that have not previously been amortized are recognized upon vesting.
Asset Retirement Obligation
Avalon recorded an estimated asset retirement obligation of $0.1 million at December 31, 2019 and 2018, respectively, to plug and abandon the two salt water injection wells based upon an estimate from an experienced and qualified third party.
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Avalon Holdings Corporation and Subsidiaries
Asset Impairments
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.
Avalon reviewed the carrying value of its long-lived assets in accordance with FASB ASC 360-10-35, Property, Plant and Equipment – Overall – Subsequent Measurement. In 2019, no triggering event was present related to the waste management services segment as future cash flows have not changed significantly and the associated asset values remained relatively stable.
In 2018, Avalon assessed the recoverability of the carrying values of the salt water injection wells for the waste management services segment based on the Chief’s decision to suspend operations of the wells. In connection with the Company’s annual impairment testing, management of Avalon and its Board of Directors concluded that the injection wells would not resume operations in the near future and generate future cash flows and that the carrying value of the salt water injection wells was not recoverable. The Company determined that any remaining salvage value on the associated assets was not significant based on market prices for similar assets. As a result, in the fourth quarter of 2018, Avalon recorded a non-cash, pre-tax impairment charge of approximately $3.3 million representing the full carrying value of the Company’s salt water injection wells property and equipment. (See Note 17).
The impairment charge is included in the operations related to the waste management service’s segment for the fiscal year ended December 31, 2018. No cash expenditures were recorded as a result of the impairment charge. The impairment charge did not affect Avalon’s compliance with debt covenants under its term loan or line of credit agreements.
For the golf and related operations segment, Avalon does not believe there was a triggering event in 2019 or 2018 as future cash flows have not changed significantly and asset values have remained relatively stable.
Environmental Liabilities
When Avalon concludes that it is probable that a liability has been incurred with respect to a site, a provision is made in Avalon’s financial statements for Avalon’s best estimate of the liability based on management’s judgment and experience, information available from regulatory agencies, and the number, financial resources and relative degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of that site, as well as, the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no amount within the range appears to be a better estimate than any other, Avalon provides for the minimum amount within the range, in accordance with generally accepted accounting principles. The liability is recognized on an undiscounted basis. Avalon’s estimates are revised, as deemed necessary, as additional information becomes known. Although Avalon is not currently aware of any environmental liability, there can be no assurance that in the future an environmental liability will not occur.
Basic and D iluted **** N et Income ( L oss ) per S hare
Basic net income (loss) per share attributable to Avalon Holdings Corporation common shareholders is computed by dividing the net income (loss) by the weighted average number of common shares outstanding.
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 periods in which Avalon is in a net loss position, the diluted per share amount reported is equal to the basic per share amount because such dilution would be considered anti-dilutive (See Note 8).
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Avalon Holdings Corporation and Subsidiaries
Note 3. Recent Accounting Pronouncements
Adopted Accounting Standards
In February 2016, the FASB issued 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).
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 clarifies the principles used to recognize revenue for all entities. ASU 2014-09 provides a unified five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The new standard replaces most of the existing revenue recognition standards in U.S. GAAP. In addition, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. On January 1, 2018, the Company adopted ASU 2014-09 and ASU 2016-08, and all related amendments using the modified retrospective method. The adoption did not result in an impact to the way the Company records revenue and as such did not result in period reclassifications to or from revenue or its associated costs. As a result of the adoption, the Company separately disclosed contract assets, in our Consolidated Balance Sheets at December 31, 2019 and 2018 and associated cash flows in our Consolidated Statements of Cash Flows for years ended December 31, 2019 and 2018 (See Note 5).
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. ASU 2016-15 also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. On January 1, 2018, the Company adopted ASU 2016-15. The adoption of this standard did not have an impact on Avalon’s financial position, results of operations or financial statement disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”), which requires entities to include restricted cash and restricted cash equivalent balances with cash and cash equivalent balances in the statement of cash flows. On January 1, 2018, the Company adopted ASU 2016-18. The adoption of ASU 2016-18 impacted the presentation of our Consolidated Statements of Cash Flows and resulted in additional disclosure in our Notes to Consolidated Financial Statements for the restricted cash related to the proceeds from the Company’s loan and security agreement deposited into a project fund account that have not yet been utilized to fund the additional renovation and expansion of The Grand Resort and Avalon Field Club at New Castle (See Note 4).
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). The purpose of ASU 2017-01 is to change the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The Company adopted ASU 2017-01 on January 1, 2018. The acquisition of the Boardman Tennis Center property, acquired in March 2018, and the acquisition of the New Castle Country Club property, acquired in May 2019, was accounted for in accordance with ASU 2017-01 (See Note 18).
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"). ASU 2018-05 adds the SEC guidance released on December 22, 2017 regarding the Tax Cuts and Jobs Act (the “Tax Act”) to the FASB Accounting Standards Codification. ASU 2018-05 provides additional guidance allowing companies to use a one year measurement period to account for the impacts of the Tax Act in their financial statements. The Company adopted ASU 2018-05 in March 2018. The Company has accounted for the impacts of the Tax Act, including the use of reasonable estimates where necessary.
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Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. ASU 2016-13 is effective January 1, 2020, with early adoption permitted January 1, 2019. The adoption of this standard is not expected to have a material impact on Avalon’s financial position, results of operations or financial statement disclosures.
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 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 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).
In the first quarter of 2018, in accordance with our loan and security agreement, the Company withdrew $1.5 million from the restricted cash account for reimbursement for capital expenditures incurred in 2018 related to The Grand Resort funded with operating cash. The Company utilized approximately $1.3 million of those proceeds to fund the acquisition of The Boardman Tennis Center facility (See Note 18).
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows. Cash, cash equivalents and restricted cash consist of the following at December 31, 2019 and 2018 (in thousands):
| 2019 | 2018 | |||
|---|---|---|---|---|
| Cash and cash equivalents | $ | 1,446 | $ | 1,406 |
| Restricted cash | 7,185 | 502 | ||
| Cash, cash equivalents and restricted cash | $ | 8,631 | $ | 1,908 |
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.
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Avalon Holdings Corporation and Subsidiaries
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.
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 17). Due to the suspension of the salt water injection wells, there were no operating revenues for the years ended December 31, 2019 and 2018.
For the years ended December 31, 2019 and 2018, the net operating revenues related to waste management services represented approximately 71% and 72%, respectively, of Avalon’s total consolidated net operating revenues. For both the years ended December 31, 2019 and 2018, 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.
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Avalon Holdings Corporation and Subsidiaries
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 2019 and 2018.
For the years ended December 31, 2019 and 2018, the net operating revenues related to the golf and related operations represented approximately 29% and 28%, respectively, of Avalon’s total consolidated net operating revenues. For both the years ended December 31, 2019 and 2018, 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).
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The following table presents our net operating revenues disaggregated by revenue source for the years ended December 31, 2019 and 2018 (in thousands). Sales and other taxes are excluded from revenues.
| 2019 | 2018 | |||
|---|---|---|---|---|
| Waste management and brokerage services | $ | 46,041 | $ | 42,232 |
| Captive landfill management operations | 2,690 | 2,303 | ||
| Total waste management services revenues | 48,731 | 44,535 | ||
| Food, beverage and merchandise sales | 7,893 | 7,149 | ||
| Membership dues revenue | 5,710 | 5,160 | ||
| Room rental revenue | 2,340 | 2,259 | ||
| Greens fees and cart rental revenue | 1,917 | 1,541 | ||
| Other revenue | 1,766 | 1,590 | ||
| Total golf and related operations revenue | 19,626 | 17,699 | ||
| Total net operating revenues | $ | 68,357 | $ | 62,234 |
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 December 31, 2019 and 2018, accounts receivable, net, related to our waste management services segment were approximately $11.0 million and $11.2 million, respectively. At December 31, 2019 one customer accounted for approximately 14% of the waste management services segment’s receivables and 13% of the consolidated receivables. At December 31, 2018 two customers accounted for approximately 25% of the waste management services segment’s receivables and 23% of the consolidated receivables. Accounts receivable, net, related to our golf and related operations segment were approximately $1.0 million at December 31, 2019 and 2018. 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 December 31, 2019 and 2018.
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 December 31, 2019 and 2018.
The following table presents changes in our allowance for doubtful accounts during the years ended at December 31, 2019 and 2018 (in thousands):
| **** | **** | Provision | Write-offs | **** | **** | ||||
|---|---|---|---|---|---|---|---|---|---|
| Balance at | for Doubtful | less | Balance at | ||||||
| Beginning of Period | Accounts | Recoveries | End of Period | ||||||
| Allowance for doubtful accounts | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Year ended December 31, 2019 | $ | 255 | $ | 33 | $ | (13 | ) | $ | 275 |
| Year ended December 31, 2018 | $ | 237 | $ | 42 | $ | (24 | ) | $ | 255 |
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Avalon Holdings Corporation and Subsidiaries
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 Consolidated Balance Sheets were approximately $0.6 million at December 31, 2019 and 2018.
The following table presents changes in our contract assets during the years ended December 31, 2019 and 2018 (in thousands):
| **** | **** | Unbilled | **** | **** | **** | **** | **** | ||
|---|---|---|---|---|---|---|---|---|---|
| Balance at | Membership | **** | **** | **** | Balance at | ||||
| Beginning of Period | Dues | Billings | End of Period | ||||||
| Contract Assets: | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Unbilled membership dues receivable | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Year ended December 31, 2019 | $ | 554 | $ | 2,029 | $ | (1,981 | ) | $ | 602 |
| Year ended December 31, 2018 | $ | 580 | $ | 1,670 | $ | (1,696 | ) | $ | 554 |
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 Consolidated Balance Sheets at December 31, 2019 and 2018 were $3.2 million and $2.9 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 Consolidated Balance Sheets. Customer advance deposits were approximately $0.6 million at December 31, 2019 and $0.5 million at December 31, 2018.
The following table presents changes in our contract liabilities during the years ended December 31, 2019 and 2018 (in thousands):
| Balance at | **** | **** | Revenue | Balance at | |||||
|---|---|---|---|---|---|---|---|---|---|
| Beginning of Period | Billings | Recognized | End of Period | ||||||
| Contract Liabilities: | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Deferred membership dues revenue | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Year ended December 31, 2019 | $ | 2,899 | $ | 5,964 | $ | (5,710 | ) | $ | 3,153 |
| Year ended December 31, 2018 | $ | 2,718 | $ | 5,341 | $ | (5,160 | ) | $ | 2,899 |
| Customer advance deposits | **** | **** | **** | **** | **** | **** | **** | **** | **** |
| Year ended December 31, 2019 | $ | 453 | $ | 1,540 | $ | (1,440 | ) | $ | 553 |
| Year ended December 31, 2018 | $ | 430 | $ | 1,507 | $ | (1,484 | ) | $ | 453 |
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Avalon Holdings Corporation and Subsidiaries
Note 6 . Property and Equipment
Property and equipment at December 31, 2019 and 2018 consists of the following (in thousands):
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Land and land improvements | $ | 14,823 | $ | 14,231 | ||
| Buildings and improvements | 44,596 | 36,185 | ||||
| Machinery and equipment | 5,005 | 4,508 | ||||
| Vehicles | 499 | 455 | ||||
| Office furniture and fixtures | 7,234 | 6,458 | ||||
| Construction in progress | 581 | 2,569 | ||||
| 72,738 | 64,406 | |||||
| Less accumulated depreciation and amortization | (23,760 | ) | (21,872 | ) | ||
| Property and equipment, net | $ | 48,978 | $ | 42,534 |
At December 31, 2019, the Company did not have any significant fixed contractual commitments for construction projects.
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 3.1 years at December 31, 2019.
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 18). In addition, subsequent to the purchase, the Company also entered into new operating lease agreements for additional golf and maintenance carts. The Company recorded an operating lease right-of-use asset and corresponding obligation under operating leases of approximately $194,000.
Leased property and associated obligations under operating leases at December 31, 2019 consists of the following (in thousands):
| 2019 | ||
|---|---|---|
| Operating lease right-of-use assets | $ | 1,466 |
| Current portion of obligations under operating leases | $ | 513 |
| Long-term portion of obligations under operating leases | 953 | |
| Total obligations under operating leases | $ | 1,466 |
The weighted average discount rate on operating leases was 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 December 31, 2019 there were approximately 33.8 years remaining on the golf course and related facilities finance lease.
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Avalon Holdings Corporation and Subsidiaries
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 December 31, 2019, the vehicles, golf course maintenance and restaurant equipment and the landfill operations equipment have remaining lease terms ranging from 1 to 5 years at December 31, 2019. The weighted average remaining lease term on the vehicles and equipment leases was approximately 2.3 years at December 31, 2019.
Leased property and associated obligations under finance leases at December 31, 2019 and 2018 consists of the following (in thousands):
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Leased property under finance leases | $ | 11,758 | $ | 11,442 | ||
| Less accumulated amortization | (5,880 | ) | (5,374 | ) | ||
| Leased property under finace leases, net | $ | 5,878 | $ | 6,068 | ||
| Current portion of obligations under finance leases | $ | 295 | $ | 236 | ||
| Long-term portion of obligations under finance leases | 555 | 688 | ||||
| Total obligations under finance leases | $ | 850 | $ | 924 |
The weighted average discount rate on finance leases was 5.2% at December 31, 2019 and 4.8% at December 31, 2018.
For the years ended December 31, 2019 and 2018, components of lease expense were as follows (in thousands):
| 2019 | 2018 | |||
|---|---|---|---|---|
| Operating lease cost: | ||||
| Rental expense | $ | 775 | $ | 562 |
| Finance lease cost: | ||||
| Depreciation expense on right-of-use assets | $ | 506 | $ | 373 |
| Interest expense on lease liabilities | 43 | 49 | ||
| Total finance lease cost | $ | 549 | $ | 422 |
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Avalon Holdings Corporation and Subsidiaries
Future commitments under long-term, operating and finance leases at December 31, 2019 are as follows (in thousands):
| Finance | Operating | Total | ||||
|---|---|---|---|---|---|---|
| 2020 | $ | 332 | $ | 575 | $ | 907 |
| 2021 | 285 | 513 | 798 | |||
| 2022 | 87 | 323 | 410 | |||
| 2023 | 29 | 154 | 183 | |||
| 2024 | 18 | 27 | 45 | |||
| Thereafter | 420 | - | 420 | |||
| Total lease payments | 1,171 | 1,592 | 2,763 | |||
| Less imputed interest | 321 | 126 | 447 | |||
| Total | 850 | 1,466 | 2,316 | |||
| Less: current portion of obligations under leases | 295 | 513 | 808 | |||
| Long-term portion of obligations under leases | $ | 555 | $ | 953 | $ | 1,508 |
Future commitments under long-term, operating and finance leases at December 31, 2018 are as follows (in thousands):
| Finance | Operating | Total | ||||
|---|---|---|---|---|---|---|
| 2019 | $ | 277 | $ | 563 | $ | 840 |
| 2020 | 277 | 483 | 760 | |||
| 2021 | 229 | 419 | 648 | |||
| 2022 | 32 | 277 | 309 | |||
| 2023 | 21 | 113 | 134 | |||
| Thereafter | 435 | - | 435 | |||
| Total lease payments | 1,271 | $ | 1,855 | $ | 3,126 | |
| Less imputed interest | 347 | |||||
| Total | 924 | |||||
| Less: current portion of obligations under finance leases | 236 | |||||
| Long-term portion of obligations under finance leases | $ | 688 |
Note 8. Basic and Diluted N et L oss per S hare
Basic net loss per share attributable to Avalon Holdings Corporation common shareholders for the years ended December 31, 2019 and 2018 is computed by dividing the net loss by the weighted average number of common shares outstanding, which was 3,875,431 for 2019 and 3,813,796 for 2018.
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 years ended December 31, 2019 and 2018, the diluted per share amounts reported are equal to the basic per share amounts 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 years ended December 31, 2019 and 2018 was 3,903,430 and 3,914,079, respectively.
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Avalon Holdings Corporation and Subsidiaries
The loss per share calculations for the years ended December 31, 2019 and 2018 are as follows (in thousands, except per share amounts):
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Net loss attributable to Avalon Holdings Corporation common shareholders | $ | (455 | ) | $ | (1,144 | ) |
| Shares used in computing basic loss per share | 3,875 | 3,814 | ||||
| Potentially dilutive shares from stock options | - | - | ||||
| Shares used in computing diluted loss per share | 3,875 | 3,814 | ||||
| Loss per share attributable to Avalon Holdings Corporation common shareholders | ||||||
| Basic and diluted net loss per share | $ | (0.12 | ) | $ | (0.30 | ) |
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 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 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 December 31, 2019, the remaining proceeds of $7.2 million are presented in the 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 commencing 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.
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Avalon Holdings Corporation and Subsidiaries
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 also contains certain financial and other covenants, customary representations, warranties and events of default. Avalon was in compliance with the New Term Loan Agreement covenants at 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 Consolidated Balance Sheets as a direct reduction from the carrying amount of the term loan liability.
2016 Term Loan Agreement
On December 20, 2016, Avalon and certain direct and indirect wholly owned subsidiaries entered into the 2016 Term Loan Agreement with Laurel Capital Corporation which provided for a $12.0 million term loan. At closing, $9.1 million of the proceeds were used to pay off amounts outstanding under the then existing line of credit agreement and associated accrued interest with Home Savings Bank and pay related transaction costs associated with the Term Loan Agreement. Remaining proceeds of $2.9 million under the Term Loan Agreement were deposited in a project fund account to fund costs of renovating and expanding The Grand Resort. At December 31, 2018, the remaining proceeds of $0.5 million are presented in the Consolidated Balance Sheets as “Restricted cash.” During 2019, the remaining project fund proceeds related to the 2016 Term Loan Agreement were fully utilized.
The 2016 Term Loan Agreement contained certain financial and other covenants, customary representations, warranties and events of default. Avalon was in compliance with the 2016 Term Loan Agreement covenants at December 31, 2018.
At December 20, 2019, the outstanding balance of $10.3 million under the 2016 Term Loan Agreement was refinanced and terminated in conjunction with the New Term Loan Agreement.
2019 Term Loan Agreement
On March 29, 2019, Avalon and certain direct and indirect wholly owned subsidiaries entered into the 2019 Term Loan Agreement with Laurel Capital Corporation which provided for a $3.0 million term loan. At closing, a portion of the proceeds were used to pay related transaction costs associated with the 2019 Term Loan Agreement with the remaining proceeds deposited into a project fund account to fund costs of renovating and expanding The Grand Resort. During 2019, the project fund proceeds related to the 2019 Term Loan Agreement were fully utilized.
At December 20, 2019, the outstanding balance of $2.9 million under the 2019 Term Loan Agreement was refinanced and terminated in conjunction with the New Term Loan Agreement.
Commercial Mortgage
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 (the “Assumption Agreement”) with Mercer County State Bank for the outstanding debt under the Club’s Commercial Mortgage and Demand Line of Credit, as amended (the “Demand Line of Credit”), at closing as consideration for the purchase of the real property of the Club (See Note 18). At closing the outstanding principal balance assumed under the Commercial Mortgage obligation was approximately $0.7 million.
At December 20, 2019, the outstanding balance of $0.6 million under the Commercial Mortgage was refinanced and terminated in conjunction with the New Term Loan Agreement.
Demand Line of Credit
Under the Assumption Agreement, Havana Cigar Shop, Inc. also assumed the Club’s $150,000 Commercial Demand Line of Credit with Mercer County State Bank of which $134,000 was outstanding at closing. During the third quarter of 2019, the outstanding balance was paid in full and in the fourth quarter of 2019 the Commercial Demand Line of Credit agreement was terminated.
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Avalon Holdings Corporation and Subsidiaries
Line of Credit Agreement
On May 31, 2018, Avalon entered into a new business loan agreement with Home Savings Bank, (the “Line of Credit Agreement”) which provides for a line of credit of up to $5.0 million with an original maturity date of May 31, 2020. On June 17, 2019, the Company amended the Line of Credit Agreement to extend the maturity date to May 31, 2021. 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. The existing line of credit agreement with Home Savings Bank, dated December 20, 2016, as amended, which was entered into concurrently with the 2016 Term Loan Agreement, was terminated in conjunction with the new Line of Credit Agreement. No amounts were outstanding under the existing line of credit agreement at termination.
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 December 31, 2019 and 2018. Outstanding borrowings under the Line of Credit Agreement bear interest at Prime Rate plus .25%. At December 31, 2019, the interest rate on the Line of Credit Agreement was 5.00%.
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 also contains certain financial and other covenants, customary representations, warranties and events of default. Avalon was in compliance with the line of credit agreements covenants at December 31, 2019 and December 31, 2018.
During the years ended December 31, 2019 and 2018, the weighted average interest rate on outstanding borrowings was 5.46% and 5.35%, respectively.
Obligations under the Company’s debt agreements at December 31, 2019 and 2018 consist of the following (in thousands):
| 2019 | |||||||
|---|---|---|---|---|---|---|---|
| Gross Amount | Debt Issuance Costs | Net Amount | |||||
| New Term Loan Agreement | $ | 23,000 | $ | (415 | ) | $ | 22,585 |
| Less current portion | 1,057 | (42 | ) | 1,015 | |||
| Long-term debt | $ | 21,943 | $ | (373 | ) | $ | 21,570 |
| 2018 | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Gross Amount | Debt Issuance Costs | Net Amount | |||||
| 2016 Term Loan Agreement | $ | 10,898 | $ | (153 | ) | $ | 10,745 |
| Less current portion | 597 | (19 | ) | 578 | |||
| Long-term debt | $ | 10,301 | $ | (134 | ) | $ | 10,167 |
At December 31, 2019, future maturities of long-term debt are as follows (in thousands):
| 2020 | $ | 1,057 |
|---|---|---|
| 2021 | 1,111 | |
| 2022 | 1,167 | |
| 2023 | 1,227 | |
| 2024 | 1,290 | |
| Thereafter | 17,148 | |
| Total | $ | 23,000 |
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Avalon Holdings Corporation and Subsidiaries
Note 10 . Income Taxes ****
Loss before income taxes for each of the two years in the period ended December 31, 2019 was subject to taxation under United States jurisdictions only. The provision for income taxes consists of the following (in thousands):
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Current: | ||||||
| Federal | $ | (3 | ) | $ | (2 | ) |
| State | 163 | 169 | ||||
| Total current income taxes | 160 | 167 | ||||
| Deferred: | ||||||
| Federal | - | - | ||||
| State | - | - | ||||
| Total deferred income taxes | - | - | ||||
| Total provision for income taxes | $ | 160 | $ | 167 |
On December 22, 2017, legislation commonly known as the Tax Act was signed into law. The Tax Act changes existing U.S. tax law and includes numerous provisions that will affect Avalon, including our income tax accounting, disclosure and tax compliance. The most impactful changes within the Tax Act are those that will reduce the U.S. corporate tax rates, business-related exclusions and deductions and credits. ASC 740, “Income Taxes,” requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Avalon valued all deferred tax assets and liabilities at the newly enacted Corporate U.S income tax rate. Avalon has a full valuation allowance on its federal deferred tax assets.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2019 and 2018 are as follows (in thousands):
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Deferred tax assets: | ||||||
| Accounts receivable, allowance for doubtful accounts | $ | 71 | $ | 65 | ||
| Reserves not deductible until paid | 154 | 133 | ||||
| Net operating loss carryforwards | ||||||
| Federal | 1,646 | 1,737 | ||||
| State | 749 | 704 | ||||
| Federal tax credit | 653 | 556 | ||||
| Business interest expense carryforward | 235 | - | ||||
| Other | 115 | 162 | ||||
| Gross deferred tax assets | 3,623 | 3,357 | ||||
| Less valuation allowance | (2,043 | ) | (1,881 | ) | ||
| Deferred tax assets net of valuation allowance | $ | 1,580 | $ | 1,476 | ||
| Deferred tax liabilities: | ||||||
| Property and equipment | $ | (1,517 | ) | $ | (1,438 | ) |
| Other | (55 | ) | (30 | ) | ||
| Gross deferred tax liabilities | $ | (1,572 | ) | $ | (1,468 | ) |
| Net deferred tax asset | $ | 8 | $ | 8 |
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Avalon Holdings Corporation and Subsidiaries
The $1,572,000 of deferred tax liabilities will reverse in the same period and jurisdiction and is of the same character as the temporary differences giving rise to the $1,580,000 of deferred tax assets. Avalon has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized. If future taxable income is less than the amount that has been assumed in assessing the recoverability of the deferred tax assets, then an increase in the valuation allowance will be required, with a corresponding increase to income tax expense. Likewise, should Avalon ascertain in the future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets, all or a portion of the $2,043,000 valuation allowance as of December 31, 2019, would be reversed as a benefit to the provision for income taxes in the period such determination was made.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to loss before income taxes as a result of the following differences (in thousands):
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Loss before income taxes | $ | (375 | ) | $ | (3,089 | ) |
| Less net loss attributable to non-controlling interest in subsidiary | (80 | ) | (2,112 | ) | ||
| Loss before income taxes attributable to | ||||||
| Avalon Holdings Corporation common shareholders | (295 | ) | (977 | ) | ||
| Federal statutory rate | 21 | % | 21 | % | ||
| Computed Federal provision (benefit) for income taxes | (62 | ) | (205 | ) | ||
| State income taxes, net of federal income tax benefits | 128 | 135 | ||||
| Change in valuation allowance | 162 | 412 | ||||
| Increase in available federal tax credit | (97 | ) | (80 | ) | ||
| Other nondeductible expenses | 39 | 34 | ||||
| Decrease (increase) in net operating loss carryforward: | ||||||
| State | - | (148 | ) | |||
| Federal | - | 4 | ||||
| Other, net | (10 | ) | 15 | |||
| Total provision for income taxes | $ | 160 | $ | 167 |
Avalon is subject to income taxes in the U.S. federal and various states jurisdictions. With few exceptions, Avalon is no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for the years before 2015. Avalon recognizes any interest and penalty assessed by taxing authorities as a component of interest expense and other expense, respectively. There were no accruals for the payment of interest and penalties for 2019 and 2018.
Avalon made net income tax payments of approximately $151,000 and $109,000 in 2019 and 2018, respectively. At December 31, 2019, Avalon has taxable loss carryforwards for federal income tax purposes aggregating approximately $8,938,000 which are available to offset future federal taxable income. Legislation under the Tax Act allows for corporations to carryforward NOLs generated beginning in 2018 indefinitely. NOLs generated in 2018 may offset 80% of future taxable income. Of the $8,938,000 taxable loss carryforwards, $709,000 is carryforward indefinitely to offset 80% of future taxable income. These carryforwards expire in 2023 through 2037. In addition, at December 31, 2019, certain subsidiaries of Avalon have net operating loss carryforwards for state purposes of approximately $9,477,000 which are available to offset future state taxable income. These carryforwards expire at various dates through 2039. A valuation allowance has been provided because it is more likely than not that the deferred tax assets relating to certain of the federal and state loss carryforwards will not be realized.
Note 11. Retirement Benefits
Avalon sponsors a defined contribution profit sharing plan that is a qualified tax deferred benefit plan under Section 401(k) of the Internal Revenue Code (the “Plan”). Substantially all employees are eligible to participate in the Plan. The Plan provides for employer discretionary cash contributions as determined by Avalon’s Board of Directors. Discretionary contributions vest on a graduated basis and become 100% vested after five years of service. Plan participants may also contribute a portion of their annual compensation to the Plan, subject to maximums imposed by the Internal Revenue Code and related regulations. The Board decided not to make a discretionary employer contribution for 2019 or 2018.
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Avalon Holdings Corporation and Subsidiaries
Note 12. 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 was 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 December 31, 2019, options to purchase 760,000 shares have been granted under the 2009 Plan. Of these, 72,000 shares have been exercised, and options for 688,000 shares remain outstanding.
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.
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.
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Avalon Holdings Corporation and Subsidiaries
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 2019 and 2018:
| **** | **** | **** | Weighted | Weighted | |||
|---|---|---|---|---|---|---|---|
| Number of | Average | Average | |||||
| Options | Exercise | Fair Value at | |||||
| Granted | Price | Grant Date | |||||
| Outstanding at January 1, 2018 | 760,000 | $ | 2.51 | $ | 1.00 | ||
| Options granted | - | - | - | ||||
| Options exercised | (72,000 | ) | 2.37 | 0.92 | |||
| Options cancelled or forfeited | - | - | - | ||||
| Outstanding at December 31, 2018 | 688,000 | 2.52 | 1.00 | ||||
| Options granted | - | - | - | ||||
| Options exercised | - | - | - | ||||
| Options cancelled or forfeited | - | - | - | ||||
| Outstanding at December 31, 2019 | 688,000 | $ | 2.52 | $ | 1.00 | ||
| Options Vested | 652,000 | $ | 2.56 | $ | 1.03 | ||
| Exercisable at December 31, 2019 | 634,000 | $ | 2.58 | $ | 1.05 |
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. |
| --- | --- |
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 |
The total intrinsic value of the 72,000 options exercised during the year ended December 31, 2018 was $154,000.
Compensation costs were approximately $6,000 for both the years ended December 31, 2019 and 2018 based upon the estimated grant date fair value calculations. As of December 31, 2019, there was approximately $18,000 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 4.42 years.
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Avalon Holdings Corporation and Subsidiaries
Note 13. Shareholders’ Equity
Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes on all matters submitted to a vote of the shareholders. Except for the election of Avalon’s Board of Directors, the Class A Common Stock and the Class B Common Stock vote together as a single class on all matters presented for a vote to the shareholders. However, with regard to the election of directors, for as long as the outstanding Class B Common Stock has more than 50% of the total outstanding voting power of all common stock, the holders of the Class A Common Stock, voting as a separate class, will elect the number of directors equal to at least 25% of the total Board of Directors and the holders of the Class B Common Stock, voting as a separate class, will elect the remaining directors. Thereafter, the holders of the Class A Common Stock (one vote per share) and Class B Common Stock (ten votes per share) will vote together as a single class for the election of directors. The holders of a majority of all outstanding shares of Class A Common Stock or Class B Common Stock, voting as separate classes, must also approve amendments to the Articles of Incorporation that adversely affect the shares of their class. Shares of Class A Common Stock and Class B Common Stock do not have cumulative voting rights.
Each share of Class B Common Stock is convertible, at any time, at the option of the shareholder, into one share of Class A Common Stock. Shares of Class B Common Stock are also automatically converted into shares of Class A Common Stock on the transfer of such shares to any person other than Avalon, another holder of Class B Common Stock or a Permitted Transferee, as defined in Avalon’s Articles of Incorporation. The Class A Common Stock is not convertible.
Note 14. 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, would have a material adverse effect on its liquidity, financial position or results of operations (See Note 17).
In August 2018, Avalon filed a complaint in the United States District Court for the Southern District of New York against Guy Gentile and MintBroker International, Ltd (collectively “MintBroker”). The complaint seeks to recover from MintBroker all short-swing trading profits realized through its purchases and subsequent sales of the Avalon Class A Common Stock during the six month period ending on or about August 1, 2019, in accordance with Section 16(b) of the Securities Exchange Act of 1934, as amended, based on MintBroker’s Schedule 13(d), Form 3 and Form 4 filings made with the Securities and Exchange Commission. To date, a court date has not been scheduled.
Note 15. 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 years 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. In 2019 and 2018, no customer individually accounted for 10% or more of Avalon’s business segment or consolidated net operating revenues.
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Avalon Holdings Corporation and Subsidiaries
The accounting policies of the segments are consistent with those described for the consolidated financial statements in the summary of significant accounting policies (See Note 2). Avalon measures segment profit for internal reporting purposes as income (loss) before taxes.
Business segment information including the reconciliation of segment income (loss) to consolidated loss before taxes is as follows (in thousands):
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Net operating revenues from: | **** | **** | **** | **** | **** | **** |
| Waste management services: | ||||||
| External customer revenues | $ | 48,731 | $ | 44,535 | ||
| Intersegment revenues | - | - | ||||
| Total waste management services | 48,731 | 44,535 | ||||
| Golf and related operations: | ||||||
| External customer revenues | 19,626 | 17,699 | ||||
| Intersegment revenues | 61 | 60 | ||||
| Total golf and related operations | 19,687 | 17,759 | ||||
| Segment operating revenues | 68,418 | 62,294 | ||||
| Intersegment eliminations | (61 | ) | (60 | ) | ||
| Total net operating revenues | $ | 68,357 | $ | 62,234 | ||
| Income (loss) before income taxes: | **** | **** | **** | **** | **** | **** |
| Waste management services | $ | 4,423 | $ | 661 | ||
| Golf and related operations | (803 | ) | (4 | ) | ||
| Segment income (loss) before taxes | 3,620 | 657 | ||||
| Corporate interest expense | (770 | ) | (626 | ) | ||
| Corporate other income (expense), net | 64 | 19 | ||||
| General corporate expenses | (3,289 | ) | (3,139 | ) | ||
| Loss before income taxes | $ | (375 | ) | $ | (3,089 | ) |
| Depreciation and amortization expense: | **** | **** | **** | **** | **** | **** |
| Waste management services | $ | 59 | $ | 541 | ||
| Golf and related operations | 2,330 | 2,200 | ||||
| Corporate | 133 | 136 | ||||
| Total depreciation and amortization expense | $ | 2,522 | $ | 2,877 | ||
| Interest expense: | **** | **** | **** | **** | **** | **** |
| Waste management services | $ | 3 | $ | 4 | ||
| Golf and related operations | 64 | 45 | ||||
| Corporate | 770 | 626 | ||||
| Total interest expense | $ | 837 | $ | 675 | ||
| Impairment of property and equipment | **** | **** | **** | **** | **** | **** |
| Waste management services | $ | - | $ | 3,261 | ||
| Golf and related operations | - | - | ||||
| Corporate | - | - | ||||
| Total interest expense | $ | - | $ | 3,261 |
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Avalon Holdings Corporation and Subsidiaries
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Capital expenditures: | **** | **** | **** | **** | ||
| Waste management services | $ | 182 | $ | 64 | ||
| Golf and related operations | 7,536 | 3,771 | ||||
| Corporate | 204 | 35 | ||||
| Total capital expenditures | $ | 7,922 | $ | 3,870 | ||
| Total assets: | **** | **** | **** | **** | **** | **** |
| --- | --- | --- | --- | --- | --- | --- |
| Waste management services | $ | 31,574 | $ | 27,383 | ||
| Golf and related operations | 55,369 | 48,074 | ||||
| Corporate | 58,638 | 47,394 | ||||
| Subtotal | 145,581 | 122,851 | ||||
| Elimination of intersegment receivables | (66,417 | ) | (58,082 | ) | ||
| Total assets | $ | 79,164 | $ | 64,769 |
In comparing the total assets at December 31, 2019 with those at December 31, 2018, the increase in the total assets of the waste management services segment of $4.2 million is primarily a result of an increase in intersegment transactions, which are eliminated in consolidation, and to a lesser extent, the right-of-use assets relating to operating leases partially offset by a decrease in accounts receivable. The increase in total assets of the golf and related operations segment of $7.3 million was primarily due to capital expenditures related to the expansion of The Grand Resort, the real property acquired relating to New Castle Country Club and the right-of-use assets related to operating leases, partially offset by current year depreciation on property and equipment. The increase in corporate total assets of approximately $11.2 million is primarily due to an increase in restricted cash received in conjunction with our New Term Loan Agreement and an increase intersegment transactions, which are eliminated in consolidation.
Note 16. 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 December 31, 2019 and 2018, respectively, Avalon owns approximately 47% of AWMS Holdings, LLC. In accordance ASC 810-10*,* due to the managerial control of AWMS Water Solutions, LLC, AWMS Holdings, LLC is a VIE, 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 Consolidated Statements of Operations.
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Avalon Holdings Corporation and Subsidiaries
Note 17 . 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.
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 10^th^ District Court of Appeals on March 21, 2017.
On September 14, 2017, an appeal hearing was held in the Ohio 10^th^ 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 10^th^ District Court of Appeals decision to the Supreme Court of Ohio. On November 21, 2018, Avalon, received notice from the Supreme Court of Ohio that the court would not accept for review the Company’s appeal of the Ohio 10^th^ 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.
Based on the Supreme Court of Ohio’s decision not to accept the Company’s appeal for review and the economically unfeasible conditions required by the Division of Oil & Gas Resources Management proposed restart plan, management of Avalon and its Board of Directors concluded that the injection wells would not resume operations in the near future and that the carrying value of the salt water injection wells was not recoverable. In the fourth quarter of 2018, the Company recorded an impairment charge of approximately $3.3 million, the full carrying value of the Company’s salt water injection wells.
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, which is pending.
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Avalon Holdings Corporation and Subsidiaries
Concurrently with the filing of the appeal with the Franklin County Court of Common Pleas, the Company filed a writ of mandamus in the 10^th^ 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.
In addition, on August 26, 2016, Avalon filed a complaint in the 11^th^ 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 11^th^ 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 have been scheduled to commence in April 2020.
No te 18 . Asset Acquisition s
On March 7, 2018, Avalon, through a newly created subsidiary, Avalon Mahoning Sports Center, Inc., completed the acquisition of the Boardman Tennis Center property in Boardman, Ohio for approximately $1.3 million in cash. In accordance with our 2016 Term Loan Agreement, the Company withdrew funds from the restricted cash account for reimbursement for capital expenditures incurred in 2017 related to The Grand Resort that were paid with operating cash to fund the acquisition of the Boardman Tennis Center property. Subsequent to the acquisition, the Boardman Tennis Center property was named the Avalon Athletic Club at Boardman. The primary assets of the Avalon Athletic Club at Boardman include the acquired real property consisting of the building and associated land.
In the third quarter of 2018, the Company began renovating the facility. The renovations include the conversion of the facility into a multipurpose recreation center including indoor tennis, basketball, volleyball and pickleball courts and a fitness area. The facilities interior renovations were completed in the first quarter of 2019.
The Avalon Athletic Club at Boardman is currently in operation. The operating results are included in the Company’s 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 Athletic Club at Boardman from the period of acquisition are not significant and, accordingly, are not provided.
The acquisition of the facility and its associated subsequent renovation is consistent with the Company’s athletics and fitness business strategy. Members of the Avalon Golf and Country Club have access to the facility and all the athletic and fitness related activities offered by the Avalon Athletic Club at Boardman. In addition, hotel guests at The Grand Resort can utilize the facility during their stay. The Avalon Athletic Club at Boardman earns revenue through membership fees, athletic and fitness related activities.
The Company accounted for the acquisition of the Avalon Athletic Club at Boardman in accordance with 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.
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Avalon Holdings Corporation and Subsidiaries
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 | $ | 1,302 |
| Total assets acquired: | 1,302 | |
| Liabilities assumed: | **** | **** |
| Accrued liabilities | 33 | |
| Total liabilities assumed | 33 | |
| Total consideration | $ | 1,269 |
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 (See Note 9).
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 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 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 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.
The Company accounted for the acquisition of Avalon Field Club at New Castle in accordance with 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.
In accordance with ASU 2017-01, the Company capitalized approximately $67,000 of transaction costs as a component of the cost of the real property assets acquired.
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.
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Avalon Holdings Corporation and Subsidiaries
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 |
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Avalon Holdings Corporation and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Avalon Holdings Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of Avalon Holdings Corporation (an Ohio corporation) and subsidiaries (the “Company”) as of December 31, 2019, the related consolidated statement of operations, shareholders’ equity, and cash flow for the year ended December 31, 2019 and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Change in accounting principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASU 2016-02, “Leases”.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2019.
Cleveland, Ohio
March 12, 2020
48
Avalon Holdings Corporation and Subsidiaries
R EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Avalon Holdings Corporation
Warren, Ohio
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Avalon Holdings Corporation (the “Company”) and subsidiaries as of December 31, 2018 and the related consolidated statement of operations, shareholders’ equity, and cash flows for the year then ended and the related notes and schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and the results of their operations and their cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
Cleveland, Ohio
March 14, 2019
49
Avalon Holdings Corporation and Subsidiaries
Management’s Annual R eport on Internal Control o ver Financial Reporting
The management of Avalon, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) of the Securities and Exchange Act of 1934, as amended. Avalon’s internal control system was designed to provide reasonable assurance as to the reliability of the preparation and presentation of the consolidated financial statements for external reporting and the safeguarding of assets from unauthorized use or disposition.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2019, based upon the framework and criteria established in Internal Control – Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2019.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
| /s/ Ronald E. Klingle | /s/ Bryan P. Saksa |
|---|---|
| Chief Executive Officer | Chief Financial Officer |
| March 12, 2020 |
50
Avalon Holdings Corporation and Subsidiaries
Company Location Directory
| Golf and Related | |
|---|---|
| Corporate Office | Operations |
| Avalon Holdings Corporation | Avalon Resorts and Clubs, Inc. |
| One American Way | One American Way |
| Warren, Ohio 44484-5555 | Warren, Ohio 44484-5555 |
| (330) 856-8800 | (330) 856-8898 |
| Waste Management | Avalon Clubs, Inc. |
| Services | One American Way |
| Warren, Ohio 44484-5555 | |
| American Waste Management | (330) 856-8898 |
| Services, Inc. | |
| One American Way | Avalon Resorts, Inc. |
| Warren, Ohio 44484-5555 | One American Way |
| (330) 856-8800 | Warren, Ohio 44484-5555 |
| (330) 856-8898 | |
| American Landfill | |
| Management, Inc. | Avalon Golf and Country Club |
| One American Way | One American Way |
| Warren, Ohio 44484-5555 | Warren, Ohio 44484-5555 |
| (330) 856-8800 | (330) 856-8898 |
| American Construction Supply, Inc. | Avalon Lakes Golf Course |
| One American Way | One American Way |
| Warren, Ohio 44484-5555 | Warren, Ohio 44484-5555 |
| (330) 856-8800 | (330) 856-8898 |
| American Water Solutions, LLC | Squaw Creek Golf Course |
| One American Way | 761 Youngstown-Kingsville Road |
| Warren, Ohio 44484-5555 | Vienna, Ohio 44473 |
| (330) 856-8800 | (330) 539-5103 |
| AWMS Holdings, LLC | Avalon Country Club at Sharon, Inc. |
| One American Way | 1030 Forker Blvd. |
| Warren, Ohio 44484-5555 | Hermitage, PA 16148-1566 |
| (330) 856-8800 | (724) 981-6700 |
| AWMS Rt. 169, LLC | The Avalon Resort and Spa LLC |
| One American Way | 9519 East Market Street |
| Warren, Ohio 44484-5555 | Warren, OH 44484-5555 |
| (330) 856-8800 | (330) 856-1900 |
| Avalon Travel, Inc . | |
| One American Way | |
| Warren, Ohio 44484-5555 | |
| (330) 856-8400 | |
| Avalon Mahoning Sports Center, Inc. | |
| One American Way | |
| Warren, Ohio 44484-5555 | |
| (330) 856-8898 | |
| Avalon Cigar Shop, Inc. | |
| One American Way | |
| Warren, Ohio 44484-5555 | |
| (330) 856-8898 |
51
Avalon Holdings Corporation and Subsidiaries
Directors and Officers
| Directors | Officers |
|---|---|
| Ronald E. Klingle | Ronald E. Klingle |
| Chairman of the Board and | Chairman of the Board and Chief Executive Officer |
| Chief Executive Officer | |
| Executive Committee (Chairman) | Bryan P. Saksa |
| Compensation Committee | Chief Financial Officer, Treasurer and Secretary |
| Bryan P. Saksa | Frances R. Klingle |
| Chief Financial Officer, Treasurer | Chief Administrative Officer |
| and Secretary | |
| Compensation Committee (Chairman) | Clifford P. Davis |
| Chief Technology Officer | |
| Kurtis D. Gramley | |
| Chairman and Chief Executive Officer, | Richard R. Fees |
| Edgewood Surgical Hospital | Controller |
| Audit Committee (Chairman) | |
| Executive Committee | |
| Option Plan Committee | |
| Stephen L. Gordon | |
| Partner, Beveridge & Diamond, P.C. | |
| Compensation Committee | |
| Audit Committee | |
| Option Plan Committee (Chairman) | |
| David G. Bozanich | |
| Financial Consultant | |
| Audit Committee | |
| Executive Committee | |
| Option Plan Committee |
52
Avalon Holdings Corporation and Subsidiaries
Shareholder
Information
Common stock information
Avalon’s Class A Common Stock is listed on the NYSE Amex (symbol: AWX). Quarterly stock information for 2019 and 2018 as reported by The Wall Street Journal is as follows:
| 2019: | **** | **** | **** | **** | **** | **** |
|---|---|---|---|---|---|---|
| Quarter Ended | High | Low | Close | |||
| March 31 | $ | 3.53 | $ | 2.43 | $ | 2.58 |
| June 30 | 3.14 | 2.22 | 2.49 | |||
| September 30 | 2.80 | 2.10 | 2.21 | |||
| December 31 | 2.59 | 1.84 | 1.92 | |||
| 2018: | **** | **** | **** | **** | **** | **** |
| --- | --- | --- | --- | --- | --- | --- |
| Quarter Ended | High | Low | Close | |||
| March 31 | $ | 2.51 | $ | 1.93 | $ | 2.20 |
| June 30 | 3.64 | 2.06 | 2.16 | |||
| September 30 | 20.20 | 2.16 | 3.72 | |||
| December 31 | 4.95 | 2.50 | 2.65 |
No dividends were paid during 2019 or 2018.
There are 302 Class A and 9 Class B Common Stock shareholders of record as of the close of business March 6, 2020. The number of holders is based upon the actual holders registered on the records of Avalon’s transfer agent and registrar and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.
Dividend policy
Avalon presently intends to retain earnings for use in the operation and expansion of its business and therefore, does not anticipate paying any cash dividends in the foreseeable future.
Annual report on Form 10-K
Copies of Avalon’s annual report on Form 10-K can be obtained free of charge by writing to Avalon Holdings Corporation, One American Way, Warren, Ohio 44484-5555, Attention: Shareholder Relations or by visiting Avalon’s web-site at www.avalonholdings.com.
53
Avalon Holdings Corporation and Subsidiaries
Transfer agent and registrar
The transfer agent and registrar for Avalon is Broadridge Corporate Issuer Solutions, Inc. Regular mail correspondence should be sent to P.O. Box 1342, Brentwood, NY 11717 and overnight correspondence to ATTN: IWS, 1155 Long Island Avenue, Edgewood, NY 11717.
Investor inquiries
Security analysts, institutional investors, shareholders, news media representatives and others seeking financial information or general information about Avalon are invited to direct their inquiries to Bryan P. Saksa, Chief Financial Officer and Treasurer, telephone (330) 856-8800.
Policy statement on equal employment opportunity and affirmative action
Avalon is firmly committed to a policy of equal employment opportunity and affirmative action. Toward this end, Avalon will continue to recruit, hire, train and promote persons in all job titles, without regard to race, color, religion, sex, national origin, age, handicap, ancestry or Vietnam-era or disabled veteran status. We will base all decisions on merit so as to further the principle of equal employment opportunity. This policy extends to promotions and to all actions regarding employment including compensation, benefits, transfers, layoffs, returns from layoff, company-sponsored training and social programs.
| 54 |
|---|
ex_174450.htm
Exhibit 21.1
The following is a list of Avalon’s subsidiaries except for unnamed subsidiaries which considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.
| Subsidiary Name | State of Incorporation |
|---|---|
| • American Landfill Management, Inc. | Ohio |
| •American Construction Supply, Inc. | Ohio |
| • American Waste Management Services, Inc. | Ohio |
| • American Waste NJ | New Jersey |
| • AWMS Water Solutions, LLC | Ohio |
| • AWMS Holdings, LLC | Ohio |
| • AWMS Rt. 169, LLC | Ohio |
| • Avalon Clubs and Resorts, Inc. | Ohio |
| • Avalon Resorts, Inc. | Ohio |
| • The Avalon Resort and Spa LLC | Ohio |
| • Avalon Cigar Shop, Inc. | Ohio |
| • Avalon Clubs, Inc. | Ohio |
| • Avalon Golf and Country Club, Inc. | Ohio |
| • Avalon Mahoning Sports Center, Inc. | Ohio |
| • Avalon Country Club at Sharon, Inc. | Pennsylvania |
| • Havana Cigar Company | Pennsylvania |
| • Avalon Lakes Golf, Inc. | Ohio |
| • Avalon Travel, Inc. | Ohio |
| • TBG, Inc. | Ohio |
Parent/subsidiary relationships are indicated by indentations. In each case, 100% of the voting securities of each of the subsidiaries are owned by the indicated parent of such subsidiary, except for AWMS Holdings, LLC. At December 31, 2019 AWMS Water Solutions, LLC owned approximately 47% of AWMS Holdings, LLC. Due to the managerial control of AWMS Water Solutions, LLC, AWMS Holdings, LLC is a variable interest entity (“VIE”), and the financial statements of AWMS Holdings, LLC and subsidiaries are included in Avalon’s consolidated financial statements.
ex_174451.htm
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Avalon Holdings Corporation
Warren, Ohio
We have issued our report dated March 12, 2020, with respect to the consolidated financial statements included in the Annual Report of Avalon Holdings Corporation on Form 10-K for the year ended December 31, 2019. We consent to the incorporation by reference of said report in the Registration Statements of Avalon Holdings Corporation on Forms S-8 (File No. 333-231082 and File No. 333-165064).
/s/ GRANT THORNTON LLP
Cleveland, Ohio
March 12, 2020
ex_174453.htm
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Avalon Holdings Corporation
Warren, Ohio
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.333-165064 and No. 333-231082) of Avalon Holdings Corporation of our report dated March 14, 2019, relating to the consolidated financial statements and financial statement schedule, which appears in the 2019 Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K.
/s/ BDO USA, LLP
Cleveland, Ohio
March 12, 2020
ex_174454.htm
Exhibit 31.1
AVALON HOLDINGS CORPORATION
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Ronald E. Klingle, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Avalon Holdings Corporation; |
|---|---|
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| --- | --- |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| --- | --- |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| --- | --- |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| --- | --- |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| --- | --- |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| --- | --- |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| --- | --- |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions) : |
| --- | --- |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| --- | --- |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| --- | --- |
Date: March 12, 2020
/s/ Ronald E. Klingle
Ronald E. Klingle, Chief Executive Officer
ex_174455.htm
Exhibit 31.2
AVALON HOLDINGS CORPORATION
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Bryan P. Saksa, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Avalon Holdings Corporation; |
|---|---|
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| --- | --- |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| --- | --- |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| --- | --- |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| --- | --- |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| --- | --- |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| --- | --- |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| --- | --- |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| --- | --- |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| --- | --- |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| --- | --- |
Date: March 12, 2020
/s/ Bryan P. Saksa
Bryan P. Saksa, Chief Financial Officer
ex_174456.htm
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
In connection with the Annual Report of Avalon Holdings Corporation (the “registrant”) on Form 10-K for the year ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “report”), I, Chief Executive Officer of the registrant, certify, pursuant to 18 U.S.C. (a) 1350, as adopted pursuant to (a) 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
|---|---|
| (2) | The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant. |
| --- | --- |
/s/ Ronald E. Klingle
Ronald E. Klingle
Chief Executive Officer
March 12, 2020
ex_174457.htm
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
In connection with the Annual Report of Avalon Holdings Corporation (the “registrant”) on Form 10-K for the year ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “report”), I, Chief Financial Officer of the registrant, certify, pursuant to 18 U.S.C. (a) 1350, as adopted pursuant to (a) 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
|---|---|
| (2) | The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant. |
| --- | --- |
/s/ Bryan P. Saksa
Bryan P. Saksa
Chief Financial Officer
March 12, 2020