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 six months ended June 30, 2020, Avalon utilized existing cash and cash provided by operations to meet operating needs, make required monthly payments on our term loan facility and to fund capital expenditures which included the continued renovation of The Grand Resort as further described below.
Financial Impact of COVID-19 Pandemic
The continued spread of COVID-19 and related governmental orders adversely impacted our operations and related financial results. Our restaurant operations generated significantly lower revenue as a result of the government mandated restrictions that were placed on in-house dining. Food and beverages sales related to banquets and conferences were minimal during the second quarter of 2020 as a result of government mandated restrictions placed on gatherings and events. In addition, the Company had high levels of room and event cancellations with some re-bookings in the third and fourth quarter of 2020 and into 2021. Our fitness, athletics, salon and spa operations generated no revenue under the mandate. In addition, our waste management brokerage business has experienced a decline in both continuous and project work due to government restrictions placed on its customers and associated shutdowns.
As government restrictions are reduced or lifted, we may experience weakened demand in light of continued travel restrictions or warnings, consumer fears and reduced consumer discretionary spending and general economic uncertainty. In light of the foregoing, we are unable to determine when our operations will return to pre-pandemic demand or pricing. During the mandated shut-down, the Company engaged in aggressive efforts to reduce expenses, including reducing employee costs, through hiring freezes, headcount reductions and substantial furloughs of employees. The Company began the process of rehiring employees in late May to meet business needs as the government restrictions on certain of our business operations were reduced or lifted. Governmental bodies may impose additional restrictions, which could include additional shutdowns, to stop the spread of infection. These additional restrictions would have a negative impact on our financial condition, results of operations and cash flows.
Paycheck Protection Program Loan
The Coronavirus Aid, Relief, and Economic Security Act, or (“CARES”) Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (the “Program”). The Program provides for 100% federally guaranteed loans to small businesses to allow employers to keep workers employed and maintain payroll during the pandemic and economic downturn. Under the Program, qualified companies are eligible for a loan in an amount equal to the lesser of $10 million or 2.5x the business’s average monthly payroll. Collateral or guarantor support is not required for the loan.
Under the Program, the borrower is eligible for loan forgiveness up to the amount the borrower spends on certain eligible costs during the 8 week period beginning on the date the proceeds were received on the loan. Eligible costs under the Program include payroll costs, interest on mortgage obligations incurred before the covered period, rent on leasing agreements and utility services. The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Under the Program, proceeds that are not forgiven convert to a loan bearing interest at a fixed rate of 1% payable in 18 equal monthly installments commencing after the forgiveness period. The Program was subsequently amended to allow the borrower to use an extended forgiveness period of 24 weeks beginning on the date the proceeds were received on the loan and to extend the repayment period to 54 months commencing after the 24 week forgiveness period.
In the second quarter of 2020, certain wholly-owned subsidiaries of Avalon entered into agreements and received a total of approximately $2.8 million in loans under the Program. The Company is currently utilizing the loan proceeds under the 24 week loan forgiveness period in accordance with Program’s guidelines. When the debt is forgiven in accordance with the Program, any amount that is forgiven will be recognized as a gain on debt extinguishment. The Company will repay amounts that are not forgiven or utilized.
New Castle Country Club Real Property Acquisition
On May 13, 2019, Havana Cigar Shop, Inc., a wholly owned subsidiary of Avalon, entered into an asset Purchase and Sale Agreement with New Castle Country Club (the “Club”) for the purchase of the real property assets associated with the Club. Havana Cigar Shop, Inc. concurrently entered into an Assignment and Assumption and Commercial Loan Modification Agreement with Mercer County State Bank for the outstanding debt under the Club’s Commercial Mortgage and Demand Line of Credit, as amended, (collectively the “Agreements”) at closing as consideration for the purchase of the real property of the Club. The total amount of outstanding debt under the Agreements assumed by Havana Cigar Shop, Inc., at closing was approximately $0.8 million.
The outstanding balance under the Commercial Demand Line of Credit was repaid in the second quarter of 2019 and in the fourth quarter of 2019 the Commercial Demand Line of Credit was terminated. The remaining outstanding balance under the Commercial Mortgage was refinanced and terminated in conjunction with the New Term Loan Agreement.
Subsequent to the asset Purchase and Sale Agreement, Havana Cigar Shop, Inc. was named Avalon Field Club at New Castle. Avalon Field Club at New Castle is currently in operation. The operating results are included in the Company’s Condensed Consolidated Statements of Operations and within Avalon’s golf and related operations segment from the date of acquisition.
The acquisition is consistent with the Company’s golf operations business strategy as members of the Avalon Golf and Country Club have access to all the golf and related country club activities offered by Avalon Field Club at New Castle. In addition, hotel guests at The Grand Resort can utilize the facility during their stay. Avalon Field Club at New Castle earns revenue through membership dues, food, beverage and merchandise sales, greens fees and associated cart rentals.
Capital Expenditures
During the six months ended June 30, 2020, Avalon incurred capital expenditures of $3.0 million of which $2.3 million of such expenditures was paid to vendors during the period. Expenditures primarily related to the continued renovation and expansion of The Grand Resort. In addition, approximately $0.4 million of such expenditures related to golf course maintenance equipment acquired under new capital lease agreements. During the six months ended June 30, 2019, Avalon incurred capital expenditures of $4.5 million of which $2.9 million of such expenditures was paid to vendors during the period. Expenditures primarily related to the continued renovation and expansion of The Grand Resort and, to a lesser extent, the renovation of the Avalon Athletic Club at Boardman. In 2020 and 2019, The Grand Resort was in operation but still in the process of being renovated and expanded. The renovations and expansion include the renovation of existing hotel rooms and the addition of a new restaurant, bars, salon and spa, outdoor resort pool and Roman Bath. Avalon’s aggregate capital expenditures in 2020 are expected to be in the range of $4.0 million to $5.0 million, funded with cash from our project fund account. Capital expenditures principally relate to the continued renovation and expansion of The Grand Resort, building improvements and equipment purchases.
New Term Loan Agreement
On December 20, 2019, Avalon and certain direct and indirect wholly owned subsidiaries entered into a loan and security agreement (the “New Term Loan Agreement”) with Laurel Capital Corporation which provided for a $23.0 million term loan. The New Term Loan Agreement proceeds were utilized to pay off and refinance the Company’s existing term loan and commercial mortgage agreements, pay down the outstanding balance and associated interest on the Company’s line of credit agreement and pay related transaction costs. The remaining proceeds were deposited into a project fund account for which those proceeds are required to fund future costs of renovating and expanding both The Grand Resort and Avalon Field Club at New Castle.
At closing, $10.3 million of the proceeds were used to pay off and refinance amounts outstanding under our term loan agreement with Laurel Capital Corporation, dated December 20, 2016 (“2016 Term Loan Agreement”), $2.9 million of the proceeds were used to pay off and refinance amounts outstanding under our term loan agreement with Laurel Capital Corporation, dated March 29, 2019 (“2019 Term Loan Agreement”), $1.7 million of the proceeds were used to pay down the outstanding balance and associated interest on our existing line of credit agreement with Premier Bank (formerly Home Savings Bank), dated May 31, 2018, as amended, $0.6 million of the proceeds were used to pay off amounts outstanding under our commercial mortgage agreement with Mercer County State Bank, dated May 13, 2019 (“Commercial Mortgage”) and $0.3 million of the proceeds were utilized to pay transaction costs. The remaining proceeds of approximately $7.2 million were deposited into a project fund account. At June 30, 2020 and December 31, 2019, loan proceeds of $4.9 and $7.2 million, respectively, are presented in the Condensed Consolidated Balance Sheets as “Restricted cash.”
The 2016 Term Loan Agreement, 2019 Term Loan Agreement and the Commercial Mortgage Agreement were terminated in conjunction with the New Term Loan Agreement.
The $23.0 million outstanding under the New Term Loan Agreement is payable in 119 equal monthly installments of principal and interest, based on a fifteen (15) year maturity schedule which commenced January 20, 2020 followed by one final balloon payment of all remaining principal, interest and fees due on the maturity date of December 20, 2029. Borrowings under the New Term Loan Agreement bear interest at a fixed rate of 5.00% until the fifth anniversary date of the closing at which time the interest rate will be reset to a fixed rate equal to the greater of (a) 5.00% per annum or (b) the sum of the five year treasury rate on the date two (2) business days prior to the reset date plus 3.60%, provided that the applicable rate shall in no event exceed 7.35% per annum.
Avalon has the right to prepay the amount outstanding under the New Term Loan Agreement, in whole or in part, at any time upon payment of the principal amount of the loan to be prepaid plus accrued unpaid interest thereon to the prepayment date, plus an applicable prepayment penalty. The prepayment penalty, expressed as a percentage of the principal of the loan being prepaid, is five percent (5%) on any prepayment in the first five years; four percent (4%) on any prepayment in the sixth and seventh year; three percent (3%) on any prepayment in the eighth and ninth year; and two percent (2%) on any prepayment in the tenth year.
Borrowings under the New Term Loan Agreement are secured by certain real property and related business assets as defined in the agreement. The New Term Loan Agreement contains a Fixed Charge Coverage Ratio requirement of at least 1.20 tested on an annual basis on December 31 of each year commencing December 31, 2020. The New Term Loan also contains other nonfinancial covenants, customary representations, warranties and events of default. Avalon was in compliance with the New Term Loan Agreement covenants at June 30, 2020 and December 31, 2019.
Line of Credit Agreement
On May 31, 2018, Avalon entered into a business loan agreement with Premier Bank (formerly Home Savings Bank), (the “Line of Credit Agreement”) which provides for a line of credit of up to $5.0 million. On August 5, 2020, the Company amended the Line of Credit Agreement to extend the maturity date to July 31, 2022. Under the Line of Credit Agreement, borrowings in excess of $1.0 million are subject to a borrowing base which is calculated based off a specific level of eligible accounts receivable of the waste management business as defined in the agreement.
At December 20, 2019, the outstanding balance of $1.7 million under the Line of Credit Agreement was paid down with a portion of the proceeds from the New Term Loan Agreement. No amounts were drawn under the Line of Credit Agreement at June 30, 2020 and December 31, 2019. Outstanding borrowings under the Line of Credit Agreement bear interest at Prime Rate plus .25%. At June 30, 2020, the interest rate on the Line of Credit Agreement was 3.50%.
Borrowings under the Line of Credit Agreement are secured by certain business assets of the Company including accounts receivable, inventory and equipment. The Line of Credit Agreement contains a Fixed Charge Coverage Ratio requirement of at least 1.20 tested on an annual basis on December 31 of each year. The Line of Credit Agreement also contains other nonfinancial covenants, customary representations, warranties and events of default. Avalon was in compliance with the Line of Credit Agreements covenants at June 30, 2020 and December 31, 2019.
During the three months ended June 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.67% and 5.53%, respectively. During the six months ended June 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.82% and 5.45%, respectively.
Squaw Creek Country Club Lease Agreement
In November 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations. Based upon the amount of leasehold improvements already made, Avalon expects to exercise all of its remaining renewal options.
Working Capital
At June 30, 2020 and December 31, 2019, there was a working capital deficit of approximately $2.6 million and $3.4 million, respectively. Working capital was primarily positively impacted by an increase in both cash and cash equivalents and unbilled membership dues receivable and a decrease in accounts payable. This increase was partially offset by a decrease in accounts receivable and an increase in deferred membership dues revenue and the current portion of the Payroll Protection Program loan.
Accounts receivable decreased to $7.8 million at June 30, 2020 compared with $12.0 million at December 31, 2019. The decrease was primarily the result of decreased sales related to the waste management services segment in the second quarter of 2020 compared with the fourth quarter of 2019 and the timing of receipt on those associated receivables. Net operating revenues related to the waste management segment were $9.1 million in the second quarter of 2020 compared with $12.8 million in the fourth quarter of 2019. This decrease was partially offset by an increase in accounts receivable related to the golf and related operations segment due to the timing of annual membership renewals.
Accounts payable was $8.7 million at June 30, 2020 compared to $11.7 million at December 31, 2019. The decrease in accounts payable was primarily due to a decrease in amounts due to disposal facilities and transportation carriers of the waste management services associated with the decrease in the net operating revenues in the second quarter of 2020 compared to the fourth quarter of 2019 and the associated timing of those vendor payments in the ordinary course of business.
Deferred revenue relating to membership dues was approximately $4.8 million at June 30, 2020 compared to $3.2 million at December 31, 2019. The increase in deferred revenues was primarily due to the associated timing of annual membership renewals partially offset by a slight decrease in members at June 30, 2020. The number of members at June 30, 2020 was 5,010 compared to 5,051 at December 31, 2019.
Management believes that anticipated cash provided from future operations and proceeds from the Paycheck Protection Program will be sufficient to meet operating requirements and make required monthly payments under our term loan facility. Depending on the continued duration the COVID-19 pandemic may have on our business, if business conditions warrant additional monies needed to fund operating requirements, Avalon will take all available actions including borrowing from our line of credit.
Growth Strategy
Waste Management Segment
Our growth strategy for the waste management services segment focuses on increasing revenue, gaining market share and enhancing shareholder value through internal growth. Although we are a waste management services company, we do not own any landfills or provide waste collection services. However, because of our many relationships with various disposal facilities and transporters, we are able to be more flexible and provide alternative solutions to a customer’s waste disposal or recycling needs. We intend to capitalize on our management and sales staff which has extensive experience in all aspects of the waste business. As such, we intend to manage our internal growth as follows:
• Sales and Marketing Activities. We will focus on retaining existing customers and obtaining new business through our well-managed sales and marketing activities. We seek to manage our sales and marketing activities to enable us to capitalize on our position in many of the markets in which we operate. We provide a tailored program to all of our customers in response to their particular needs. We accomplish this by centralizing services to effectively manage their needs, such as minimizing their procurement costs.
We currently have a number of professional sales and marketing employees in the field who are compensated using a commission structure that is focused on generating high levels of quality revenue. For the most part, these employees directly solicit business from existing and prospective customers. We emphasize our rate and cost structures when we train new and existing sales personnel. We intend to hire additional qualified professional sales personnel to expand into different geographical areas.
• Development Activities. We will seek to identify opportunities to further position us as an integrated service provider in markets where we provide services. In addition, we will continue to utilize the extensive experience of our management and sales staff to bid on significant one-time projects and those that require special expertise. Where appropriate, we may seek to obtain permits that would provide vertically integrated waste services or expand the service offerings or leverage our existing volumes with current vendors to provide for long term, cost competitive strategic positioning within our existing markets.
Golf and Related Operations Segment
In August 2014, the Company acquired The Grand Resort which was integrated into the golf and related operations segment. The acquisition is consistent with the Company's business strategy in that The Grand Resort provides guests with a self-contained vacation experience, offering hotel guests golf packages to all of the golf courses of the Avalon Golf and Country Club and allows its guests to utilize the facilities at each of the clubhouses. Members of the Avalon Golf and Country Club also have access to all of the amenities offered by The Grand Resort. The Grand Resort is open year-round and provides a consistent, comfortable environment where our guests can enjoy our various amenities and activities. Avalon believes that the combination of its four golf facilities and The Grand Resort will result in additional memberships in the Avalon Golf and Country Club.
On May 13, 2019, Avalon acquired Avalon Field Club at New Castle which was integrated into the golf and related operations segment. The acquisition is consistent with the Company’s golf operations business strategy as members of the Avalon Golf and Country Club have access to all the golf and related country club activities offered by Avalon Field Club at New Castle. In addition, hotel guests of The Grand Resort can utilize the facility during their stay.
In addition, several private country clubs in the northeast Ohio area are experiencing economic difficulties. Avalon believes some of these clubs may represent an attractive investment opportunity. While Avalon has not entered into any pending agreements for acquisitions, it may do so at any time and will continue to consider acquisitions that make economic sense.
Results of Operations
Avalon’s primary business segment, the waste management services segment, provides hazardous and nonhazardous waste brokerage and management services, captive landfill management services and salt water injection well operations. The golf and related operations segment includes the operation and management of four golf courses and related country clubs and facilities, a hotel and its associated resort amenities, a multipurpose recreation center and a travel agency.
Performance in the second quarter of 2020 compared with the second quarter of 2019
Overall Performance
Net operating revenues decreased to $13.1 million in the second quarter of 2020 compared with $18.4 million in the second quarter of 2019. This decrease was primarily due to a decrease in net operating revenues of the waste management services segment. Net operating revenues of the waste management services segment were $9.1 million in the second quarter of 2020 compared with $12.9 million in the second quarter of 2019. In addition, net operating revenues of the golf and related operations segment decreased in the second quarter of 2020 compared to the second quarter of 2019. Net operating revenues of the golf and related operations segment were approximately $4.0 million in the second quarter of 2020 compared to $5.5 million in the second quarter of 2019.
Costs of operations related to the waste management segment decreased to $7.2 million in the second quarter of 2020 compared with $10.3 million in the second quarter of 2019. The decrease in the cost of operations between periods for the waste management segment is primarily due to the decreased net operating revenues as these costs vary directly with the associated revenues. Cost of operations related to the golf and related operations segment decreased to $3.4 million in the second quarter of 2020 compared to $4.6 million in the second quarter of 2019. The decrease was a result of lower employee related costs and food product costs in the second quarter of 2020 when compared to the second quarter of 2019 due to the decrease in net operating revenues as a result of the government mandated shut down.
Depreciation and amortization expense was approximately $0.7 million in the second quarter of 2020 compared to $0.6 million in the second quarter of 2019. The increase is due to the higher depreciable asset base primarily due to the renovation and expansion of The Grand Resort.
Consolidated selling, general and administrative expenses were approximately $1.9 million in the second quarter of 2020 compared to $2.4 million in the second quarter of 2019. The decrease was attributable to lower employee related costs and, to a lesser extent, a decrease in advertising costs.
Interest expense was approximately $0.3 million in the second quarter of 2020 compared to $0.2 million in the second quarter of 2019. The increase in interest expense is due to the higher average outstanding debt during the second quarter of 2020 compared to the prior period. This increase was partially offset by a lower weighted average interest rate on the outstanding borrowings. During the three month periods ended June 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.67% and 5.53%, respectively.
Net loss attributable to Avalon Holdings Corporation common shareholders was $0.4 million, or $0.11 per share, in the second quarter of 2020 compared with net income attributable to Avalon Holdings Corporation common shareholders of approximately $0.5 million, or $0.12 per share, in the second quarter of 2019.
Segment Performance
Segment performance should be read in conjunction with Note 13 to the Condensed Consolidated Financial Statements.
Waste Management Services Segment
The net operating revenues of the waste management services segment decreased to $9.1 million in the second quarter of 2020 compared with $12.9 million in the second quarter of 2019. The waste management services segment includes waste disposal brokerage and management services, captive landfill management operations and salt water injection well operations.
During the second quarter of 2020, our waste disposal brokerage business experienced a decline in both continuous and project work due to government restrictions placed on its customers and related shutdowns as a result of the COVID-19 pandemic. The net operating revenues of the waste disposal brokerage and management services business decreased to $8.5 million in the second quarter of 2020 from $12.2 million in the second quarter of 2019. Net operating revenues relating to event work related to multiple projects decreased by approximately $2.1 million during the second quarter of 2020 when compared to the second quarter of 2019. Event work is defined as bid projects under contract that occurs on a one-time basis over a short period of time. Such work can fluctuate significantly from year to year. Net operating revenues related to event work were approximately $3.3 million in the second quarter of 2020 compared with $5.4 million in the second quarter of 2019. In addition, continuous work of the waste disposal brokerage business decreased approximately $1.7 million between periods as a result of decreased work from multiple customers. Net operating revenues related to continuous work were approximately $4.7 million in the second quarter of 2020 compared with $6.4 million in the second quarter of 2019. Net operating revenues related to managerial, consulting and clerical services were approximately $0.5 million in the second quarter of 2020 compared to $0.4 million in the second quarter of 2019. Net operating revenue relating to managerial, consulting and clerical services, which is performed for one customer, is entirely dependent on that customer’s needs.
The net operating revenues of the captive landfill management operations were approximately $0.6 million in the second quarter of 2020 compared to $0.7 million in the second quarter of 2019. The net operating revenues of the captive landfill operations are almost entirely dependent upon the volume of waste generated by the owner of the landfill for whom Avalon manages the facility.
Operations of the salt water injection wells have been suspended in accordance with the Chief of the Division of Oil and Gas Resources Management order. Due to the suspension of the salt water injections wells, there were no operating revenues during the second quarter of 2020 and 2019.
Costs of operations related to the waste management segment decreased to $7.2 million in the second quarter of 2020 compared with $10.3 million in the second quarter of 2019. The decrease in the cost of operations between periods for the waste management segment is primarily due to the decreased net operating revenues as these costs vary directly with the associated revenues. The overall gross margin percentage of the waste brokerage and management services business was approximately 21% in the second quarter of 2020 compared to 20% in the second quarter of 2019. 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 second quarter of 2020.
Income before income taxes for the waste management services segment was approximately $0.8 million in the second quarter of 2020 compared to $1.2 million in the second quarter of 2019. Income before income taxes of the waste brokerage and management services business was approximately $0.7 million in the second quarter of 2020 compared to $1.2 million in the second quarter of 2019. The decreased income before income taxes was primarily attributable to lower revenues and associated decreased gross margin related to both continuous and event work during the second quarter of 2020 compared to the second quarter of 2019. Income before income taxes of the captive landfill operations was approximately $0.1 million in both the second quarter of 2020 and 2019. During both the second quarter of 2020 and 2019 the salt water injection wells incurred a loss before income taxes of less than $0.1 million primarily due to legal and professional costs incurred relating to Avalon’s mandamus processes.
Golf and Related Operations Segment
Net operating revenues of the golf and related operations segment were approximately $4.0 million in the second quarter of 2020 compared to $5.5 million in the second quarter of 2019. Avalon’s golf and related operations segment consists of the operation and management of four golf courses and related country clubs which provide dining and banquet facilities, a hotel that provides lodging, dining, banquet and conference facilities and other resort related amenities, a multipurpose recreation center and a travel agency.
Food, beverage and merchandise sales decreased to approximately $1.4 million in the second quarter of 2020 compared to $2.3 million in the second quarter of 2019. Our restaurant operations generated significantly lower revenue as a result of the government mandated restrictions placed on in-house dining as a result of The Ohio Department of Health and The Pennsylvania Department of Health Director's Orders which temporarily closed all bars and restaurants to in-house patrons (collectively the “Orders”) in March 2020 as a result of the COVID-19 pandemic. In accordance with the Orders, the Company continued to provide take-out, but revenues related to these services were not significant. The Order also placed a limit on mass gatherings and large community events. Food and beverages sales related to banquets and conferences were minimal during the second quarter of 2020 as a result of these government mandated restrictions. In late May and June 2020, the states of Ohio and Pennsylvania allowed for both the reopening of dining rooms and limited gatherings under mandated restrictions.
Other net operating revenues related to the golf and related operations were approximately $2.6 million in the second quarter of 2020 compared to $3.2 million in the second quarter of 2019. Membership dues revenue was approximately $1.5 million in the second quarter of 2020 compared to $1.4 million in the second quarter of 2019. The increase in membership dues revenue is primarily attributable to the increase in the average number of members between periods. The average number of members during the second quarter of 2020 was 5,002 compared to 4,870 in the second quarter of 2019. Greens fees and associated cart rentals were approximately $0.6 million in both the second quarter of 2020 and 2019. Net operating revenues related to room rental was approximately $0.3 million in the second quarter of 2020 compared to $0.7 million in the second quarter of 2019. During the second quarter of 2020, the Company had significantly lower occupancy compared to the second quarter of 2019 due to customer cancellations of overnight stays in response to the COVID-19 pandemic. Other revenues consisting of athletic, fitness, travel agency, salon and spa related activities decreased to approximately $0.2 million in the second quarter of 2020 compared to $0.5 million in the second quarter of 2019 due to the March 2020 Orders requiring all nonessential business activities, including athletic, fitness, salon and spa activities to temporarily cease operations. These business activities were allowed to resume operating in late May and early June 2020.
Cost of operations for the golf and related operations segment was $3.4 million in the second quarter of 2020 compared with $4.6 million in the second quarter of 2019. Cost of food, beverage and merchandise was approximately $0.6 million in the second quarter of 2020 compared to $1.0 million in the second quarter of 2019. The decrease in food, beverage and merchandise costs between periods is primarily attributable to the lower revenues. The cost of food, beverage and merchandise sales was approximately 41% of associated revenue in the second quarter of 2020 compared to 42% in the second quarter of 2019. Golf and related operations operating costs decreased to approximately $2.8 million in the second quarter of 2020 compared with $3.6 million in the second quarter of 2019. The decrease in operating costs between periods was directly attributable to the decreased business operations under the Orders.
The golf and related operations recorded a loss before income taxes of $0.2 million in the second quarter of 2020 compared with income before income taxes of $0.2 million in the second quarter of 2019. The change between periods was primarily a result of lower net operating revenues and associated gross profit generated in the second quarter of 2020 to cover the operation’s fixed costs.
General Corporate Expenses
General corporate expenses were $0.8 million in both the second quarter of 2020 and 2019.
Interest Expense
Interest expense was approximately $0.3 million in the second quarter of 2020 compared to $0.2 million in the second quarter of 2019. The increase in interest expense is due to the higher average outstanding debt during the second quarter of 2020 compared to the prior period. This increase was partially offset by a lower weighted average interest rate on the outstanding borrowings. During the three month periods ended June 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.67% and 5.53%, respectively.
Net Income ( Loss)
During the three months ended June 30, 2020 net loss attributable to Avalon Holdings Corporation common shareholders was $0.4 million compared to net income attributable to Avalon Holdings Corporation common shareholders of $0.5 million for the three months ended June 30, 2019. Avalon recorded a state income tax provision in both the second quarter of 2020 and 2019, which was related entirely to the waste management and brokerage operations. Due to the recording of a full valuation allowance against the Company’s federal net deferred tax assets, the overall effective tax rate in both periods reflects taxes owed in certain U.S state jurisdictions. Avalon’s income tax on the income (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.
Performance in the first six month of 2020 compared with the first six months of 2019
Overall Performance
Net operating revenues decreased to $27.5 million in the first six months of 2020 compared with $33.0 million in the first six months of 2019. This decrease was primarily due to a decrease in net operating revenues of the waste management services segment. Net operating revenues of the waste management services segment were $20.2 million in the first six months of 2020 compared with $24.3 million in the first six months of 2019. In addition, net operating revenues of the golf and related operations segment decreased in the first six months of 2020 compared to the first six months of 2019. Net operating revenues of the golf and related operations segment were approximately $7.3 million in the first six months of 2020 compared to $8.7 million in the first six months of 2019.
Costs of operations related to the waste management segment decreased to $16.1 million in the first six months of 2020 compared with $19.5 million in the first six months of 2019. The decrease in the cost of operations between periods for the waste management segment is primarily due to the decreased net operating revenues as these costs vary directly with the associated revenues. Cost of operations related to the golf and related operations segment decreased to $6.6 million in the first six months of 2020 compared to $7.6 million in the first six months of 2019. The decrease was a result of lower employee related costs and food product costs during the first six months of 2020 when compared to the first six months of 2019 due to the decrease in net operating revenues as a result of the government mandated shut down.
Depreciation and amortization expense was approximately $1.4 million in the first six months of 2020 compared to $1.2 million in the first six months of 2019. The increase is due to the higher depreciable asset base primarily due to the renovation and expansion of The Grand Resort.
Consolidated selling, general and administrative expenses were approximately $4.2 million in the first six months of 2020 compared to $4.6 million in the first six months of 2019. The decrease was attributable to lower employee related costs, legal and professional costs and advertising costs.
Interest expense was approximately $0.6 million in the first six months of 2020 compared to $0.4 million in the first six months of 2019. The increase in interest expense is due to the higher average outstanding debt during the first six months of 2020 compared to the prior period. This increase was partially offset by a lower weighted average interest rate on the outstanding borrowings. During the six month periods ended June 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.82% and 5.45%, respectively.
Net loss attributable to Avalon Holdings Corporation common shareholders was $1.2 million, or $0.32 per share, in the first six months of 2020 compared with a net loss attributable to Avalon Holdings Corporation common shareholders of approximately $0.2 million, or $0.04 per share, in the first six months of 2019.
Segment Performance
Segment performance should be read in conjunction with Note 13 to the Condensed Consolidated Financial Statements.
Waste Management Services Segment
The net operating revenues of the waste management services segment decreased to $20.2 million in the first six months of 2020 compared with $24.3 million in the first six months of 2019.
During the first six months of 2020, our waste disposal brokerage business experienced a decline in both continuous and project work due to government restrictions placed on its customers and related shutdowns as a result of the COVID-19 pandemic. The net operating revenues of the waste disposal brokerage and management services business decreased to $19.0 million in the first six months of 2020 from $23.0 million in the first six months of 2019. Net operating revenues relating to event work related to multiple projects decreased by approximately $2.3 million during the first six months of 2020 when compared to the first six months of 2019. Event work is defined as bid projects under contract that occurs on a one-time basis over a short period of time. Such work can fluctuate significantly from year to year. Net operating revenues related to event work were approximately $7.4 million in the first six months of 2020 compared with $9.7 million in the first six months of 2019. In addition, continuous work of the waste disposal brokerage business decreased approximately $1.9 million between periods as a result of decreased work from multiple customers. Net operating revenues related to continuous work were approximately $10.8 million in the first six months of 2020 compared with $12.7 million in the first six months of 2019. Net operating revenues related to managerial, consulting and clerical services were approximately $0.8 million in the first six months of 2020 compared to $0.6 million in the first six months of 2019. Net operating revenue relating to managerial, consulting and clerical services, which is performed for one customer, is entirely dependent on that customer’s needs.
The net operating revenues of the captive landfill management operations were approximately $1.2 million in the first six months of 2020 compared to $1.3 million in the first six months of 2019. The net operating revenues of the captive landfill operations are almost entirely dependent upon the volume of waste generated by the owner of the landfill for whom Avalon manages the facility.
Operations of the salt water injection wells have been suspended in accordance with the Chief of the Division of Oil and Gas Resources Management order. Due to the suspension of the salt water injections wells, there were no operating revenues during the first six months of 2020 and 2019.
Costs of operations related to the waste management segment decreased to $16.1 million in the first six months of 2020 compared with $19.5 million in the first six months of 2019. The decrease in the cost of operations between periods for the waste management segment is primarily due to the decreased net operating revenues as these costs vary directly with the associated revenues. The overall gross margin percentage of the waste brokerage and management services business was approximately 20% in both the first six months of 2020 and 2019.
Income before income taxes for the waste management services segment was approximately $1.9 million in the first six months of 2020 compared to $2.2 million in the first six months of 2019. Income before income taxes of the waste brokerage and management services business was approximately $1.8 million in the first six months of 2020 compared to $2.1 million in the first six months of 2019. The decreased income before income taxes was primarily attributable to lower revenues and associated decreased gross margin related to both continuous and event work during the first six months of 2020 compared to the first six months of 2019. Income before income taxes of the captive landfill operations was approximately $0.1 million in the first six months of 2020 compared to $0.2 million in the first six months of 2019. During both the first six months of 2020 and 2019 the salt water injection wells incurred a loss before income taxes of less than $0.1 million primarily due to legal and professional costs incurred relating to Avalon’s mandamus processes.
Golf and Related Operations Segment
Net operating revenues of the golf and related operations segment were approximately $7.3 million in the first six months of 2020 compared to $8.7 million in the first six months of 2019.
Food, beverage and merchandise sales decreased to approximately $2.4 million in the first six months of 2020 compared to $3.4 million in the first six months of 2019. Our restaurant operations generated significantly lower revenue as a result of the government mandated restrictions placed on in-house dining as a result of The Ohio Department of Health and The Pennsylvania Department of Health Director's Orders which temporarily closed all bars and restaurants to in-house patrons in March 2020 as a result of the COVID-19 pandemic. In accordance with the Orders, the Company continued to provide take-out, but revenues related to these services were not significant. The Order also placed a limit on mass gatherings and large community events. Food and beverages sales related to banquets and conferences were significantly lower during the first six months of 2020 compared to the first six months of 2019 as a result of these government mandated restrictions. In late May and June 2020, the states of Ohio and Pennsylvania allowed for both the reopening of dining rooms and limited gatherings under mandated restrictions.
Other net operating revenues related to the golf and related operations were approximately $4.9 million in the first six months of 2020 compared to $5.3 million in the first six months of 2019. Membership dues revenue was approximately $3.0 million in the first six months of 2020 compared to $2.7 million in the first six months of 2019. The increase in membership dues revenue is primarily attributable to the increase in the average number of members between periods. The average number of members during the first six months of 2020 was 5,061 compared to 4,760 in the first six months of 2019. Net operating revenues related to room rental was approximately $0.6 million in the first six months of 2020 compared to $1.0 million in the first six months of 2019. During the first six months of 2020, the Company had significantly lower occupancy compared to the first six months of 2019 due to customer cancellations of overnight stays in response to the COVID-19 pandemic. Other revenues consisting of athletic, fitness, travel agency, salon and spa related activities decreased to approximately $0.6 million in the first six months of 2020 compared to $0.9 million in the first six months of 2019 due to the March 2020 Orders requiring all nonessential business activities, including athletic, fitness, salon and spa activities to temporarily cease operations. These business activities were allowed to resume operating in late May and early June 2020. Greens fees and associated cart rentals were approximately $0.7 million in both the first six months of 2020 and 2019. Due to adverse weather conditions, net operating revenues relating to the golf courses, which are located in northeast Ohio and western Pennsylvania, were minimal during the first three months of 2020 and 2019.
Cost of operations for the golf and related operations segment was $6.6 million in the first six months of 2020 compared with $7.6 million in the first six months of 2019. Cost of food, beverage and merchandise was approximately $1.1 million in the first six months of 2020 compared to $1.5 million in the first six months of 2019. The decrease in food, beverage and merchandise costs between periods is attributable to the lower revenues partially offset by higher food product cost. The cost of food, beverage and merchandise sales was approximately 46% of associated revenue in the first six months of 2020 compared to 44% in the first six months of 2019. Golf and related operations operating costs decreased to approximately $5.5 million in the first six months of 2020 compared with $6.1 million in the first six months of 2019. The decrease in operating costs between periods was directly attributable to the decreased business operations under the Orders.
The golf and related operations recorded a loss before income taxes of $0.9 million in the first six months of 2020 compared with a loss before income taxes of $0.5 million in the first six months of 2019. The change between periods was primarily a result of lower net operating revenues and associated gross profit generated in the first six months of 2020 to cover the operations fixed costs.
The ability to attract new members and retain members is very important to the success of the golf and related operations segment. Avalon is continually using different marketing strategies to attract and retain members, such as local television advertising and/or various membership promotions. A significant decline in members could adversely impact the financial results of the golf and related operations segment.
General Corporate Expenses
General corporate expenses were $1.6 million in both the first six months of 2020 and 2019.
Interest Expense
Interest expense was approximately $0.6 million in the first six months of 2020 compared to $0.4 million in the first six months of 2019. The increase in interest expense is due to the higher average outstanding debt during the first six months of 2020 compared to the prior period. This increase was partially offset by a lower weighted average interest rate on the outstanding borrowings. During the six month periods ended June 30, 2020 and 2019, the weighted average interest rate on outstanding borrowings was 4.82% and 5.45%, respectively.
Net Loss
During the six months ended June 30, 2020 net loss attributable to Avalon Holdings Corporation common shareholders was $1.2 million compared to a net loss attributable to Avalon Holdings Corporation common shareholders of $0.2 million for the six months ended June 30, 2019. Avalon recorded a state income tax provision in both the first six months of 2020 and 2019, which was related entirely to the waste management and brokerage operations. Due to the recording of a full valuation allowance against the Company’s federal net deferred tax assets, the overall effective tax rate in both periods reflects taxes owed in certain U.S state jurisdictions. Avalon’s income tax benefit on the loss before taxes was offset by a change in the valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.
Trends and Uncertainties
Financial impact of COVID-19 pandemic
In December 2019, a novel strain of coronavirus, COVID-19, emerged in Wuhan, Hubei Province, China. While initially concentrated in China, the outbreak spread to other countries and infections have been reported globally including in the United States. On March 11, 2020, the World Health Organization declared the COVID-19 viral disease a pandemic. The duration of the outbreak and new information which continually emerges concerning the severity of the illness and its treatment still remains unclear. As a result, the federal and state governmental bodies have taken unprecedented measures to try and control the spread of the virus.
In response to the COVID-19 pandemic, on March 15, 2020, the Governor of the State of Ohio announced that the Ohio Department of Health (“ODH”) issued a Director's Order (the “Order”) temporarily closing all Ohio bars and restaurants to in-house patrons. The Order stated that restaurants with take-out and delivery options could continue to operate those services, even as their dining rooms were temporarily closed. The Order also placed a limit on mass gatherings and large community events.
On March 19, 2020, the ODH issued a Director’s Order temporarily closing all salons and spas in the state of Ohio and also further limited the number of individuals for gatherings. On March 23, 2020, a “Stay at Home” order was issued by the ODH. The Stay at Home order stated that all individuals living within the State of Ohio are ordered to stay at home or at their place of residence. Under the order, individuals were only allowed to leave their home for essential activities including tasks related to their health and safety, obtaining necessary supplies and services and certain types of work. The Stay at Home Order required all non-essential businesses to cease operations. In March 2020 the Governor of the state of Pennsylvania issued a similar Stay at Home order. Under the order, all non-essential businesses were required to cease operations.
In accordance with the “Essential Critical Infrastructure Workforce” guidance issued by the U.S Department of Homeland Security, Cybersecurity & Infrastructure Agency (“CISA”) on March 19, 2020, the Company’s waste management services, restaurant carry-out, overnight lodging and outdoor golf courses remained in operation during the Order.
In late May and June 2020, the states of Ohio and Pennsylvania allowed the reopening of certain business operations that were temporarily closed under the Order. The Company’s dining rooms, fitness, athletic, pool, salon and spa services reopened under certain mandatory restrictions including mask protection for employees, decrease in occupancy and other measures to enforce social distancing.
The continued spread of COVID-19 and related governmental orders adversely impacted our operations and related financial results. Our restaurant operations generated significantly lower revenue as a result of the government mandated restrictions that were placed on in-house dining. Food and beverages sales related to banquets and conferences were minimal during the second quarter of 2020 as a result of government mandated restrictions placed on gatherings and events. In addition, the Company had high levels of room and event cancellations with some re-bookings in the third and fourth quarter of 2020 and into 2021. Our fitness, athletics, salon and spa operations generated no revenue under the mandate. In addition, our waste management brokerage business has experienced a decline in both continuous and project work due to government restrictions placed on its customers and associated shutdowns.
As government restrictions are reduced or lifted, we may experience weakened demand in light of continued travel restrictions or warnings, consumer fears and reduced consumer discretionary spending and general economic uncertainty. In light of the foregoing, we are unable to determine when our operations will return to pre-pandemic demand or pricing. During the mandated shut-down, the Company engaged in aggressive efforts to reduce expenses, including reducing employee costs, through hiring freezes, headcount reductions and substantial furloughs of employees. The Company began the process of rehiring employees in late May to meet business needs as the government restrictions on certain of our business operations were reduced or lifted. Governmental bodies may impose additional restrictions, which could include additional shutdowns, to stop the spread of infection. These additional restrictions would have a negative impact on our financial condition, results of operations and cash flows.
Paycheck Protection Program Loan
The Coronavirus Aid, Relief, and Economic Security Act, or (“CARES”) Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (the “Program”). The Program provides for 100% federally guaranteed loans to small businesses to allow employers to keep workers employed and maintain payroll during the pandemic and economic downturn. Under the Program, qualified companies are eligible for a loan in an amount equal to the lesser of $10 million or 2.5x the business’s average monthly payroll. Collateral or guarantor support is not required for the loan.
Under the Program, the borrower is eligible for loan forgiveness up to the amount the borrower spends on certain eligible costs during the 8 week period beginning on the date the proceeds were received on the loan. Eligible costs under the Program include payroll costs, interest on mortgage obligations incurred before the covered period, rent on leasing agreements and utility services. The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Under the Program, proceeds that are not forgiven convert to a loan bearing interest at a fixed rate of 1% payable in 18 equal monthly installments commencing after the forgiveness period. The Program was subsequently amended to allow the borrower to use an extended forgiveness period of 24 weeks beginning on the date the proceeds were received on the loan and to extend the repayment period to 54 months commencing after the 24 week forgiveness period.
In the second quarter of 2020, certain wholly-owned subsidiaries of Avalon entered into agreements and received a total of approximately $2.8 million in loans under the Program. The Company is currently utilizing the loan proceeds under the 24 week loan forgiveness period in accordance with Program’s guidelines. When the debt is forgiven in accordance with the Program, any amount that is forgiven will be recognized as a gain on debt extinguishment. The Company will repay amounts that are not forgiven or utilized.
Government regulations
The federal government and numerous state and local governmental bodies are continuing to consider legislation or regulations to either restrict or impede the disposal and/or transportation of waste. A portion of Avalon’s waste management services revenues is derived from the brokerage of the disposal and/or transportation of out-of-state waste. Any law or regulation restricting or impeding the transportation of waste or the acceptance of out-of-state waste for disposal could have a negative effect on Avalon. Avalon’s waste brokerage and management services may also be affected by the trend toward laws requiring the development of waste reduction and recycling or other programs.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryforwards generated in taxable years beginning after December 31, 2017, to offset 100% of taxable income for taxable years beginning before January 1, 2021, and 80% of taxable income in taxable years beginning after December 31, 2020. In addition, the CARES Act allows net operating losses incurred in taxable years beginning after December 31, 2017, and before January 1, 2021, to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the full impact of these provisions and recent IRS guidance, and we expect that it will not have a material impact on the Company’s financial position or results of operations.
Legal matters
In the ordinary course of conducting its business, Avalon becomes involved in lawsuits, administrative proceedings and governmental investigations, including those relating to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, management assesses the probability of loss and accrues a liability as appropriate. Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, will have a material adverse effect on its liquidity, financial position or results of operations.
Credit and collections
Economic challenges throughout the industries served by Avalon may result in payment defaults by customers. While Avalon continuously endeavors to limit customer credit risks, customer-specific financial downturns are not controllable by management. Significant customer payment defaults would have a material adverse impact upon Avalon’s future financial performance.
Competitive pressures
Avalon’s waste brokerage and management services business obtains and retains customers by providing services and identifying cost-efficient disposal options unique to a customer’s needs. Consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and may cause disposal pricing to increase. Avalon’s waste brokerage and management services business may not be able to pass these price increases onto some of its customers, which, in turn, may adversely impact Avalon’s future financial performance.
A majority of Avalon’s business is not subject to long-term contracts
A significant portion of Avalon’s business is generated from waste brokerage and management services provided to customers that are not subject to long-term contracts. In light of current economic, regulatory and competitive conditions, there can be no assurance that Avalon’s current customers will continue to transact business with Avalon at historical levels. Failure by Avalon to retain its current customers or to replace lost business could adversely impact the future financial performance of Avalon.
Avalon’s captive landfill management business is dependent upon a single customer as its sole source of revenue. If the captive landfill management business is unable to retain this customer, Avalon’s future financial performance could be adversely impacted.
A significant source of the golf and related operations revenues is derived from the members of the Avalon Golf and Country Club. Members are obligated to pay dues for a one year period. As such, the golf and related operations is primarily dependent on the sale and renewal of memberships in the Avalon Golf and Country Club, on a year to year basis.
Avalon's loan and security agreement may obligate it to repay debt before its maturity
The Company’s loan and security agreement contains certain covenants and events of default. Should Avalon be unable to meet one or more of these covenants, its lender may require it to repay any outstanding balance prior to the expiration date of the agreement. Our ability to comply with the financial and other covenants in our loan and security agreement may be affected by worsening economic or business conditions, or other events that may be beyond our control. We cannot provide assurance that our business will generate sufficient cash flow from operating activities in amounts sufficient to enable us to service debt and meet these covenants. We may need to refinance all or a portion of our indebtedness, on or before maturity. The Company cannot assure that additional sources of financing would be available to pay off any long-term borrowings under the loan and security agreement, so as to avoid default.
Saltwater disposal wells
Saltwater disposal wells are regulated by the Ohio Department of Natural Resources (“ODNR”), with portions of the disposal facilities regulated by the Ohio EPA. As exploitation of the Marcellus and Utica shale formations by the hydrofracturing process develops, regulatory and public awareness of the environmental risks of saltwater brine and its disposal in saltwater disposal wells is growing and consequently, it is expected that regulation governing the construction and operation of saltwater disposal wells will increase in scope and complexity. Increased regulation may result in increased construction and/or operating costs, which could adversely affect the financial results of Avalon.
There is a continuing risk during the saltwater disposal well’s operation of an environmental event causing contamination to the water tables in the surrounding area, or seismic events. The occurrence of a spill or contamination at a disposal well site could result in remedial expenses and/or result in the operations at the well site being suspended and/or terminated by the Ohio EPA or the ODNR. Incurring remedial expenses and /or a suspension or termination of Avalon’s right to operate one or more saltwater disposal wells at the well site could have an adverse effect on Avalon’s financial results.
As a result of a seismic event with a magnitude of 2.1 occurring on August 31, 2014, the Chief of the Division of Oil and Gas Resources Management (“Chief” or “Division”) issued Orders on September 3, 2014 to immediately suspend all operations of Avalon’s two saltwater injection wells until the Division could further evaluate the wells. The Orders were based on the findings that the two saltwater injection wells were located in close proximity to an area of known seismic activity and that the saltwater injection wells pose a risk of increasing or creating seismic activity.
On September 5, 2014, Avalon submitted the information required by the Chief’s Order in regards to its AWMS #1 injection well, and the Chief lifted the suspension for that well on September 18, 2014. On September 19, 2014, Avalon submitted information and a written plan required by the Chief’s Order proposing the establishment of certain operations and management controls on injections for the AWMS #2 injection well. To date, the Division has not responded to that plan despite Avalon’s request for feedback.
On October 2, 2014, Avalon filed an appeal with the Ohio Oil and Gas Commission (the “Commission”) disputing the basis for suspending operations of AWMS #2 and also the authority of the Chief to immediately suspend such operations. On March 11, 2015, an appeal hearing was held. The Chief stated during the hearing that the suspension order is temporary, and he expects that AWMS #2 will be allowed to resume operations once the state’s final policymaking is complete.
On August 12, 2015, the Commission upheld the temporary suspension of injection operations of AWMS #2 stating that the temporary suspension would allow the Chief more time to fully evaluate the facts in anticipation of the Division’s implementation of a comprehensive regulatory plan that will specifically address injection-induced seismicity.
Avalon appealed that decision to the Franklin County Court of Common Pleas (the “Court”), and on November 1, 2016 an appeal hearing was held in that Court. On December 23, 2016, the Court issued its Decision and Order in Avalon’s favor, and vacated the Commission’s decision. The Court found that the Division’s suspension and refusal to work with the Company over the 26 month period was arbitrary and not in accordance with reason. Subsequent to the ruling, and in accordance with the Court’s Decision and Order, both Avalon and the Division submitted their proposed restart plans to the Court. Avalon’s plan sets forth both the initial volumes and pressures and increases in volume and pressure while continuously monitoring seismicity and addressing the concerns of public health and safety.
On February 21, 2017, the Court issued its Final Decision and Order. The Court’s Final Decision and Order set forth conditions for restarting the AWMS #2 salt water injection well in accordance with the proposed restart plans filed by Avalon with minor revisions. On February 22, 2017, the Division appealed the Final Decision and Order and filed a Motion to Stay the Court Order. The Motion to Stay was granted by the Ohio 10th District Court of Appeals on March 21, 2017.
On September 14, 2017, an appeal hearing was held in the Ohio 10th District Court of Appeals and on July 31, 2018 a decision was issued on the appeal. The decision reinstated the previous Ohio Oil and Gas Commission decision in this matter.
On September 12, 2018, the Company appealed the Ohio 10th District Court of Appeals decision to the Supreme Court of Ohio. On November 21, 2018, Avalon, received notice from the Supreme Court of Ohio that the court would not accept for review the Company’s appeal of the Ohio 10th District Court of Appeals decision on the Division of Oil and Gas Resources Management’s appeal of the Franklin County Court of Common Pleas February 21, 2017 entry allowing restart of the Company’s AWMS Water Solutions, LLC #2 salt water injection well.
On April 5, 2019, Avalon filed with the Oil and Gas Commission a motion to vacate its prior decisions in this matter. There can be no guarantee that the salt water injection wells will resume operations, but the Company will continue to pursue all available avenues to allow the restart of the Company’s salt water injection well under reasonable conditions. Currently, there is no implemented state-wide policy on induced seismicity and the Ohio Department of Natural Resources (“ODNR”) has refused to communicate with the Company regarding the status and requirements of any policymaking. The operations of Company’s injection wells will remain suspended until that time. The Oil and Gas Commission scheduled a hearing on this motion for August 13, 2019. Before the hearing began, and in response to the Division’s motion to dismiss the Company’s motion to vacate, the Commission dismissed the matter. The Company appealed that decision to the Franklin County Court of Common Pleas. In April 2020, the Division’s motion to dismiss and the Company’s opposition were reviewed by the Court. The Company is currently awaiting judgment from the Court.
Concurrently with the filing of the appeal with the Franklin County Court of Common Pleas, the Company filed a writ of mandamus in the 10th District Court of Appeals on August 30, 2019 to compel the chief of the Division to issue restart orders, or alternative orders that would allow the Company to either restart the AWMS #2 well, or appeal said orders to the Oil and Gas Commission in accordance with Ohio Law.
In addition, on August 26, 2016, Avalon filed a complaint in the 11th Appellate District Court in Trumbull County, Ohio for a Peremptory Writ of Mandamus to compel the Director of the ODNR to initiate appropriations procedures to determine damages from the illegal regulatory taking of the Company’s property, or issue an alternative remedy at law. The Company believes that the actions, and lack of responsible actions, by the ODNR is a clear violation of the Company’s property rights and a violation of the Fifth and Fourteenth Amendments to the U.S. Constitution; Article I, Section 19 of the Ohio Constitution; and Ohio Revised Code Chapter 163.
On March 18, 2019, Avalon received notice that the 11th Appellate District Court in Trumbull County, Ohio issued summary judgment in favor of the Ohio Department of Natural Resources in the writ of mandamus action that resulted from the suspension order of the Company’s salt water injection well. The decision was appealed to the Supreme Court of Ohio on April 5, 2019. Oral arguments in the case occurred on April 7, 2020. The Company is currently awaiting judgment from the Supreme Court of Ohio.
Golf memberships and liquor licenses
The Avalon Golf and Country Club operates four golf courses and related country clubs and a multipurpose recreation center. The Avalon Golf and Country Club facilities also offer swimming pools, fitness centers, tennis courts, dining and banquet facilities, salon and spa services. In addition, The Grand Resort provides guests with a self-contained vacation experience, offering hotel guests golf packages to all of the golf courses of the Avalon Golf and Country Club and allows its guests to utilize the facilities at each of the clubhouses. Members of the Avalon Golf and Country Club also have access to all of the amenities offered by The Grand Resort. The Avalon Golf and Country Club competes with many public courses and country clubs in the area. Although the golf courses continue to be available to the general public, the primary source of revenues is derived from the members of the Avalon Golf and Country Club. Avalon believes that the combination of its three facilities and The Grand Resort will result in additional memberships in the Avalon Golf and Country Club. The ability to retain current members and attract new members has been an ongoing challenge. Although Avalon was able to increase the number of members of the Avalon Golf and Country Club, as of June 30, 2020, Avalon has not attained its membership goals. There can be no assurance as to when such goals will be attained and when the golf and related operations will ultimately become profitable. Avalon is continually using different marketing strategies to attract new members, such as local television advertising and various membership promotions. A significant decline in members could adversely affect the future financial performance of Avalon.
Avalon’s golf course operations, The Grand Resort and multipurpose recreation center currently hold liquor licenses for their respective facilities. If, for some reason, any one of these facilities were to lose their liquor license, the financial performance of the golf and related operations would be adversely affected.
Seasonality
Avalon’s operations are somewhat seasonal in nature since a significant portion of those operations are primarily conducted in selected northeastern and midwestern states. Additionally, Avalon’s golf courses are located in northeast Ohio and western Pennsylvania and are significantly dependent upon weather conditions during the golf season. As a result, Avalon’s financial performance is adversely affected by adverse weather conditions.
