Exhibit 13.1

 

 

 

Financial Highlights

(in thousands, except for per share amounts)

 

For the year		2017				2016
Net operating revenues		$	55,848			$	61,352
Loss before income taxes			(694	)			(284	)
Net loss attributable to Avalon Holdings Corporation common shareholders			(307	)			(69	)
Net loss per share attributable to Avalon Holdings Corporation common shareholders			(0.08	)			(0.02	)

 

At year-end		2017				2016
Working capital (deficit)		$	(197	)		$	242
Total assets			65,378				67,898
Avalon Holdings Corporation Shareholders' Equity			38,446				38,741

 

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The Company

 

Avalon Holdings Corporation provides waste management services to industrial, commercial, municipal and governmental customers in selected northeastern and midwestern U.S. markets, captive landfill management services and salt water injection well operations. Avalon Holdings Corporation also owns Avalon Resorts and Clubs Inc., which includes the operation of a hotel and its associated amenities, three golf courses and related country clubs and facilities.

 

 

 Contents

 

Financial Highlights	1
Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Consolidated Balance Sheets	19
Consolidated Statements of Operations	20
Consolidated Statements of Cash Flows	21
Consolidated Statements of Shareholders’ Equity	22
Notes to Consolidated Financial Statements	23
Report of Independent Registered Public Accounting Firm	41
Management’s Annual Report on Internal Controls over Financial Reporting	42
Company Location Directory	43
Directors and Officers	44
Shareholder Information	45

 

Avalon Holdings Corporation and Subsidiaries

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

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 year ended December 31, 2017, Avalon utilized existing cash and cash provided by operations to meet operating needs, make required monthly cash payments on the term loan facility and to fund capital expenditures which included the continued renovation and expansion of The Avalon Inn 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 in Boardman, Ohio for approximately $1.3 million in cash. Subsequent to the acquisition, the Boardman Tennis Center 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 tennis building and associated land.

 

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 tennis, 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, tennis, athletic and fitness related activities. The operating results will be included in the Company’s Consolidated Statements of Operations and within Avalon’s golf and related operations segment from the date of acquisition.

 

In July 2016, the Company formed Avalon Resorts and Clubs, Inc. (“ARCI”), a wholly owned subsidiary of Avalon, the purpose of which is to hold the corporate activity of Avalon Clubs, Inc. and Avalon Resorts, Inc., both formed concurrently with ARCI.  Avalon Clubs, Inc. was formed to hold the wholly owned subsidiaries of the Avalon Golf and Country Club, while Avalon Resorts, Inc. holds the operations of The Avalon Inn. ACRI, Avalon Clubs, Inc. and Avalon Resorts, Inc. are included within Avalon’s golf and related operations segment.

 

In 2017, Avalon incurred capital expenditures of $2.5 million of which $1.8 million of such expenditures was paid to vendors and primarily related to the continued renovation and expansion of The Avalon Inn and $0.7 million of such expenditures related to equipment acquired under new capital lease agreements. In 2016, Avalon incurred capital expenditures of $3.4 million and paid vendors $3.0 million for such expenditures which principally related to the renovation and expansion of The Avalon Inn. In 2017 and 2016, The Avalon Inn was in operation but still in the process of being renovated and expanded. The renovations and expansion include a complete renovation of the existing facility and the addition of new restaurants, bars, extensive banquet and conference facilities. Avalon’s aggregate capital expenditures in 2018 are expected to be in the range of $3.0 million to $4.0 million, funded with cash in our project fund account, further described below, and cash generated from operations. Capital expenditures principally relate to the continued renovation and expansion of The Avalon Inn, building improvements and equipment purchases.

 

Avalon Holdings Corporation and Subsidiaries

 

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 the existing line of credit agreement and associated accrued interest with Home Savings Bank (formerly The Home Savings and Loan Company of Youngstown, Ohio), 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. 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 December 31, 2017 and 2016.

 

Concurrently with the Term Loan Agreement, 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 $4.0 million with an original maturity date of May 31, 2017. On April 25, 2017, the Line of Credit Agreement was amended to increase the available line of credit from $4.0 million to $5.0 million and extend the maturity date to May 31, 2019. The amendment also has the option to request a one year extension of maturity in 2018 based on certain terms and conditions. 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. No amounts were drawn under the Line of Credit Agreement at December 31, 2017 and 2016.

 

Outstanding borrowings under the Line of Credit Agreement bear interest at Prime Rate plus .25%. At December 31, 2017, the interest rate on the Line of Credit Agreement was 4.50%.

 

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 covenants, customary representations, warranties and events of default. Avalon was in compliance with the Line of Credit Agreement covenants at December 31, 2017 and 2016.

 

During the years ended December 31, 2017 and 2016, the weighted average interest rate on outstanding borrowings was 5.35% and 3.80%, respectively.

 

Avalon Holdings Corporation and Subsidiaries

 

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 December 31, 2017, there was a working capital deficit of $0.2 million compared with working capital of $0.2 million at December 31, 2016. Working capital was negatively impacted by a decrease in cash and cash equivalents and accounts receivable partially offset by a decrease in accounts payable.

 

Accounts receivable decreased to $10.5 million at December 31, 2017 compared with $11.3 million at December 31, 2016. The decrease was primarily the result of decreased sales related to the waste management services segment in the fourth quarter of 2017 compared with the fourth quarter of 2016 and the timing of receipt on those associated receivables. Net operating revenues related to the waste management segment were $10.5 million in the fourth quarter of 2017 compared with $11.7 million in the fourth quarter of 2016.

 

Accounts payable decreased to $7.8 million at December 31, 2017 compared with $9.4 million at December 31, 2016. The decrease in accounts payable is primarily due to a decrease in the amounts due to disposal facilities and transportation carriers of the waste brokerage and management services business associated with the decrease in net operating revenues in the fourth quarter of 2017 compared with the fourth quarter of 2016 and the associated timing of those vendor payments in the ordinary course of business.

 

Deferred revenue relating to membership dues was approximately $2.7 million at December 31, 2017 and 2016, respectively. The increase in deferred revenues resulting from an increase in membership dues rates was offset by the decrease in the average number of members during 2017 compared to the prior year. During the third quarter of 2016, annual membership dues rates were increased. The increased rates became effective on the member’s annual renewal date. The average number of members during 2017 was 4,531 compared to 4,615 in the prior year. Revenues related to annual membership dues are recognized proportionately over the membership term.

 

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.

 

Avalon Holdings Corporation and Subsidiaries

 

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 tennis, 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 and a travel agency.

 

Performance in 2017 compared with 2016

 

Overall Performance

 

Net operating revenues decreased to $55.8 million in 2017 compared with $61.4 million in 2016. This decrease was due to a decrease in net operating revenues of the waste management services segment. Net operating revenues of the waste management services segment were $38.4 million in 2017 compared with $44.3 million in 2016. The decrease in net operating revenues attributable to the waste management services segment during 2017 compared to 2016 was slightly offset by an increase in revenue attributable to the golf and related operations segment. Net operating revenues of the golf and related operations segment were approximately $17.4 million in 2017 compared with $17.1 million in 2016.

 

Avalon Holdings Corporation and Subsidiaries

 

Costs of operations related to the waste management segment decreased to $30.5 million in 2017 compared with $36.4 million in 2016. The decrease in the cost of operations between years for the waste management segment is primarily due to the decreased 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 increased to $14.2 million in 2017 compared with $14.1 million in 2016. The increase was primarily a result of higher employee related costs and increased use of lawn care maintenance products for the golf courses.

 

Depreciation and amortization expense was approximately $3.0 million in 2017 compared with $2.8 million in 2016. The increase is primarily the result of depreciation expense associated with The Avalon Inn.

 

Consolidated selling, general and administrative expenses were $8.5 million in 2017 compared with $8.2 million in 2016. The increase in selling, general and administrative costs was primarily due to increased legal costs incurred relating to Avalon’s appeal and mandamus processes associated with the Company’s salt water injection wells.

 

Interest expense was $0.7 million in 2017 compared with $0.4 million in 2016. The increase in interest expense was due to higher average outstanding borrowings at a higher weighted average interest rate during 2017 compared to the prior year.

 

Net loss attributable to Avalon Holdings Corporation common shareholders was $0.3 million, or $0.08 per share, in 2017 compared with a net loss attributable to Avalon Holdings Corporation common shareholders of $0.1 million, or $0.02 per share, in 2016.

 

Segment Performance

 

Segment performance should be read in conjunction with Note 12 to the Consolidated Financial Statements.

 

Waste Management Services Segment

 

The net operating revenues of the waste management services segment decreased to approximately $38.4 million in 2017 compared with $44.3 million in 2016. 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 decreased to $36.2 million in 2017 from $42.2 million in 2016. This decrease was primarily due to a decrease of $8.8 million, or a 40% decrease, in net operating revenues attributable 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 $13.4 million in 2017 compared with $22.2 million in 2016. In addition, net operating revenues related to managerial, consulting and clerical services decreased to $1.3 million in 2017 compared with $1.7 million in 2016. Net operating revenue relating to managerial, consulting and clerical services, which is performed for one customer, is entirely dependent on that customer’s needs. The decreases noted above were partially offset by 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 approximately $3.2 million, or a 17% increase between years related to increased work from multiple customers. Net operating revenues related to continuous work were $21.5 million in 2017 compared with $18.3 million in 2016.

 

The net operating revenues of the captive landfill management operations were approximately $2.2 million in 2017 compared to $2.1 million in 2016. 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 2017 and 2016.

 

Avalon Holdings Corporation and Subsidiaries

 

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 10^th Circuit 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 10^th Circuit Court of Appeals on March 21, 2017. On September 14, 2017, an appeal hearing was held. The Company is currently awaiting judgment from the court. In the event the suspension order is lifted, Avalon will make preparations for restarting the well and opening the facility in accordance with the restart plans. In the event that the temporary suspension is not lifted by the Ohio 10^th Circuit Court of Appeals, Avalon will continue in its effort to receive a favorable ruling lifting the temporary suspension.

 

Avalon Holdings Corporation and Subsidiaries

 

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 trial is tentatively scheduled to occur in the second quarter of 2018. The Company intends to vigorously pursue the Complaint and obtain due process and fair compensation.

 

Costs of operations related to the waste management segment decreased $5.9 million, or 16%, to $30.5 million in 2017 compared with $36.4 million in 2016. The decrease in the cost of operations between years for the waste management segment is primarily due to the decreased net operating revenues between periods as these costs vary directly with the associated net operating revenues.

 

Income before income taxes for the waste management services segment decreased to approximately $2.7 million in 2017 compared with $2.8 million in 2016. Income before income taxes of the waste brokerage and management services business was approximately $3.3 million in 2017 compared to $3.1 million in 2016. The gross margins associated with continuous work are typically higher than gross margins from event work and managerial, consulting and clerical services, and although total net operating revenues for the waste management brokerage and services business decreased $6.0 million between years, the higher gross profit generated on the increased net operating revenues related to continuous work between years offset the lower gross profit generated from the decreased event work net operating revenues between years. The overall gross margin percentage of the waste brokerage and management services business was approximately 21% in 2017 compared with 18% in 2016. Income before income taxes of the captive landfill operations was approximately $0.3 million in 2017 and 2016. During 2017, the salt water injection wells incurred a loss before income taxes of approximately $0.9 million compared with a loss before income taxes of $0.6 million in 2016. The increased loss between years was due to legal 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 increased approximately 2% to $17.4 million in 2017 compared with $17.1 million in 2016. 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 and a travel agency.

 

Food, beverage and merchandise sales were $7.3 million in 2017 and 2016. The increase in food and beverage revenue related to The Avalon Inn between periods was partially offset by a decrease in food and beverage revenue at the clubs during 2017 compared to 2016.

 

Other net operating revenues related to the golf and related operations were $10.1 million in 2017 compared with $9.8 million in 2016. This increase was primarily attributable to an increase in annual membership dues revenue and, to a lesser extent, an increase in room rental at The Avalon Inn. Membership dues revenue increased approximately $0.4 million in 2017 when compared with the prior year. The increase was primarily due to an increase in annual membership dues which was slightly offset by a decrease in the average number of members between periods. During the third quarter of 2016, annual membership dues rates were increased. The increased rates become effective for existing members on the member’s renewal date. The average number of members during 2017 was 4,531 compared with 4,615 in the comparable prior year. Net operating revenues related to room rental was approximately $2.0 million in 2017 compared with $1.9 million in 2016. The increase in net operating revenues related to room rental was due to higher average room rates during 2017 compared with the prior year. The increases noted above were slightly offset by a decrease of approximately $0.2 million in greens fees and associated cart rentals and fitness related revenue. 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 2017 and 2016.

 

Avalon Holdings Corporation and Subsidiaries

 

Cost of operations for the golf and related operations segment increased to $14.2 million in 2017 compared with $14.1 million in 2016. Cost of food, beverage and merchandise was approximately $3.2 million in 2017 and 2016. Golf and related operations operating costs increased approximately $0.1 million between years from $11.0 million in 2017 compared with $10.9 million in 2016. 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 income taxes for the golf and related operations was $0.3 million in 2017 and 2016. During 2017, the increased employee related and lawn care maintenance operating costs and the additional depreciation expense attributable to The Avalon Inn were offset by an increase in membership dues revenue and room rental revenue noted above.

 

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

 

General Corporate Expenses

 

General corporate expenses were $3.0 million in 2017 and 2016. The increase in general corporate expenses related to increased legal costs were offset with decreased employee related costs and an accumulated net decrease in various corporate administrative expenses.

 

Interest Expense

 

Interest expense was $0.7 million in 2017 compared to $0.4 million in 2016. The increase in interest expense was due to higher average outstanding borrowings at a higher weighted average interest rate during 2017 compared to the prior year. During 2017 and 2016, the weighted average interest rate on outstanding borrowings was 5.35% and 3.80%, respectively.

 

 

Net Loss

 

Net loss attributable to Avalon Holdings Corporation common shareholders was $0.3 million in 2017 compared with a net loss attributable to Avalon Holdings Corporation common shareholders of $0.1 million in 2016. Avalon recorded a state income tax provision in both 2017 and 2016, which was related entirely to the waste management and brokerage operations. The effective tax rate related to the waste management and brokerage operations was approximately 6% in 2017 and 7% in 2016. 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 benefit on the loss before taxes was offset by a change in the valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.

 

Avalon Holdings Corporation and Subsidiaries

 

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, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act contains significant changes to corporate taxation, including reduction of the corporate tax rate from 35% to 21%, additional limitations on the tax deductibility of interest, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain, and our results of operations, cash flows and financial condition, as well as the trading price of our common stock, could be adversely affected.

 

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.

 

Avalon Holdings Corporation and Subsidiaries

 

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 10^th Circuit 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 10^th Circuit Court of Appeals on March 21, 2017. On September 14, 2017, an appeal hearing was held. The Company is currently awaiting judgment from the court. In the event the suspension order is lifted, Avalon will make preparations for restarting the well and opening the facility in accordance with the restart plans. In the event that the temporary suspension is not lifted by the Ohio 10^th Circuit Court of Appeals, Avalon will continue in its effort to receive a favorable ruling lifting the temporary suspension.

 

Avalon Holdings Corporation and Subsidiaries

 

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 trial is tentatively scheduled to occur in the second quarter of 2018. The Company intends to vigorously pursue the Complaint and obtain due process and fair compensation.

 

Avalon assessed the recoverability of the carrying values of the salt water injection wells based on the Chief of the Division of Oil and Gas Resources Management’s decision to temporarily suspend operations of the wells. Avalon estimated future cash flows directly associated with and which are expected to arise as a direct result of the wells once the temporary 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 lives of those assets.

 

Management will continue to consider whether indicators of impairment are present and test for recoverability, as necessary. If management concludes that the carrying amount of the salt water injection wells are not recoverable, Avalon may record an impairment charge up to $3.7 million, the carrying value of the salt water injection wells.

 

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 December 31, 2017, 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 Holdings Corporation and Subsidiaries

 

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

 

Inflation Impact

 

Avalon has not entered into any long-term fixed price contracts that could have a material adverse impact upon its financial performance in periods of inflation. In general, management believes that rising costs resulting from inflation could be passed on to customers; however, Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions, and estimates that affect reported amounts. Significant accounting policies used in the preparation of Avalon’s Consolidated Financial Statements are described in Note 2 to the consolidated financial statements. Estimates are used when accounting for, among other things, the allowance for doubtful accounts, estimated useful lives of property and equipment used to depreciate and amortize the assets, asset impairments, compensation costs relating to stock options granted, contingencies and administrative proceedings, environmental matters and taxes.

 

The majority of Avalon’s accounts receivable is due from industrial and commercial customers. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, Avalon’s previous accounts receivable loss history, the customer’s current ability to pay its obligation to Avalon and the condition of the general economy and the industry as a whole. Bankruptcy or economic challenges of a particular customer represent uncertainties that are not controllable by management. If management’s assessments change due to different assumptions or if actual collections differ from management’s estimates, future operating results could be impacted. Avalon writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.

 

Avalon recognizes share-based compensation expense related to stock options issued to employees and directors. Avalon estimates the fair value of the stock options granted using a Monte Carlo simulation. The Monte Carlo simulation was selected to determine the fair value because it incorporates six minimum considerations; 1) the exercise price of the option, 2) the expected term of the option, taking into account both the contractual term of the option, the effects of employees’ expected exercise and post-vesting employment termination behavior, as well as the possibility of change in control events during the contractual term of the option agreements, 3) the current fair value of the underlying equity, 4) the expected volatility of the value of the underlying share for the expected term of the option, 5) the expected dividends on the underlying share for the expected term of the option and 6) the risk-free interest rate(s) for the expected term of the option.

 

The expected term, or time until the option is exercised, is typically based on historical exercising behavior of previous option holders of a company’s stock. Due to the fact that the Company has had no historical exercising activity, we estimate the expected term using the simplified method.

 

Avalon amortizes the fair value of the stock options over the expected term which approximates the requisite service period. If accelerated vesting occurs based on the market performance of Avalon’s common stock, the compensation costs related to the vested stock options that have not previously been amortized are recognized upon vesting.

 

 

Avalon Holdings Corporation and Subsidiaries

 

Certain events or changes in circumstances may indicate that the recoverability of the carrying value of long-lived assets should be assessed. Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, or a current-period operating or cash flow loss combined with historical losses or projected future losses. If an event occurs or changes in circumstances are present, Avalon estimates the future cash flows expected to result from the use of the applicable groups of long-lived assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value, Avalon would recognize an impairment loss to the extent the carrying value of the groups of long-lived assets exceeds their fair value. Avalon would determine the fair value by using quoted market prices, if available, for such assets; or if quoted market prices are not available, Avalon would discount the expected estimated future cash flows.

 

The ability to accurately predict future cash flows may impact the determination of fair value. Avalon’s assessments of cash flows represent management’s best estimate at the time of the impairment review. Avalon estimates the future cash flows expected to result from the use and, if applicable, the eventual disposition of the assets. The key variables that management must estimate include, among other factors, sales, costs, inflation and capital spending. Significant management judgment is involved in estimating these variables and they include inherent uncertainties. If different cash flows had been estimated in the current period, the value of the long-lived assets could have been materially impacted. Furthermore, Avalon’s accounting estimates may change from period to period as conditions in markets change, and this could materially impact financial results in future periods.

 

When Avalon concludes that it is probable that an environmental liability has been incurred, a provision is made in Avalon’s financial statements for Avalon’s best estimate of the liability based on management’s judgment and experience, information available from regulatory agencies, and the number, financial resources and relative degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of that site, as well as, the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no amount within the range appears to be a better estimate than any other, then Avalon provides for the minimum amount within the range, in accordance with generally accepted accounting principles. The liability is recognized on an undiscounted basis. Avalon’s estimates are revised, as deemed necessary, as additional information becomes known. Such revisions may impact future operating results. Although Avalon is not currently aware of any environmental liability, there can be no assurance that in the future an environmental liability will not occur.

 

Avalon recognizes deferred tax assets and liabilities based on differences between financial statement carrying amounts and the tax bases of assets and liabilities. Avalon also records tax benefits when it believes that it is more likely than not that the benefit will be sustained by the tax authority. Avalon regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences to reduce its deferred assets to the amount that it believes is more likely than not to be realized. Avalon has considered future taxable income in assessing the need for the valuation allowance. The $1,752,000 of deferred tax liabilities will reverse in the same period and jurisdiction and is of the same character as the temporary differences giving rise to the $1,760,000 of deferred tax assets. Avalon has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized. Should Avalon ascertain in the future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets, all or a portion of the $1,313,000 valuation allowance as of December 31, 2017, would be reversed as a benefit to the provision for income taxes in the period such determination was made.

 

 

Avalon Holdings Corporation and Subsidiaries

 

Recent Accounting Pronouncements

 

Adopted Accounting Standards

 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), to simplify the measurement of inventory. ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted the updated standard in the first quarter of 2017 with no material impact to the financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. This amendment is effective for annual periods beginning after December 15, 2016. During the first quarter of 2017, the Company adopted ASU 2015-17. The adoption of this standard did not have an impact on Avalon’s financial position, results of operations or financial statement disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. During the first quarter of 2017, the Company adopted ASU 2016-09. The adoption of this standard did not have a material impact on Avalon’s financial position, results of operations or financial statement disclosures.

 

Accounting Standards Not Yet Adopted

 

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.

 

The Company reviewed the terms and conditions contained its contracts with customers relating to our brokerage and management services and captive landfill management activities for our waste management services segment. The Company considered the terms and conditions of the contracts and the all-inclusive pricing for the service contained in those contracts and determined that the waste management services provided to the customer represent a single performance obligation that meets the criteria to be accounted for under the series guidance. Avalon transfers control of the service over time and, therefore, satisfies the performance obligation and will continue to recognize 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 will apply the guidance in ASC 606-10-55-18 which provides a practical expedient 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.

 

 

Avalon Holdings Corporation and Subsidiaries

 

The Company also assessed whether the principal versus agent consideration would change how the Company presents revenue for these contracts. Under the contracts, the Company is primarily responsible for fulfilling the service and controls the service prior to transferring it to the customer. Based on our assessment, the Company is acting as the principal and primary obligor under the contracts, and will continue to recognize revenue in the gross amount of consideration which it expects to be entitled in exchange for the service provided.

 

The Company reviewed ASU 2014-09 for our golf and related operations segment. For our country club memberships, Avalon providing the “stand ready obligation” for unlimited use of the country club 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. As such, the Company will continue to recognize membership dues on a straight line basis over the term of the contract. As a practical expedient, the Company applied this guidance to the whole portfolio of annual membership contracts as all contracts have similar characteristics. The Company determined that the effect on the financial statements of applying this guidance to the portfolio of all membership contracts does not differ from applying this guidance to each individual contract.

 

For our hotel operations, Avalon’s performance obligation is to provide lodging facilities. The separate components of providing this service 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. Our hotel room reservation performance obligation is 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 will continue to recognize revenue over time by measuring the progress toward complete satisfaction of that performance obligation.

 

For food, beverage, and merchandise sales, greens fees and associated cart rental 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, the Company will continue to recognize revenue at the point of sale.

 

The Company will adopt the new revenue standard in its first quarter of 2018 using the modified retrospective approach adoption method. Based on our analysis, the Company does not believe there will be a material impact to Avalon’s consolidated revenues upon adoption or on an ongoing basis. The Company is currently finalizing its financial statement disclosures in accordance with the requirements of the standard.

 

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 for its golf carts, machinery and equipment for the landfill operations, furniture and fixtures for The Avalon Inn and office copiers under operating leases and 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.

 

 

Avalon Holdings Corporation and Subsidiaries

 

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. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The standard requires application using a retrospective transition method. 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.

 

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.  ASU 2016-18 will be effective January 1, 2018 and will impact the presentation of our statement of cash flows for the restricted cash related to the remaining 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. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Avalon Athletic Club at Boardman, acquired in March 2018, will be accounted for in accordance with ASU 2017-01.

 

 

Avalon Holdings Corporation and Subsidiaries

 

Consolidated Balance Sheets

(in thousands, except for share data)

 

 

 

See accompanying notes to consolidated financial statements.

 

Avalon Holdings Corporation and Subsidiaries

 

Consolidated Statements of Operations

(in thousands, except for per share amounts)

 

 

 

See accompanying notes to consolidated financial statements.

 

Avalon Holdings Corporation and Subsidiaries

 

Consolidated Statements of Cash Flows

(in thousands)

 

 

For supplemental cash flow information regarding income taxes, see Note 6.

 

 

See accompanying notes to consolidated financial statements

 

Avalon Holdings Corporation and Subsidiaries

 

Consolidated Statements of Shareholders’ Equity

(in thousands)

 

 

 

See accompanying notes to consolidated financial statements.

 

Avalon Holdings Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

 

Shareholders and Board of Directors

Avalon Holdings Corporation

Warren, Ohio

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Avalon Holdings Corporation (the “Company”) and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes and schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/BDO USA, LLP

 

We have served as the Company's auditor since 2015.

 

Cleveland, Ohio

 

March 15, 2018

 

Avalon Holdings Corporation and Subsidiaries

 

Management’s Annual Report on Internal Control over Financial Reporting

 

The management of Avalon, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) of the Securities and Exchange Act of 1934, as amended. Avalon’s internal control system was designed to provide reasonable assurance as to the reliability of the preparation and presentation of the consolidated financial statements for external reporting and the safeguarding of assets from unauthorized use or disposition.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2017, based upon the framework and criteria established in Internal Control – Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2017.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

 

/s/ Ronald E. Klingle	/s/ Bryan P. Saksa
Chief Executive Officer	Chief Financial Officer

 

March 15, 2018

 

Avalon Holdings Corporation and Subsidiaries

 

Company Location Directory

 

Corporate Office	Golf and Related Operations
Avalon Holdings Corporation One American Way Warren, Ohio 44484-5555 (330) 856-8800     Waste Management Services   American Waste Management Services, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800   American Landfill Management, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800   American Construction Supply, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800   American Water Solutions, LLC One American Way Warren, Ohio 44484-5555 (330) 856-8800   AWMS Holdings, LLC One American Way Warren, Ohio 44484-5555 (330) 856-8800   AWMS Rt. 169, LLC One American Way Warren, Ohio 44484-5555 (330) 856-8800	Avalon Resorts and Clubs, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8898   Avalon Clubs, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8898   Avalon Resorts, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8898   Avalon Golf and Country Club One American Way Warren, Ohio 44484-5555 (330) 856-8898   Avalon Lakes Golf Course One American Way Warren, Ohio 44484-5555 (330) 856-8898   Squaw Creek Golf Course 761 Youngstown-Kingsville Road Vienna, Ohio 44473 (330) 539-5103   Avalon Country Club at Sharon, Inc. 1030 Forker Blvd. Hermitage, PA 16148-1566 (724) 981-6700   The Avalon Resort and Spa LLC 9519 East Market Street Warren, OH 44484-5555 (330) 856-1900   Avalon Travel, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8400   Avalon Mahoning Sports Center, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8898

 

Avalon Holdings Corporation and Subsidiaries

 

Directors and Officerss

 

Directors	Officers
Ronald E. Klingle Chairman of the Board and Chief Executive Officer Executive Committee (Chairman) Compensation Committee   Bryan P. Saksa Chief Financial Officer, Treasurer and Secretary Compensation Committee (Chairman)   Kurtis D. Gramley Chairman and Chief Executive Officer, Edgewood Surgical Hospital Audit Committee (Chairman) Executive Committee Option Plan Committee   Stephen L. Gordon Partner, Beveridge & Diamond, P.C. Compensation Committee Audit Committee Option Plan Committee (Chairman)   David G. Bozanich Financial Consultant  Audit Committee Executive Committee  Option Plan Committee	Ronald E. Klingle Chairman of the Board and Chief Executive Officer   Bryan P. Saksa Chief Financial Officer, Treasurer and Secretary   Frances R. Klingle Chief Administrative Officer   Clifford P. Davis Chief Technology Officer   Richard R. Fees Controller

 

Avalon Holdings Corporation and Subsidiaries

 

Shareholder Information

 

Common stock information

 

Avalon’s Class A Common Stock is listed on the NYSE Amex (symbol: AWX). Quarterly stock information for 2017 and 2016 as reported by The Wall Street Journal is as follows:

 

2017:
Quarter Ended		High				Low				Close
March 31		$	3.37			$	2.12			$	2.38
June 30			2.97				1.91				2.43
September 30			2.62				1.83				2.00
December 31			2.23				1.92				2.00

 

2016:
Quarter Ended		High				Low				Close
March 31		$	1.98			$	1.60			$	1.88
June 30			2.40				1.77				2.33
September 30			3.41				2.19				2.95
December 31			3.39				2.26				2.95

 

No dividends were paid during 2017 or 2016.

 

There are 321 Class A and 9 Class B Common Stock shareholders of record as of the close of business March 2, 2018. The number of holders is based upon the actual holders registered on the records of Avalon’s transfer agent and registrar and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

 

Dividend policy

 

Avalon presently intends to retain earnings for use in the operation and expansion of its business and therefore, does not anticipate paying any cash dividends in the foreseeable future.

 

Avalon Holdings Corporation and Subsidiaries

 

Annual report on Form 10-K

 

Copies of Avalon’s annual report on Form 10-K can be obtained free of charge by writing to Avalon Holdings Corporation, One American Way, Warren, Ohio 44484-5555, Attention: Shareholder Relations or by visiting Avalon’s web-site at

 www.avalonholdings.com.

 

Transfer agent and registrar

 

The transfer agent and registrar for Avalon is Broadridge Corporate Issuer Solutions, Inc. Regular mail correspondence should be sent to P.O. Box 1342, Brentwood, NY 11717 and overnight correspondence to ATTN: IWS, 1155 Long Island Avenue, Edgewood, NY 11717

 

Investor inquiries

 

Security analysts, institutional investors, shareholders, news media representatives and others seeking financial information or general information about Avalon are invited to direct their inquiries to Bryan P. Saksa, Chief Financial Officer and Treasurer, telephone (330) 856-8800.

 

Avalon Holdings Corporation and Subsidiaries

 

Policy statement on equal employment opportunity and affirmative action

 

Avalon is firmly committed to a policy of equal employment opportunity and affirmative action. Toward this end, Avalon will continue to recruit, hire, train and promote persons in all job titles, without regard to race, color, religion, sex, national origin, age, handicap, ancestry or Vietnam-era or disabled veteran status. We will base all decisions on merit so as to further the principle of equal employment opportunity. This policy extends to promotions and to all actions regarding employment including compensation, benefits, transfers, layoffs, returns from layoff, company-sponsored training and social programs.