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)

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except per share amounts)

 

  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(in thousands)

 

  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands) 

 

 

  

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

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

 

Liquidity and Capital Resources

 

For the nine months ended September 30, 2018, Avalon utilized existing cash and cash provided by operations to meet operating needs, make required monthly payments on the term loan facility and to fund capital expenditures which included the renovation of the Avalon Athletic Club at Boardman and the continued renovation and expansion of The Avalon Inn as described below.

 

In addition, during the first quarter of 2018, in accordance with our Term Loan Agreement, the Company withdrew $1.5 million from the restricted cash account for reimbursement for capital expenditures incurred in 2017 related to The Avalon Inn funded with operating cash. The Company utilized approximately $1.3 million of those proceeds to fund the acquisition of The Boardman Tennis Center facility as described below.

 

On March 7, 2018, Avalon, through a newly created subsidiary, Avalon Mahoning Sports Center, Inc., completed the acquisition of the Boardman Tennis Center facility 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 Avalon Inn that were paid with operating cash to fund the acquisition of the Boardman Tennis Center facility. Subsequent to the acquisition, the Boardman Tennis Center facility 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 is currently in operation providing indoor tennis court rental and lessons. The operating results are included in the Company’s Condensed Consolidated Statements of Operations and within Avalon’s golf and related operations segment from the date of acquisition.

 

In the third quarter of 2018, the Company started renovating the facility. The renovations include converting the facility into a multipurpose recreation center which will include indoor tennis courts, indoor basketball, volleyball and pickleball courts and a fitness area.

 

The acquisition of the facility and its associated renovation is consistent with the Company’s athletics and fitness business strategy. Members of the Avalon Golf and Country Club will have access to the renovated facility and all the athletic and fitness related activities that will be offered by The Avalon Athletic Club at Boardman. In addition, hotel guests at The Avalon Inn will also be able to utilize the facility during their stay. The Avalon Athletic Club at Boardman will earn revenue through membership fees, athletic and fitness related activities.

 

During the nine months ended September 30, 2018, Avalon incurred capital expenditures of $2.6 million of which $2.0 million of such expenditures was paid to vendors and primarily related to the continued renovation and expansion of The Avalon Inn and approximately $0.1 million of such expenditures related to a vehicle acquired under a new capital lease agreement. During the nine months ended September 30, 2017, Avalon incurred capital expenditures of $2.2 million of which $1.5 million of such expenditures was paid to vendors and primarily related to the continued renovation and expansion of The Avalon Inn and $0.6 million of such expenditures related to golf course maintenance equipment acquired under new capital lease agreements. In 2018 and 2017, The Avalon Inn 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, outdoor resort pool and Roman Bath. Avalon’s aggregate capital expenditures in 2018 are expected to be in the range of $3 million to $4 million, funded with cash in our project fund account and cash generated from operations. Capital expenditures will principally relate to the continued renovation and expansion of The Avalon Inn, renovation of The Avalon Athletic Club at Boardman facility, building improvements and equipment purchases.

 

 

On December 20, 2016, Avalon and certain direct and indirect wholly owned subsidiaries entered into a loan and security agreement (the “Term Loan Agreement”) with Laurel Capital Corporation which provides 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 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 Term Loan Agreement were deposited in a project fund account to fund costs of renovating and expanding The Avalon Inn. At September 30, 2018 and December 31, 2017, the remaining proceeds of $1.3 million and $2.8 million, respectively, are presented in the Condensed Consolidated Balance Sheets as “Restricted cash.” On December 4, 2017 the 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 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 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 and 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 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 are secured by certain real property and related business assets as defined in the Term Loan Agreement. The Term Loan Agreement also contains certain financial and other covenants, customary representations, warranties and events of default. Avalon was in compliance with the Term Loan Agreement covenants at September 30, 2018 and December 31, 2017.

 

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 maturing on May 31, 2020. 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 September 30, 2018. Outstanding borrowings under the Line of Credit Agreement bear interest at Prime Rate plus .25%. At September 30, 2018, the interest rate on the Line of Credit Agreement was 5.25%. Effective October 1, 2018, the interest rate on the Line of Credit Agreement increased to 5.50%.

 

Borrowings under the Line of Credit Agreement are secured by certain business assets of the Company including accounts receivable, inventory and equipment. The Line of Credit Agreement 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 September 30, 2018 and December 31, 2017.

 

During both the three and nine month periods ended September 30, 2018 and 2017, the weighted average interest rate on outstanding borrowings was 5.35%.

 

 

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.

 

At September 30, 2018 and December 31, 2017, there was a working capital deficit of $0.7 million and $0.2 million, respectively. Working capital was negatively impacted primarily by an increase in accounts payable and deferred membership dues revenue partially offset by an increase in cash and cash equivalents and accounts receivable.

 

Accounts receivable increased to $11.3 million at September 30, 2018 compared with $9.9 million at December 31, 2017. The increase was primarily the result of increased sales related to the waste management services segment in the third quarter of 2018 compared with the fourth quarter of 2017 and the timing of receipt on those associated receivables. Net operating revenues related to the waste management segment were $12.6 million in the third quarter of 2018 compared with $10.5 million in the fourth quarter of 2017.

 

Unbilled membership dues receivable increased to $0.8 million at September 30, 2018 compared to $0.6 million at December 31, 2017 due to the associated timing of membership renewals which are billed on a monthly basis over the course of the annual agreement.

 

Accounts payable increased to $9.8 million at September 30, 2018 compared with $7.8 million at December 31, 2017. The increase in accounts payable is primarily due to an increase in the amounts due to disposal facilities and transportation carriers of the waste brokerage and management services business associated with the increase in net operating revenues in the third quarter of 2018 compared with the fourth quarter of 2017 and the associated timing of those vendor payments in the ordinary course of business. To a lesser extent, accounts payable also increased due to the timing of payment related to a construction billing associated with the expansion of The Avalon Inn.

 

Accrued payroll and other compensation increased to $1.0 million at September 30, 2018 compared to $0.7 million at December 31, 2017. The increase was primarily the result of timing of payment of certain accrued bonuses.

 

Deferred revenue relating to membership dues was approximately $3.4 million at September 30, 2018 compared to $2.7 million at December 31, 2017. The increase in deferred revenues was primarily due to the associated timing of annual membership renewals and, to a lesser extent, an increase in memberships during the first nine months of 2018. The number of members at September 30, 2018 was 4,424 compared to 4,338 at December 31, 2017.

 

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 facility. 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.

 

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 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 Avalon Inn 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 Avalon Inn. The Avalon Inn 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 three golf facilities and The Avalon Inn 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 is consistent with the Company’s athletics and fitness business strategy. Members of the Avalon Golf and Country Clubs will have access to all the athletic and fitness related activities that will be offered by The Avalon Athletic Club at Boardman. In addition, hotel guests of The Avalon Inn will also be able to 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. 

 

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 three golf courses and related country clubs and facilities, a hotel and its associated amenities, a recreation center and a travel agency.

 

Performance in the third quarter of 2018 compared with the third quarter of 2017

 

Overall Performance

 

Net operating revenues increased to $18.1 million in the third quarter of 2018 compared with $16.3 million in the third quarter of 2017. This increase was primarily due to an increase in net operating revenues of the waste management services segment. Net operating revenues of the waste management services segment were $12.5 million in the third quarter of 2018 compared with $10.8 million in the third quarter of 2017. Net operating revenues of the golf and related operations segment were approximately $5.6 million in the third quarter of 2018 compared to $5.5 million in the third quarter of 2017.

 

Costs of operations related to the waste management segment increased to $9.9 million in the third quarter of 2018 compared with $8.8 million in the third quarter of 2017. The increase in the cost of operations between years for the waste management segment is primarily due to the increased net operating revenues between periods as these costs vary directly with the associated net operating revenues. Cost of operations for the golf and related operations segment was $4.3 million in the third quarter of 2018 compared to $4.1 million in the third quarter of 2017.

 

Depreciation and amortization expense was approximately $0.7 million in both the third quarter of 2018 and 2017.

 

 

Consolidated selling, general and administrative expenses were $2.3 million in the third quarter of 2018 compared with $2.2 million in the third quarter of 2017. The increase in selling, general and administrative costs was primarily due to increased employee related costs.

 

Interest expense was $0.2 million in both the third quarter of 2018 and 2017. During both the three month periods ended September 30, 2018 and 2017, the weighted average interest rate on outstanding borrowings was 5.35%.

 

Net income attributable to Avalon Holdings Corporation common shareholders was $0.8 million, or $0.22 per share, in the third quarter of 2018 compared with net income attributable to Avalon Holdings Corporation common shareholders of $0.5 million, or $0.14 per share, in the third quarter of 2017.

 

Segment Performance

 

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

 

Waste Management Services Segment

 

The net operating revenues of the waste management services segment increased to $12.5 million in the third quarter of 2018 compared with $10.8 million in the third quarter of 2017. 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 brokerage and management services business increased to $12.0 million in the third quarter of 2018 from $10.2 million in the third quarter of 2017. This increase was due to an increase in net operating revenues relating to continuous work of the waste disposal brokerage business. Continuous work of the waste disposal brokerage business increased $1.6 million between periods related to increased work from multiple customers. Net operating revenues related to continuous work were approximately $6.6 million in the third quarter of 2018 compared with $5.0 million in the third quarter of 2017. In addition, net operating revenue increased between periods due to event work relating to 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 $5.3 million in the third quarter of 2018 compared with $4.6 million in the third quarter of 2017. The increase in net operating revenues noted above were partially offset by a decrease in net operating revenues related to managerial, consulting and clerical services. Net operating revenue relating to managerial, consulting and clerical services, which is performed for one customer, is entirely dependent on that customer’s needs. Net operating revenues related to managerial, consulting and clerical services decreased to $0.1 million in the third quarter of 2018 compared with $0.6 million in the third quarter of 2017.

 

The net operating revenues of the captive landfill management operations were approximately $0.5 million in the third quarter of 2018 compared to $0.6 million in the third quarter of 2017. 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.

 

Due to the temporary suspension of the salt water injections wells described below, there were no operating revenues during the third quarter of 2018 and 2017. 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 both of Avalon’s saltwater injection 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 also that the saltwater injection wells pose a risk of increasing or creating seismic activity. The two saltwater injection wells are located approximately 112 feet apart. Based on these findings, the Chief ordered the immediate suspension of all operations of the two saltwater injection wells, until the Division could further evaluate the wells.

 

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 at the AWMS #2 injection well. To date, the Division has not responded to that plan despite Avalon’s requests 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 is only temporary, and that he expects that AWMS #2 will be allowed to inject 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 will allow the Chief to more 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 in September 2015 to the Franklin County Court of Common Pleas, but that appeal was dismissed on a filing technicality. Avalon appealed the dismissal to the Ohio 10th District Court of Appeals, which found the Commission erred in its filing of their decision. Following the Commission’s proper notice, Avalon appealed again to the Franklin County Court of Common Pleas (the “Court”).

 

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 for over 26 months 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 sets conditions for the restarting of AWMS #2 in accordance with the proposed restart plans filed by Avalon with minor revisions. While the Company was making preparations for restarting the well and opening the facility, the Division appealed the Final Decision and Order and filed a Motion to Stay the Court Order on February 22, 2017. The Motion to Stay was granted by the Ohio 10th District Court of Appeals on March 21, 2017. On September 14, 2017, an appeal hearing was held.

 

On July 31, 2018 the Ohio 10^th District Court of Appeals issued its decision on the appeal. In the decision, the Ohio 10^th District Court of Appeals overruled the majority of the Division’s assignments of error, but also found that the Franklin County Court of Common Pleas abused its discretion in issuing the restart order for the Company’s injection well.  The Ohio 10^th District Court of Appeals therefore 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 Ohio Supreme Court. Avalon will continue in its effort to receive a favorable ruling lifting the temporary suspension. The operations of Company’s #2 injection well will remain suspended until that time. 

 

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 Ohio Department of Natural Resources (“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. There is currently no implemented state-wide policy on induced seismicity and The ODNR has refused to communicate with the Company regarding the status and requirements of any policymaking. The Company believes that the actions, and lack of responsible actions, by ODNR, which were triggered by a seismic event that presented no hazard or risk to any individual or to the environment, 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. 

 

The hearing was scheduled to commence on June 25, 2018. On June 8, 2018, the 11^th Appellate District Court in Trumbull County, Ohio issued a motion to stay all further proceedings in the writ of mandamus action until a ruling is made on the suspension order by the Ohio 10th District Court of Appeals. On September 17, 2018, the Company filed a motion to lift the stay in the proceeding based on the Ohio 10^th District Court of Appeals ruling. To date, the hearing date has not been rescheduled. The ODNR has stated that they will not oppose the lifting of the stay. The Company intends to vigorously pursue the complaint and obtain due process and fair compensation.

 

Costs of operations related to the waste management segment increased to $9.9 million in the third quarter of 2018 compared with $8.8 million in the third quarter of 2017. The increase in the cost of operations between years for the waste management segment is primarily due to the increased net operating revenues between periods as these costs vary directly with the associated net operating revenues. The overall gross margin percentage of the waste brokerage and management services business was approximately 21% in the third quarter of 2018 compared with 18% in the third quarter of 2017. The increase in the overall gross margin percentage was attributable to the higher gross profit generated from both the continuous and event work projects during the quarter.

 

 

Income before income taxes for the waste management services segment was approximately $1.2 million in the third quarter of 2018 compared to $0.6 million in the third quarter of 2017. Income before income taxes of the waste brokerage and management services business was approximately $1.3 million in the third quarter of 2018 compared to $0.8 million in the third quarter of 2017. The increased income before taxes was primarily attributable to the increased net operating revenues and associated gross margin from both the continuous and event work projects during the quarter. Income before income taxes of the captive landfill operations was approximately $0.1 million in both the third quarter of 2018 and 2017. During the third quarter of 2018 and 2017, the salt water injection wells incurred a loss before income taxes of approximately $0.2 million and $0.3 million respectively. The loss was primarily due to depreciation expense recorded on the facility and legal and professional costs incurred relating to Avalon’s appeal and mandamus processes described above.

 

Golf and Related Operations Segment

 

Net operating revenues of the golf and related operations segment were approximately $5.6 million in the third quarter of 2018 compared to $5.5 million in the third quarter of 2017. Avalon’s golf and related operations segment consists of the operation and management of three golf courses and related country clubs which provide dining and banquet facilities, a hotel which provides lodging, dining, banquet and conference facilities, a recreation center and a travel agency.

 

Food, beverage and merchandise sales were $2.3 million in both the third quarter of 2018 and 2017. Other net operating revenues related to the golf and related operations were $3.3 million in the third quarter of 2018 compared to $3.2 million in the third quarter of 2017. Net operating revenues related to room rental was approximately $0.7 million in both the third quarter of 2018 and 2017. Membership dues revenue was approximately $1.3 million in the third quarter of 2018 and 2017. The average number of members during the third quarter of 2018 was 4,446 compared to 4,412 in the prior period. Greens fees and associated cart rentals were approximately $0.9 million in the third quarter of 2018 compared to $0.8 million in the third quarter of 2017. Other revenues consisting of athletic, fitness, travel agency and spa related activities were approximately $0.4 million in both the third quarter of 2018 and 2017.

 

Cost of food, beverage and merchandise was approximately $1.0 million in both the third quarter of 2018 and 2017. Golf and related operations operating costs increased to approximately $3.3 million in the third quarter of 2018 compared with $3.1 million in the third quarter of 2017. The increase was primarily attributable to higher employee related costs.

 

Income before income taxes for the golf and related operations was approximately $0.5 million in the third quarter of 2018 compared with $0.7 million in the third quarter of 2017. The change between periods was primarily due to higher employee related costs.

 

General Corporate Expenses

 

General corporate expenses were $0.7 million in both the third quarter of 2018 and 2017.

 

Interest Expense

 

Interest expense was $0.2 million in both the third quarter of 2018 and 2017. During both the three month periods ended September 30, 2018 and 2017, the weighted average interest rate on outstanding borrowings was 5.35%.

 

Net Income

 

Net income attributable to Avalon Holdings Corporation common shareholders was $0.8 million in the third quarter of 2018 compared to $0.5 million in the third quarter of 2017. Avalon recorded a state income tax provision in both the third quarter of 2018 and 2017, which was related entirely to the waste management and brokerage operations. Due to the recording of a full valuation allowance against the Company’s federal net deferred tax assets, the overall effective tax rate in both periods reflects taxes owed in certain U.S state jurisdictions. Avalon’s income tax on the income before taxes was offset by a change in the valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.

 

 

Performance in the first nine months of 2018 compared with the first nine months of 2017

 

Overall Performance

 

Net operating revenues increased to $46.4 million in the first nine months of 2018 compared with $41.6 million in the first nine months of 2017. This increase was primarily due to an increase in net operating revenues of the waste management services segment. Net operating revenues of the waste management services segment were $32.5 million in the first nine months of 2018 compared with $27.9 million in the first nine months of 2017. Net operating revenues of the golf and related operations segment were approximately $13.9 million in the first nine months of 2018 compared to $13.7 million in the first nine months of 2017.

 

Costs of operations related to the waste management segment increased to $25.6 million in the first nine months of 2018 compared with $22.2 million in the first nine months of 2017. The increase in the cost of operations between years for the waste management segment is primarily due to the increased net operating revenues between periods as these costs vary directly with the associated net operating revenues. Cost of operations for the golf and related operations segment were $11.1 million in both the first nine months of 2018 and 2017.

 

Depreciation and amortization expense was approximately $2.2 million in the first nine months of 2018 compared to $2.3 million in the first nine months of 2017.

 

Consolidated selling, general and administrative expenses were $6.7 million in the first nine months of 2018 compared with $6.3 million in the first nine months of 2017. The increase in selling, general and administrative costs was primarily attributable to higher employee related costs and, to a lesser extent, an increase in advertising and sales promotions during the golf season and higher professional costs.

 

Interest expense was approximately $0.5 million in both the first nine months of 2018 and 2017. During both the nine month periods ended September 30, 2018 and 2017, the weighted average interest rate on outstanding borrowings was 5.35%.

 

Net income attributable to Avalon Holdings Corporation common shareholders was $0.7 million, or $0.18 per share, in the first nine months of 2018 compared with a net loss attributable to Avalon Holdings Corporation common shareholders of $0.3 million, or $0.07 per share, in the first nine months of 2017.

 

Segment Performance

 

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

 

Waste Management Services Segment

 

The net operating revenues of the waste management services segment increased to $32.5 million in the first nine months of 2018 compared with $27.9 million in the first nine months of 2017.

 

The net operating revenues of the waste brokerage and management services business increased to $30.8 million in the first nine months of 2018 from $26.3 million in the first nine months of 2017. This increase was due to an increase in net operating revenues relating to continuous work of the waste disposal brokerage business. Continuous work of the waste disposal brokerage business increased $3.1 million between periods as a result of increased work from multiple customers. Net operating revenues related to continuous work were approximately $18.4 million in the first nine months of 2018 compared with $15.3 million in the first nine months of 2017. In addition, net operating revenue increased $1.6 million between periods due to event work relating to 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 $11.5 million in the first nine months of 2018 compared with $9.9 million in the first nine months of 2017. The increase in net operating revenues noted above were partially offset by a decrease in net operating revenues related to managerial, consulting and clerical services. Net operating revenue relating to managerial, consulting and clerical services, which is performed for one customer, is entirely dependent on that customer’s needs. Net operating revenues related to managerial, consulting and clerical services decreased to $0.9 million in the first nine months of 2018 compared with $1.1 million in the first nine months of 2017.

 

 

The net operating revenues of the captive landfill management operations were approximately $1.7 million in the first nine months of 2018 compared to $1.6 million in the first nine months of 2017. 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.

 

Due to the temporary suspension of the salt water injections wells noted above, there were no operating revenues during the first nine months of 2018 and 2017.

 

Costs of operations related to the waste management segment increased to $25.6 million in the first nine months of 2018 compared with $22.2 million in the first nine months of 2017. The increase in the cost of operations between years for the waste management segment is primarily due to the increased net operating revenues between periods as these costs vary directly with the associated net operating revenues. The overall gross margin percentage of the waste brokerage and management services business was approximately 21% in the first nine months of 2018 compared to 20% in the first nine months of 2017. The increase in the overall gross margin percentage was attributable to the higher gross profit generated from event work projects during the first nine months of 2018.

 

Income before income taxes for the waste management services segment was approximately $2.8 million in the first nine months of 2018 compared to $1.9 million in the first nine months of 2017. Income before income taxes of the waste brokerage and management services business was approximately $3.1 million in the first nine months of 2018 compared to $2.3 million in the first nine months of 2017. The increased income before taxes was primarily attributable to the increased gross margin from the higher net operating revenues related to both continuous and event work during the first nine months of 2018. Income before income taxes of the captive landfill operations was approximately $0.3 million in the first nine months of 2018 and 2017. During the first nine months of 2018 and 2017, the salt water injection wells incurred a loss before income taxes of approximately $0.6 million and $0.7 million, respectively. The loss was primarily due to depreciation expense recorded on the facility and legal and professional costs incurred relating to Avalon’s appeal and mandamus processes described above.

 

Golf and Related Operations Segment

 

Net operating revenues of the golf and related operations segment were approximately $13.9 million in the first nine months of 2018 compared to $13.7 million in the first nine months of 2017.

 

Food, beverage and merchandise sales were $5.5 million in the first nine months of 2018 compared to $5.7 million in the first nine months of 2017. The decrease was primarily due to a decrease in food and beverage revenue related to the clubs between periods.

 

Other net operating revenues related to the golf and related operations were $8.4 million in the first nine months of 2018 compared to $8.0 million in the first nine months of 2017. Net operating revenues related to room rental was approximately $1.8 million in the first nine months of 2018 compared with $1.6 million in the first nine months of 2017. The increase in net operating revenues related to room rental was due to higher occupancy and associated average room rates during the first nine months of 2018 compared with the prior period. Membership dues revenue was approximately $3.9 million in both the first nine months of 2018 and 2017. The increase in membership dues revenue attributable to the increase in membership rates that went into effect on the member’s annual renewal date was offset by a decrease in the average number of members between periods. The average number of members during the first nine months of 2018 was 4,443 compared to 4,604 in the prior period. Greens fees and associated cart rentals were $1.5 million in the first nine months of 2018 compared to $1.4 million in the first nine months of 2017. Other revenues consisting of athletic, fitness, travel agency and spa related activities were approximately $1.2 million in the first nine months of 2018 compared to $1.1 million in the first nine months of 2017. 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 2018 and 2017.

 

Cost of operations for the golf and related operations segment were $11.1 million in both the first nine months of 2018 and 2017. Cost of food, beverage and merchandise was approximately $2.4 million in the first nine months of 2018 compared to $2.5 million in the first nine months of 2017. The decrease is primarily attributable to the decreased food revenue and its associated cost coupled with lower average cost of food. Golf and related operations operating costs increased to approximately $8.7 million in the first nine months of 2018 compared with $8.6 million in the first nine months of 2017. The increase was primarily a result of higher employee related costs and increased use of lawn care maintenance products for the golf courses.

 

 

Income before taxes for the golf and related operations was $0.5 million in the first nine months of 2018 compared with $0.3 million in the first nine months of 2017. The change between periods was primarily due to higher occupancy and associated room rates attributable to The Avalon Inn.

 

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

 

General Corporate Expenses

 

General corporate expenses were $2.3 million in the first nine months of 2018 compared to $2.2 million in the first nine months of 2017. The increase in general corporate expenses related to higher legal and professional costs.

 

Interest Expense

 

Interest expense was $0.5 million in both the first nine months of 2018 and 2017. During both the three month periods ended September 30, 2018 and 2017, the weighted average interest rate on outstanding borrowings was 5.35%.

 

Net Income (Loss)

 

Net income attributable to Avalon Holdings Corporation common shareholders was $0.7 million in the first nine months of 2018 compared to a net loss attributable to Avalon Holdings Corporation common shareholders of $0.3 million in the first nine months of 2017. Avalon recorded a state income tax provision in both the first nine months of 2018 and 2017, 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.

 

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 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. Accounting Standards Codification Topic 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, and during the nine months ended September 30, 2018, 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.  Avalon is still in the process of estimating the full tax impact and expects to finalize its adoption of this guidance at year end.

 

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.

 

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 both of Avalon’s saltwater injection 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 also that the saltwater injection wells pose a risk of increasing or creating seismic activity. The two saltwater injection wells are located approximately 112 feet apart. Based on these findings, the Chief ordered the immediate suspension of all operations of the two saltwater injection wells, until the Division could further evaluate the wells.

 

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 at the AWMS #2 injection well. To date, the Division has not responded to that plan despite Avalon’s requests 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 is only temporary, and that he expects that AWMS #2 will be allowed to inject 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 will allow the Chief to more 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 in September 2015 to the Franklin County Court of Common Pleas, but that appeal was dismissed on a filing technicality. Avalon appealed the dismissal to the Ohio 10th District Court of Appeals, which found the Commission erred in its filing of their decision. Following the Commission’s proper notice, Avalon appealed again to the Franklin County Court of Common Pleas (the “Court”).

 

 

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 for over 26 months 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 sets conditions for the restarting of AWMS #2 in accordance with the proposed restart plans filed by Avalon with minor revisions. While the Company was making preparations for restarting the well and opening the facility, the Division appealed the Final Decision and Order and filed a Motion to Stay the Court Order on February 22, 2017. The Motion to Stay was granted by the Ohio 10th District Court of Appeals on March 21, 2017. On September 14, 2017, an appeal hearing was held.

 

On July 31, 2018 the Ohio 10^th District Court of Appeals issued its decision on the appeal. In the decision, the Ohio 10^th District Court of Appeals overruled the majority of the Division’s assignments of error, but also found that the Franklin County Court of Common Pleas abused its discretion in issuing the restart order for the Company’s injection well.  The Ohio 10^th District Court of Appeals therefore 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 Ohio Supreme Court. Avalon will continue in its effort to receive a favorable ruling lifting the temporary suspension. The operations of Company’s #2 injection well will remain suspended until that time. 

 

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 Ohio Department of Natural Resources (“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. There is currently no implemented state-wide policy on induced seismicity and The ODNR has refused to communicate with the Company regarding the status and requirements of any policymaking. The Company believes that the actions, and lack of responsible actions, by ODNR, which were triggered by a seismic event that presented no hazard or risk to any individual or to the environment, 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. 

 

The hearing was scheduled to commence on June 25, 2018. On June 8, 2018, the 11^th Appellate District Court in Trumbull County, Ohio issued a motion to stay all further proceedings in the writ of mandamus action until a ruling is made on the suspension order by the Ohio 10th District Court of Appeals. On September 17, 2018, the Company filed a motion to lift the stay in the proceeding based on the Ohio 10^th District Court of Appeals ruling. To date, the hearing date has not been rescheduled. The ODNR has stated that they will not oppose the lifting of the stay. The Company intends to vigorously pursue the complaint and obtain due process and fair compensation.

 

At December 31, 2017, Avalon assessed the recoverability of the carrying values of the salt water injection wells based on the Chief’s decision to temporarily suspend operations of the wells. Avalon believes the suspension order is temporary and will reopen and, as such, the Company estimated future cash flows directly associated with and which are expected to arise as a direct result of the wells once the suspension is lifted. The assumptions used by management in developing the estimates of future cash flows were based on current market conditions and comparable prior periods while in operation. Based on the estimated undiscounted sum of the future cash flows, the net book value of the property, plant and equipment relating to the wells of approximately $3.7 million at December 31, 2017 was recoverable in less than the estimated remaining useful life of those assets. There were no changes to this assessment at September 30, 2018.

 

Management continues to consider whether indicators of impairment are present and tests for recoverability, as necessary. Although the Company believes that the suspension order is temporary, there can be no guarantee that the salt water injection wells will resume operations. If management concludes that the suspension is other than temporary and the carrying amount of the salt water injection wells are not recoverable, Avalon may record an impairment charge up to $3.3 million, the carrying value of the salt water injection wells at September 30, 2018.

 

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 golf courses and related clubhouses at each of its three facilities. The Avalon Golf and Country Club facilities also offer swimming pools, fitness centers, tennis courts, dining and banquet facilities and spa services. In addition, The Avalon Inn 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 Avalon Inn. 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 Avalon Inn will result in additional memberships in the Avalon Golf and Country Club. The ability to retain current members and attract new members has been an ongoing challenge. Although Avalon was able to increase the number of members of the Avalon Golf and Country Club, as of September 30, 2018, 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.

 

All three of Avalon’s golf course operations and The Avalon Inn 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.

 

Recent Accounting Pronouncements

 

Adopted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 September 30, 2018 and December 31, 2017 and associated cash flows in our Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017. The Company does not expect the adoption to have a material impact on an ongoing basis.

 

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.

 

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 facility, acquired in March 2018, was accounted for in accordance with ASU 2017-01.

 

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. The Company may continue to refine its estimates throughout the measurement period.

 

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases. 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. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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. Avalon is currently reviewing its agreements and in the process of calculating the ROU asset and related lease liability for its golf carts, machinery and equipment for the landfill operations, furniture and fixtures for The Avalon Inn and office copiers under operating leases. The Company is also evaluating the impact the adoption of this guidance will have on its financial position, results of operations, cash flows and related disclosures. Upon adoption, the Company expects that the ROU asset and the lease liability will be recognized in the balance sheets in amounts that will be material.

 

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.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Avalon does not have significant exposure to changing interest rates. Borrowings under our Term Loan Agreement bear interest at a fixed rate of 5.35% 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 and 3.95%, provided that the applicable rate shall in no event exceed 7.50% per annum. Outstanding borrowings under our Line of Credit Agreement bear interest at Prime Rate plus .25%. At September 30, 2018, the interest rate on the Line of Credit Agreement was 5.25%. Effective October 1, 2018, the interest rate on the Line of Credit Agreement increased to 5.50%. No amounts were outstanding under the Line of Credit Agreement at September 30, 2018.

 

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

 

 

Item 4. Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), Avalon’s management conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. For purposes of the foregoing, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Avalon’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as outlined above. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that they believe that, as of September 30, 2018, our disclosure controls and procedures were effective at a reasonable assurance level.

 

Changes in Internal Controls over Financial Reporting.

 

There were no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standard related to revenue recognition on our financial statements to facilitate their adoption on January 1, 2018. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Reference is made to “Item 3. Legal Proceedings” in Avalon’s Annual Report on Form 10-K for the year ended December 31, 2017 for a description of legal proceedings.

 

Item 2. Changes in Securities and Use of Proceeds 

None

 

Item 3. Defaults upon Senior Securities

None

 

Item 4. Mine Safety Disclosures  

None

 

Item 5. Other Information 

None

 

Item 6. Exhibits and Reports on Form 8-K  

	(a)	Exhibits
		Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		Exhibit 101.INS* XBRL Instance
		Exhibit 101.SCH* XBRL Taxonomy Extension Schema
		Exhibit 101.CAL* XBRL Taxonomy Extension Calculation
		Exhibit 101.DEF* XBRL Taxonomy Extension Definition
		Exhibit 101.LAB* XBRL Taxonomy Extension Labels
		Exhibit 101.PRE* XBRL Taxonomy Extension Presentation
		XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
	(b)	Reports on Form 8-K
		On July 30, 2018, Avalon issued a press release regarding the recent trading activity of the Company’s common stock.   On August 1, 2018, Avalon reported the Ohio 10th District Court of Appeals decision on the appeal of Company’s salt water injection well restart order.

 

 

SIGNATURE

 

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

 

	AVALON HOLDINGS CORPORATION
	(Registrant)
Date:        November 8, 2018	By:	/s/ Bryan P. Saksa
	Bryan P. Saksa, Chief Financial Officer and
	Treasurer (Principal Financial and Accounting
	Officer and Duly Authorized Officer)

 

38