2019



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 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

 

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X 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 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.

 

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

 

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

 

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

 

The registrant had 3,263,647 shares of its Class A Common Stock and 611,784 shares of its Class B Common Stock outstanding as of August 2, 2019.

 



 

 

 

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

Page

PART I. FINANCIAL INFORMATION  

 

 

 

Item 1.    Financial Statements  

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) 

1

 

 

Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018 (Unaudited)

2

   

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended June 30, 2019 and 2018 (Unaudited)

 3

 

 

Condensed Consolidated Statement of Shareholders’ Equity for the Six Months Ended June 30, 2019 and 2018 (Unaudited)   

    4

   

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)

5

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

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

28

 

 

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

43

 

 

Item 4.    Controls and Procedures

44

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.    Legal Proceedings

45

 

 

Item 2.    Changes in Securities and Use of Proceeds

45

 

 

Item 3.    Defaults upon Senior Securities

45

 

 

Item 4.    Mine Safety Disclosures

45

 

 

Item 5.    Other Information

45

 

 

Item 6.    Exhibits and Reports on Form 8-K

45

 

 

SIGNATURE

47

 

i.

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net operating revenues:

                               

Waste management services

  $ 12,902     $ 11,510     $ 24,336     $ 19,968  
                                 

Food, beverage and merchandise sales

    2,358       2,206       3,440       3,246  

Other golf and related operations

    3,165       2,989       5,257       5,007  

Total golf and related operations

    5,523       5,195       8,697       8,253  

Total net operating revenues

    18,425       16,705       33,033       28,221  
                                 

Costs and expenses:

                               

Waste management services operating costs

    10,296       9,090       19,544       15,752  

Cost of food, beverage and merchandise

    999       932       1,514       1,399  

Golf and related operations operating costs

    3,563       3,146       6,095       5,363  

Depreciation and amortization expense

    618       726       1,218       1,455  

Selling, general and administrative expenses

    2,380       2,215       4,611       4,440  

Operating income (loss)

    569       596       51       (188 )
                                 

Other income (expense):

                               

Interest expense

    (215 )     (174 )     (378 )     (345 )

Other income, net

    148       113       216       173  

Income (loss) before income taxes

    502       535       (111 )     (360 )
                                 

Provision for income taxes

    57       41       97       60  

Net income (loss)

    445       494       (208 )     (420 )
                                 

Less net loss attributable to non-controlling interest in subsidiary

    (34 )     (129 )     (49 )     (244 )

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

  $ 479     $ 623     $ (159 )   $ (176 )
                                 

Income (loss) per share attributable to Avalon Holdings Corporation common shareholders:

                         

Basic net income (loss) per share

  $ 0.12     $ 0.16     $ (0.04 )   $ (0.05 )

Diluted net income (loss) per share

  $ 0.12     $ 0.16     $ (0.04 )   $ (0.05 )
                                 

Weighted average shares outstanding - basic

    3,875       3,803       3,875       3,803  

Weighted average shares outstanding - diluted

    3,894       3,818       3,875       3,803  

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except per share amounts)

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 3,280     $ 1,406  

Accounts receivable, less allowance for doubtful accounts of $267 at June 30, 2019 and $255 at December 31, 2018

    12,271       12,197  

Unbilled membership dues receivable

    1,101       554  

Inventories

    913       820  

Prepaid expenses

    512       622  

Other current assets

    48       31  

Total current assets

    18,125       15,630  
                 

Property and equipment, net

    46,794       42,534  

Property and equipment under finance leases, net

    5,942       6,068  

Operating lease right-of-use assets

    1,726       -  

Restricted cash

    501       502  

Noncurrent deferred tax asset

    8       8  

Other assets, net

    42       27  

Total assets

  $ 73,138     $ 64,769  
                 

Liabilities and Equity

               

Current liabilities:

               

Current portion of long-term debt

  $ 771     $ 578  

Current portion of obligations under finance leases

    247       236  

Current portion of obligations under operating leases

    551       -  

Accounts payable

    12,098       10,454  

Accrued payroll and other compensation

    1,222       872  

Accrued income taxes

    102       84  

Other accrued taxes

    296       405  

Deferred membership dues revenue

    4,497       2,899  

Other liabilities and accrued expenses

    907       793  

Total current liabilities

    20,691       16,321  
                 

Long-term debt, net of current portion

    13,258       10,167  

Obligations under finance leases, net of current portion

    626       688  

Obligations under operating leases, net of current portion

    1,175       -  

Asset retirement obligation

    100       100  
                 

Equity:

               

Avalon Holdings Corporation Shareholders' Equity:

               

Class A Common Stock, $.01 par value

    33       33  

Class B Common Stock, $.01 par value

    6       6  

Paid-in capital

    59,144       59,141  

Accumulated deficit

    (21,860 )     (21,701 )

Total Avalon Holdings Corporation Shareholders' Equity

    37,323       37,479  

Non-controlling interest in subsidiary

    (35 )     14  

Total equity

    37,288       37,493  

Total liabilities and equity

  $ 73,138     $ 64,769  

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(in thousands, except for share data)

 

   

For the Three Months Ended June 30, 2019

 
                                                                         
                                                   

Total

                 
   

Common Stock

                   

Avalon

   

Non-controlling

         
   

Shares

   

Amount

   

Paid-in

   

Accumulated

   

Shareholders'

   

Interest in

         
   

Class A

   

Class B

   

Class A

   

Class B

   

Capital

   

Deficit

   

Equity

   

Subsidiary

   

Total

 
                                                                         

Balance at March 31, 2019

    3,263,647       611,784     $ 33     $ 6     $ 59,142     $ (22,339 )   $ 36,842     $ (1 )   $ 36,841  
                                                                         

Stock options - compensation costs

    -       -       -       -       2       -       2       -       2  
                                                                         

Net income (loss)

    -       -       -       -       -       479       479       (34 )     445  
                                                                         

Balance at June 30, 2019

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

 

 

   

For the Three Months Ended June 30, 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 March 31, 2018

    3,191,100       612,231     $ 32     $ 6     $ 58,967     $ (21,356 )   $ 37,649     $ 2,011     $ 39,660  
                                                                         

Stock options - compensation costs

    -       -       -       -       1       -       1       -       1  
                                                                         

Net income (loss)

    -       -       -       -       -       623       623       (129 )     494  
                                                                         

Balance at June 30, 2018

    3,191,100       612,231       32       6       58,968       (20,733 )     38,273       1,882       40,155  

  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(in thousands, except for share data)

 

   

For the Six Months Ended June 30, 2019

 
                                                                         
                                                   

Total

                 
   

Common Stock

                   

Avalon

   

Non-controlling

         
   

Shares

   

Amount

   

Paid-in

   

Accumulated

   

Shareholders'

   

Interest in

         
   

Class A

   

Class B

   

Class A

   

Class B

   

Capital

   

Deficit

   

Equity

   

Subsidiary

   

Total

 
                                                                         

Balance at January 1, 2019

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

Stock options - compensation costs

    -       -       -       -       3       -       3       -       3  
                                                                         

Net loss

    -       -       -       -       -       (159 )     (159 )     (49 )     (208 )
                                                                         

Balance at June 30, 2019

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

 

 

   

For the Six Months Ended June 30, 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

    -       -       -       -       3       -       3       -       3  
                                                                         

Net loss

    -       -       -       -       -       (176 )     (176 )     (244 )     (420 )
                                                                         

Balance at June 30, 2018

    3,191,100       612,231       32       6       58,968       (20,733 )     38,273       1,882       40,155  

   

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands) 

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net loss

  $ (208 )   $ (420 )

Reconciliation of net loss to cash provided by operating activities:

               

Depreciation and amortization expense

    1,218       1,455  

Amortization of debt issuance costs

    13       16  

Compensation costs - stock options

    3       3  

Provision for losses on accounts receivable

    18       23  

Gain from disposal of vehicle

    (45 )     (16 )

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

               

Accounts receivable

    (92 )     (1,163 )

Unbilled membership dues receivable

    (547 )     (429 )

Inventories

    (93 )     (160 )

Prepaid expenses

    131       134  

Other assets

    (27 )     9  

Accounts payable

    46       1,168  

Accrued payroll and other compensation

    350       311  

Accrued income taxes

    18       5  

Other accrued taxes

    (109 )     (143 )

Deferred membership dues revenue

    1,598       1,296  

Other liabilities and accrued expenses

    114       76  

Net cash provided by operating activities

    2,388       2,165  
                 

Cash flows from investing activities:

               

Capital expenditures

    (2,867 )     (670 )

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       16  

Net cash used in investing activities

    (2,912 )     (1,923 )
                 

Cash flows from financing activities:

               

Proceeds under term loan facility

    3,000       -  

Payments of debt issuance costs

    (47 )     (5 )

Principal payments on term loan facilities

    (338 )     (279 )

Repayment under line of credit facility

    (134 )     -  

Principal payments on finance lease obligations

    (84 )     (74 )

Net cash provided by (used in) financing activities

    2,397       (358 )
                 

Increase (decrease) in cash, cash equivalents and restricted cash

    1,873       (116 )

Cash, cash equivalents and restricted cash at beginning of period

    1,908       3,851  

Cash, cash equivalents and restricted cash at end of period

  $ 3,781     $ 3,735  
                 

Supplemental disclosure of cash flow information:

               
                 

Significant non-cash operating and investing activities:

               

Capital expenditures included in accounts payable

  $ 1,598     $ 131  

Significant non-cash investing and financing activities:

               

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

  $ 1,807     $ -  

Finance lease obligations incurred

  $ 33     $ 77  

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

  $ 787     $ -  
                 

Cash paid during the period for interest

  $ 353     $ 329  

Cash paid during the period for income taxes

  $ 79     $ 55  

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2019

 

 

 

Note 1. Description of Business

 

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

 

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

 

 

Note 2. Basis of Presentation

 

The unaudited condensed consolidated financial statements of Avalon and related notes included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted consistent with such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in Avalon’s 2018 Annual Report to Shareholders.

 

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

 

In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of Avalon as of June 30, 2019, and the results of its operations and cash flows for the interim periods presented.

 

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

 

 

Note 3. Recent Accounting Pronouncements

 

Adopted Accounting Standards

 

In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. 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 golf carts, machinery and equipment for the landfill operations, furniture and fixtures for The Avalon Inn and office copiers under operating leases (See Note 7).

 

6

 

 

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 Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018 and associated cash flows in our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018. The Company does not expect the adoption to have a material impact on an ongoing basis (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 Condensed Consolidated Statements of Cash Flows and resulted in additional disclosure in our Notes to Unaudited Condensed Consolidated Financial Statements for the restricted cash related to the loan proceeds deposited into our project fund account that have not yet been utilized to fund the additional renovation and expansion of The Avalon Inn (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 16).

 

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.

 

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.

 

7

 

 

 

Note 4. Cash, Cash Equivalents and Restricted Cash

 

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

 

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

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows. Cash, cash equivalents and restricted cash consist of the following at June 30, 2019 and December 31, 2018 (in thousands):

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Cash and cash equivalents

  $ 3,280     $ 1,406  

Restricted cash

    501       502  

Cash, cash equivalents and restricted cash

  $ 3,781     $ 1,908  

 

 

Note 5. Revenues

 

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

 

On January 1, 2018, Avalon adopted the new accounting standard FASB ASC 606, Revenue from Contracts with Customers (“ASC 606”), and all the related amendments using the modified retrospective method for all contracts. The Company's accounting policy has been updated to align with Topic 606, and no significant changes to revenue recognition have occurred as a result of the change. The adoption of ASC 606 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, further described below, in our Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018 and associated cash flows in our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018.

 

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.

 

8

 

 

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 15). Due to the suspension of the salt water injection wells, there were no operating revenues for the three and six months ended June 30, 2019 and 2018.

 

For the three months ended June 30, 2019 and 2018, the net operating revenues related to waste management services represented approximately 70% and 69%, respectively, of Avalon’s total consolidated net operating revenues. For the six months ended June 30, 2019 and 2018, the net operating revenues related to waste management services represented approximately 74% and 71%, respectively, of Avalon’s total consolidated net operating revenues. For both the six months ended June 30, 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. For contracts with terms that extend beyond a year, variability will be resolved over the remaining term. The nature of the variability is based on a fixed rate for invoices processed and/or tonnages of waste transported and disposed.

 

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.

 

9

 

 

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.

 

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 three months ended June 30, 2019 and 2018, the net operating revenues related to the golf and related operations represented approximately 30% and 31%, respectively, of Avalon’s total consolidated net operating revenues. For the six months ended June 30, 2019 and 2018, the net operating revenues related to the golf and related operations represented approximately 26% and 29%, respectively, of Avalon’s total consolidated net operating revenues. For both the six months ended June 30, 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 Avalon Inn 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.

 

10

 

 

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).

 

The following table presents our net operating revenues disaggregated by revenue source for the three and six months ended June 30, 2019 and 2018 (in thousands). Sales and other taxes are excluded from revenues.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Waste management and brokerage services

  $ 12,188     $ 10,895     $ 22,986     $ 18,770  

Captive landfill management operations

    714       615       1,350       1,198  

Total waste management services revenues

    12,902       11,510       24,336       19,968  

Food, beverage and merchandise sales

    2,358       2,206       3,440       3,246  

Membership dues revenue

    1,424       1,307       2,746       2,593  

Room rental revenue

    658       666       994       1,042  

Greens fees and cart rental revenue

    616       557       657       595  

Other revenue

    467       459       860       777  

Total golf and related operations revenue

    5,523       5,195       8,697       8,253  

Total net operating revenues

  $ 18,425     $ 16,705     $ 33,033     $ 28,221  

 

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 June 30, 2019 and December 31, 2018, accounts receivable, net, related to our waste management services segment were approximately $10.6 million and $11.2 million, respectively. At June 30, 2019 one customer accounted for approximately 10% of the waste management services segment’s receivables and 9% 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 $1.7 million at June 30, 2019 and $1.0 million at December 31, 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 June 30, 2019 or December 31, 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 June 30, 2019 and December 31, 2018.

 

11

 

 

The following table presents changes in our allowance for doubtful accounts during the three and six months ended at June 30, 2019 and 2018 (in thousands):

 

           

Provision

   

Write-offs

         
   

Balance at

   

for Doubtful

   

less

   

Balance at

 
   

Beginning of Period

   

Accounts

   

Recoveries

   

End of Period

 

Three months ended June 30, 2019

                               

Allowance for doubtful accounts

  $ 262     $ 9     $ (4 )   $ 267  

Three months ended June 30, 2018

                               

Allowance for doubtful accounts

  $ 251     $ 11     $ 1     $ 263  
                                 

Six months ended June 30, 2019

                               

Allowance for doubtful accounts

  $ 255     $ 18     $ (6 )   $ 267  

Six months ended June 30, 2018

                               

Allowance for doubtful accounts

  $ 237     $ 23     $ 3     $ 263  

 

Contract Assets

 

Contract assets include unbilled membership dues receivables related to the Avalon Golf and Country Club for the customers membership commitment which are billed on a monthly basis over the course of the annual agreement. Such amounts are stated at their net realizable value. Contract assets related to unbilled membership dues are classified as current as revenue related to such agreements is recognized within the annual membership period. Unbilled membership receivables in our Condensed Consolidated Balance Sheets were approximately $1.1 million at June 30, 2019 and $0.6 million at December 31, 2018.

 

The following table presents changes in our contract assets during the three and six months ended June 30, 2019 and 2018 (in thousands):

 

           

Unbilled

                 
   

Balance at

   

Membership

           

Balance at

 
   

Beginning of Period

   

Dues

   

Billings

   

End of Period

 

Three months ended June 30, 2019

                               

Contract Assets:

                               

Unbilled membership dues receivable

  $ 672     $ 978     $ (549 )   $ 1,101  

Three months ended June 30, 2018

                               

Contract Assets:

                               

Unbilled membership dues receivable

  $ 694     $ 832     $ (517 )   $ 1,009  
                                 

Six months ended June 30, 2019

                               

Contract Assets:

                               

Unbilled membership dues receivable

  $ 554     $ 1,529     $ (982 )   $ 1,101  

Six months ended June 30, 2018

                               

Contract Assets:

                               

Unbilled membership dues receivable

  $ 580     $ 1,412     $ (983 )   $ 1,009  

 

Contract Liabilities

 

Contract liabilities include unrecognized or deferred revenues relating to membership dues and customer advance deposits. We record deferred revenue when cash payments are received in advance of satisfying our performance obligation. We classify deferred membership dues revenue as current based on the timing of when we expect to recognize revenue for the membership commitment based on the Company satisfying the stand ready performance obligation throughout the annual membership period. The unrecognized or deferred revenues related to membership dues in our Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018 were $4.5 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 Condensed Consolidated Balance Sheets. At June 30, 2019 and December 31, 2018, customer advance deposits were approximately $0.6 million and $0.5 million, respectively.

 

12

 

 

The following table presents changes in our contract liabilities during the three and six months ended June 30, 2019 and 2018 (in thousands):

 

   

Balance at

           

Revenue

   

Balance at

 
   

Beginning of Period

   

Billings

   

Recognized

   

End of Period

 

Three months ended June 30, 2019

                               

Contract Liabilities:

                               

Deferred membership dues revenue

  $ 3,316     $ 2,605     $ (1,424 )   $ 4,497  

Customer advance deposits

  $ 536     $ 375     $ (355 )   $ 556  

Three months ended June 30, 2018

                               

Contract Liabilities:

                               

Deferred membership dues revenue

  $ 3,147     $ 2,194     $ (1,307 )   $ 4,034  

Customer advance deposits

  $ 518     $ 408     $ (435 )   $ 491  
                                 

Six months ended June 30, 2019

                               

Contract Liabilities:

                               

Deferred membership dues revenue

  $ 2,899     $ 4,344     $ (2,746 )   $ 4,497  

Customer advance deposits

  $ 453     $ 662     $ (559 )   $ 556  

Six months ended June 30, 2018

                               

Contract Liabilities:

                               

Deferred membership dues revenue

  $ 2,718     $ 3,909     $ (2,593 )   $ 4,034  

Customer advance deposits

  $ 430     $ 672     $ (611 )   $ 491  

 

 

Note 6. Property and Equipment

 

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

 

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

 

Property and equipment at June 30, 2019 and December 31, 2018 consists of the following (in thousands):

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Land and land improvements

  $ 14,544     $ 14,231  

Buildings and improvements

    37,410       36,185  

Machinery and equipment

    4,803       4,508  

Office furniture and fixtures

    6,827       6,458  

Vehicles

    499       455  

Construction in progress

    5,427       2,569  
      69,510       64,406  

Less accumulated depreciation and amortization

    (22,716 )     (21,872 )

Property and equipment, net

  $ 46,794     $ 42,534  

 

At June 30, 2019, the Company did not have any significant fixed contractual commitments for construction projects.

 

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Note 7. Leases

 

In February 2016, the FASB issued ASU 2016-02. The new standard establishes a 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. In accordance with ASU 2016-02, leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. On January 1, 2019, the Company adopted ASU 2016-02 under the modified retrospective method with the available practical expedients.

 

Operating Leases

 

Avalon leases golf carts, machinery and equipment for the landfill operations, furniture and fixtures for the Avalon Inn, 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 3.5 years at June 30, 2019.

 

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

 

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

 

   

June 30,

 
   

2019

 

Operating lease right-of-use assets

  $ 1,726  
         

Current portion of obligations under operating leases

  $ 551  

Long-term portion of obligations under operating leases

    1,175  

Total obligations under operating leases

  $ 1,726  

 

The weighted average discount rate on operating leases was 5.01% at June 30, 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 June 30, 2019 there were approximately 34.3 years remaining on the golf course and related facilities finance lease.

 

In addition, the golf and related operations also entered into lease agreements for vehicles, golf course maintenance and restaurant equipment and the captive landfill operations entered into a lease for a piece of equipment which were determined to be finance leases. At June 30, 2019, the vehicles, golf course maintenance and restaurant equipment and the landfill operations equipment have remaining lease terms ranging from 2 to 5 years at June 30, 2019.   The weighted average remaining lease term on the vehicles and equipment leases was approximately 2.5 years at June 30, 2019.

 

14

 

 

Leased property and associated obligations under finance leases at June 30, 2019 and December 31, 2018 consists of the following (in thousands):

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Leased property under finance leases

  $ 11,568     $ 11,442  

Less accumulated amortization

    (5,626 )     (5,374 )

Leased property under finace leases, net

  $ 5,942     $ 6,068  
                 

Current portion of obligations under finance leases

  $ 247     $ 236  

Long-term portion of obligations under finance leases

    626       688  

Total obligations under finance leases

  $ 873     $ 924  

 

The weighted average discount rate on finance leases was 4.8% at both June 30, 2019 and December 31, 2018.

 

For the three and six months ended June 30, 2019 and 2018, components of lease expense were as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Operating lease cost

  $ 197     $ 166     $ 288     $ 251  
                                 

Finance lease cost:

                               

Depreciation on right-of-use assets

  $ 126     $ 102     $ 252     $ 225  

Interest on lease liabilities

    11       13       22       25  

Total finance lease cost

  $ 137     $ 115     $ 274     $ 250  

 

Future commitments under long-term, operating leases and finance leases at June 30, 2019 are as follows (in thousands):

 

   

Finance

   

Operating

   

Total

 

2020

  $ 285     $ 623     $ 908  

2021

    264       498       762  

2022

    168       425       593  

2023

    37       238       275  

2024

    22       96       118  

Thereafter

    435       -       435  

Total lease payments

    1,211       1,880       3,091  

Less imputed interest

    338       154       492  

Total

    873       1,726       2,599  

Less: current portion of obligations under leases

    247       551       798  

Long-term portion of obligations under leases

  $ 626     $ 1,175     $ 1,801  

 

 

Note 8. Basic and Diluted Net Loss per Share

  

Basic net loss per share attributable to Avalon Holdings Corporation common shareholders is computed by dividing the net loss by the weighted average number of common shares outstanding. For the three months ended June 30, 2019 and 2018, the weighted average number of common shares outstanding was 3,875,431 and 3,803,331, respectively.

 

15

 

 

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

 

For the three months ended June 30, 2019 and 2018, the diluted weighted average number of shares outstanding was 3,893,956 and 3,817,781, respectively. For the six months ended June 30, 2019 and 2018, the diluted per share amount reported is equal to the basic per share amount because Avalon was in a net loss position and as a result, such dilution would be considered anti-dilutive. Assuming dilution, the weighted average number of common shares outstanding for the six months ended June 30, 2019 and 2018 was 3,918,225 and 3,817,078 respectively.

 

 

Note 9. Term Loans and Line of Credit Agreements

 

2016 Term Loan Agreement

 

On December 20, 2016, Avalon and certain direct and indirect wholly owned subsidiaries entered into a loan and security agreement (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, dated May 21, 2015, as amended, and pay related transaction costs associated with the 2016 Term Loan Agreement. The line of credit agreement with Home Savings Bank was terminated in conjunction with the repayment. Remaining proceeds of $2.9 million under the 2016 Term Loan Agreement were deposited in a project fund account to fund costs of renovating and expanding The Avalon Inn. At June 30, 2019 the project fund proceeds related to the 2016 Term Loan Agreement were fully utilized. At December 31, 2018, the remaining project fund proceeds of approximately $0.5 million are presented in the Condensed Consolidated Balance Sheets as “Restricted cash.” On December 4, 2017 the 2016 Term Loan Agreement was amended to restate the definition of “Total Fixed Charges” utilized in the calculation of the “Fixed Charge Coverage Ratio.”

 

The $12.0 million term loan amount is payable in 119 equal monthly installments of principal and interest, based on a fifteen (15) year maturity schedule which commenced on January 20, 2017. The 2016 Term Loan Agreement matures on December 20, 2026 at which time the final balloon payment equal to the remaining outstanding principal, interest and fees are due. Borrowings under the 2016 Term Loan Agreement bear interest at a fixed rate of 5.35% 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) 5.35% per annum or (b) the sum of the Index Rate on the date two (2) business days prior to the reset date plus 3.95%, provided that the applicable rate shall in no event exceed 7.50% per annum.

 

Avalon has the right to prepay the amount outstanding under the 2016 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 2016 Term Loan Agreement are secured by certain real property and related business assets as defined in the agreement. The 2016 Term Loan Agreement also contains certain financial and other covenants, customary representations, warranties and events of default. Avalon was in compliance with the 2016 Term Loan Agreement covenants at June 30, 2019 and December 31, 2018.

 

The Company incurred approximately $191,000 of debt issuance costs in connection with the 2016 Term Loan Agreement. These debt issuance costs were capitalized and will be amortized over the life of the 2016 Term Loan Agreement. In accordance with ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), these costs are presented in the Condensed Consolidated Balance Sheets as a direct reduction from the carrying amount of the term loan liability.

 

16

 

 

2019 Term Loan Agreement

 

On March 29, 2019, Avalon and certain direct and indirect wholly owned subsidiaries entered into a loan and security agreement (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 Avalon Inn. At June 30, 2019, the remaining project fund proceeds of approximately $0.5 million are presented in the Condensed Consolidated Balance Sheets as “Restricted cash.”

 

The $3.0 million outstanding under the 2019 Term Loan Agreement is payable in 92 equal monthly installments of principal and interest, based on a fifteen (15) year maturity schedule which commenced on April 20, 2019 followed by one final balloon payment of all remaining principal, interest and fees due on the maturity date of December 20, 2026. Borrowings under the 2019 Term Loan Agreement bear interest at a fixed rate of 6.25% 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) 6.25% per annum or (b) the sum of the Index 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 8.50% per annum.

 

Avalon has the right to prepay the amount outstanding under the 2019 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 and two percent (2%) on any prepayment in the sixth, seventh or eighth year.

 

Borrowings under the 2019 Term Loan Agreement are secured by a second priority mortgage lien on the land, building and improvements on the property owned by The Avalon Inn as defined in the agreement. The 2019 Term Loan Agreement also contains certain financial and other covenants, customary representations, warranties and events of default. Avalon was in compliance with the 2019 Term Loan Agreement covenants at June 30, 2019.

 

The Company incurred approximately $42,000 of debt issuance costs in connection with the 2019 Term Loan Agreement. These debt issuance costs were capitalized and will be amortized over the life of the 2019 Term Loan Agreement. In accordance with ASU 2015-03, these costs are presented in the Condensed Consolidated Balance Sheets as a direct reduction from the carrying amount of the term loan liability.

 

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 (the “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 16).

 

At closing the outstanding principal balance assumed under the Commercial Mortgage obligation was $653,000. The $653,000 outstanding under the $950,000 Commercial Mortgage is payable in 110 equal monthly installments of $7,573 consisting of principal and interest which commenced May 21, 2019 and matures on June 21, 2028. Borrowings under the Commercial Mortgage bear interest at a fixed rate of 5.50% until June 21, 2023 at which time the interest rate will be reset to a fixed rate equal to the greater of (a) 4.25% per annum or (b) the Prime Rate plus 0.50%.

 

Avalon has the right to prepay the amount outstanding under the Commercial Mortgage, 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, with no prepayment penalty.

 

Borrowings under the Commercial Mortgage are secured by a first lien mortgage and assignment of leases and rents on the land, building and improvements on the property and non-real estate assets owned by Havana Cigar Shop, Inc. The Commercial Mortgage also contains certain financial and other covenants, customary representations, warranties and events of default.

 

17

 

 

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. Monthly payments consist of interest only on the outstanding principal balance with principal due on demand in the event of default as defined in the Commercial Demand Line of Credit agreement. During the second quarter of 2019, the outstanding balance was paid in full. No additional funds were drawn under the Demand Line of Credit at June 30, 2019.

 

Outstanding borrowings under the Commercial Demand Line of Credit bear interest at Prime Rate plus 0.50%. At June 30, 2019, the interest rate on the Commercial Demand Line of Credit was 6.00%.

 

Borrowings under the Commercial Demand Line of Credit are secured by a second lien mortgage and assignment of leases and rents on the land, building and improvements on the property and non-real estate assets owned by Havana Cigar Shop, Inc. The Commercial Demand Line of Credit agreement also contains certain financial and other covenants, customary representations, warranties and events of default.

 

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 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.

 

No amounts were drawn under the Line of Credit Agreement at June 30, 2019 and December 31, 2018. Outstanding borrowings under the Line of Credit Agreement bear interest at Prime Rate plus .25%. At June 30, 2019, the interest rate on the Line of Credit Agreement was 5.75%.

 

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 June 30, 2019 and December 31, 2018.

 

During the three month periods ended June 30, 2019 and 2018, the weighted average interest rate on outstanding borrowings was 5.53% and 5.35%, respectively. During the six month periods ended June 30, 2019 and 2018, the weighted average interest rate on outstanding borrowings was 5.45% and 5.35%, respectively.

 

18

 

 

Obligations under the Company’s debt agreements at June 30, 2019 and December 31, 2018 consist of the following (in thousands):

 

   

June 30, 2019

 
   

Gross Amount

   

Debt Issuance Costs

   

Net Amount

 

2016 Term loan agreement

  $ 10,604     $ (144 )   $ 10,460  

2019 Term loan agreement

    2,965       (40 )     2,925  

Commercial Mortgage

    644       -       644  

Total

    14,213       (184 )     14,029  

Less current portion

    796       (25 )     771  

Long-term debt

  $ 13,417     $ (159 )   $ 13,258  

 

   

December 31, 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  

 

Future maturities of long-term debt are as follows (in thousands):

 

For the Twelve Month Period Ending June 30,

       

2020

  $ 796  

2021

    841  

2022

    888  

2023

    939  

2024

    991  

Thereafter

    9,758  

Total

  $ 14,213  

 

 

Note 10. Income Taxes

 

During the three month periods ended June 30, 2019 and 2018, net income attributable to Avalon Holdings Corporation shareholders was $0.5 million and $0.6 million, respectively. During both the six month periods ended June 30, 2019 and 2018, net loss attributable to Avalon Holdings Corporation shareholders was $0.2 million. Avalon recorded a state income tax provision in both the three and six month periods ended June 30, 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 on the income (loss) before taxes was offset by a change in the valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.

 

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. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but for which they are able to determine a reasonable estimate, the company must record a provisional amount in the financial statements. 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. 

 

19

 

 

 

Note 11. Long-Term Incentive Plan

 

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

 

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

 

The purpose of the Avalon Holdings Corporation 2019 Long-term Incentive Plan (the “Plan”) is (a) to improve individual employee performance by providing long-term incentives and rewards to employees of Avalon, (b) to assist Avalon in attracting, retaining and motivating employees and non-employee directors with experience and ability, and (c) to associate the interests of such employees and directors with those of the Avalon shareholders. At June 30, 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.

 

20

 

 

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

 

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

 

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

 

The following table is a summary of the stock option activity during 2019:                     

 

           

Weighted

   

Weighted

 
   

Number of

   

Average

   

Average

 
   

Options

   

Exercise

   

Fair Value at

 
   

Granted

   

Price

   

Grant Date

 

Outstanding at January 1, 2019

    688,000       2.52       1.00  

Options granted

    -       -       -  

Options exercised

    -       -       -  

Options cancelled or forfeited

    -       -       -  

Outstanding at June 30, 2019

    688,000     $ 2.52     $ 1.00  

Options Vested

    652,000     $ 2.56     $ 1.03  

Exercisable at June 30, 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  

 

Compensation costs were approximately $2,000 and $1,000 for the three months ended June 30, 2019 and 2018, respectively, and $3,000 for both the six months ended June 30, 2019 and 2018, based upon the estimated grant date fair value calculations. As of June 30, 2019, there was approximately $20,000 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 4.92 years.

 

 

Note 12. Legal Matters

 

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

 

21

 

 

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, 2018, 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 13. Business Segment Information

 

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

 

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

 

Avalon’s golf and related operations segment consists of four golf courses and associated clubhouses which provide dining and banquet facilities, a hotel which provides lodging, dining, banquet and conference facilities, a 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, spa services and food and beverage sales.

 

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

 

For both the six months ended June 30, 2019 and 2018, no one customer accounted for 10% of Avalon’s consolidated or reportable segment net operating revenues.

 

The accounting policies of the segments are consistent with those described for the consolidated financial statements in the summary of significant accounting policies included in Avalon’s 2018 Annual Report to Shareholders. Avalon measures segment profit for internal reporting purposes as income (loss) before taxes.

 

22

 

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net operating revenues from:

                               

Waste management services:

                               

External customer revenues

  $ 12,902     $ 11,510     $ 24,336     $ 19,968  

Intersegment revenues

    -       -       -       -  

Total waste management services

    12,902       11,510       24,336       19,968  
                                 

Golf and related operations:

                               

External customer revenues

    5,523       5,195       8,697       8,253  

Intersegment revenues

    14       16       35       41  

Total golf and related operations

    5,537       5,211       8,732       8,294  
                                 

Segment operating revenues

    18,439       16,721       33,068       28,262  

Intersegment eliminations

    (14 )     (16 )     (35 )     (41 )

Total net operating revenues

  $ 18,425     $ 16,705     $ 33,033     $ 28,221  
                                 

Income (loss) before income taxes:

                               

Waste management services

  $ 1,221     $ 977     $ 2,221     $ 1,524  

Golf and related operations

    181       381       (463 )     -  

Segment income before income taxes

    1,402       1,358       1,758       1,524  

Corporate interest expense

    (196 )     (161 )     (348 )     (320 )

Corporate other income, net

    46       11       48       13  

General corporate expenses

    (750 )     (673 )     (1,569 )     (1,577 )

Income (loss) before income taxes

  $ 502     $ 535     $ (111 )   $ (360 )

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Identifiable assets:

               

Waste management services

  $ 29,014     $ 27,383  

Golf and related operations

    54,795       48,074  

Corporate

    51,318       47,394  

Subtotal

    135,127       122,851  

Elimination of intersegment receivables

    (61,989 )     (58,082 )

Total

  $ 73,138