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 three months ended March 31, 2022, Avalon utilized existing cash and
cash provided by operations to meet operating needs and make required monthly
payments on our term loan facility. Cash in our project fund account was
utilized to fund capital expenditures which included the continued renovation of
The Grand Resort and Avalon Field Club at New Castle as further described below.
Financial Impact of COVID-19 Pandemic
In March 2020, both federal and state governmental bodies took unprecedented
measures to try and control the spread of the COVID-19 coronavirus including the
issuance of temporary stay at home orders, the temporary closing of
non-essential businesses and in-house dining and restrictions on gatherings and
events. Although the various government mandates impacting our business
operations have currently been lifted, we may experience weakened demand in
light of travel restrictions or warnings, consumer fears and reduced consumer
discretionary spending and general economic uncertainty. The full extent of the
impact of the COVID-19 pandemic on our operations and financial performance will
depend on future developments, including the duration and spread of the pandemic
and the impact of COVID-19 variants, all of which are uncertain and cannot be
predicted at this time. Governmental bodies may impose restrictions, which could
include additional shutdowns, to stop the spread of infection. These
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, which
was signed into law in March 2020, authorized the Small Business Administration
to temporarily guarantee loans under a 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, the borrower is eligible for loan forgiveness up to the amount the
borrower spends on certain eligible costs during the covered 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. Collateral
or guarantor support is not required for the loan.
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 utilized the entire balance of the loan
proceeds in accordance with the Program's guidelines and subsequently applied
for forgiveness with the Small Business Administration.
During the three months ended March 31, 2021, approximately $1.1 million of the
loans and $8,000 of associated interest were forgiven by the Small Business
Administration. As of March 31, 2022, all loan proceeds received under the
Program and related interest has been forgiven by the Small Business
Administration. Debt forgiven in accordance with the Program is recognized in
the Condensed Consolidated Statements of Operations as a gain on debt
extinguishment.
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Term Loan Agreement
On December 20, 2019, 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 provided for a $23.0 million
term loan. At closing, $13.8 million of the proceeds were used to pay off and
refinance amounts outstanding under our then existing term loan and commercial
mortgage agreements, $1.7 million of the proceeds were used to pay down the
outstanding balance and associated interest on our existing line of credit
agreement and $0.3 million of the proceeds were utilized to pay related
transaction costs. The remaining proceeds of approximately $7.2 million 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 March 31, 2022 and December 31, 2021, loan proceeds
of $0.7 million and $1.7 million, respectively, remained in the project fund
account.
The then existing term loan and commercial mortgage agreements were terminated
in conjunction with the Term Loan Agreement.
The 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 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 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 Term Loan Agreement are secured by certain real property
and related business assets as defined in the agreement. The 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. The Term Loan also contains other
nonfinancial covenants, customary representations, warranties and events of
default. Avalon was in compliance with the Term Loan Agreement covenants at
March 31, 2022 and December 31, 2021.
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 17, 2021, the Company
amended the Line of Credit Agreement to extend the maturity date to July 31,
2023. 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 March 31, 2022 and
December 31, 2021. Outstanding borrowings under the Line of Credit Agreement
bear interest at Prime Rate plus .25%. At March 31, 2022, the interest rate on
the Line of Credit Agreement was 3.75%.
Borrowings under the Line of Credit Agreement are secured by certain business
assets of the Company including accounts receivable, inventory and equipment.
The Line of Credit Agreement 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 March 31, 2022 and December 31, 2021.
During the three months ended March 31, 2022 and 2021, the weighted average
interest rate on outstanding borrowings was 5.00% and 4.80%, respectively.
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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.
Capital Expenditures
During the three months ended March 31, 2022, Avalon incurred capital
expenditures of $1.9 million of which $1.3 million of such expenditures was paid
to vendors during the period. During the three months ended March 31, 2021,
Avalon incurred capital expenditures of $0.9 million of which $0.7 million of
such expenditures was paid to vendors during the period. For both the three
months ended March 31, 2022 and 2021, expenditures primarily related to the
continued renovation of The Grand Resort and the clubhouse at Avalon Field Club
at New Castle.
In 2022 and 2021, The Grand Resort was in operation but certain existing hotel
rooms were in the process of being renovated. In addition, in 2022 and 2021, the
Avalon Field Club at New Castle was in operation but the club house was in the
process of being renovated. Avalon's aggregate capital expenditures in 2022 are
expected to be in the range of $3.5 million to $4.5 million, funded with cash
from our project fund account, existing operating cash and cash generated from
operations. Capital expenditures principally relate to the continued hotel room
renovations at The Grand Resort, the clubhouse at Avalon Field Club at New
Castle, building improvements and equipment purchases.
Working Capital
At March 31, 2022 and December 31, 2021, there was a working capital deficit of
approximately $3.6 million and $2.1 million, respectively. Working capital was
negatively impacted by an increase in deferred membership dues revenue and
accrued payroll and a decrease in cash and cash equivalents. The negative impact
was partially offset by an increase in accounts receivable, unbilled membership
dues receivable, inventory and prepaid expenses.
Accounts receivable increased to $10.7 million at March 31, 2022 compared with
$9.9 million at December 31, 2021. Accounts receivable related to the golf and
related operations segment increased approximately $1.9 million at March 31,
2022 compared to December 31, 2021 due to the associated timing of annual
membership renewals. The increase in accounts receivable related to our golf and
related operations segment was partially offset by a decrease in accounts
receivable related to our waste management services segment. Accounts receivable
related to our waste management services segment decreased approximately $1.1
million at March 31, 2022 compared with December 31, 2021 as a result of the
decrease in net operating revenues in the first quarter of 2022 compared with
the fourth quarter of 2021.
Accounts payable was approximately $10.2 million at both March 31, 2022 and
December 31, 2021. Accounts payable related to our waste management segment
decreased as a result of a decrease in amounts due to disposal facilities and
transportation carriers in the first quarter of 2022 compared to the fourth
quarter of 2021 and the associated timing of those vendor payments in the
ordinary course of business. The decrease in accounts payable related to our
waste management services segment was offset by an increase in accounts payable
related to our golf and related operations segment. Accounts payable related to
the golf and related operations increased as a result of unpaid construction
bills at March 31, 2022 related to The Grand Resort and Avalon Field Club at New
Castle.
Deferred revenue relating to membership dues was approximately $4.9 million at
March 31, 2022 compared to $3.4 million at December 31, 2021. The increase in
deferred revenues was primarily due to the associated timing of annual
membership renewals, and to a lesser extent, an increase in members and
membership dues rates during 2022. The number of members at March 31, 2022 was
5,259 compared to 5,120 at December 31, 2021.
Accrued payroll and other compensation was approximately $1.3 million at March
31, 2022 compared to $0.8 million at December 31, 2021. The increase is due to
the associated timing of certain employee incentive payments related to our
waste management services segment.
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Management believes that anticipated cash provided from future operations will
be sufficient to meet operating requirements and make required monthly payments
under our term loan facility. If business conditions warrant additional monies
needed, Avalon will take all available actions to fund operating requirements
including borrowing from our existing line of credit.
Growth Strategy
Waste Management Services 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.
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.
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Performance in the first quarter of 2022 compared with the first quarter of 2021
Overall Performance
Net operating revenues decreased to $14.3 million in the first quarter of 2022
compared with $15.1 million in the first quarter of 2021. Net operating revenues
of the waste management services segment were approximately $9.3 million in the
first quarter of 2022 compared to $11.1 million in the first quarter of 2021.
The decrease in net operating revenues of the waste management services segment
was a result of a decrease in both continuous and event work projects during the
first quarter of 2022 compared to the first quarter of 2021. Net operating
revenues of the golf and related operations segment were approximately $5.0
million in the first quarter of 2022 compared to $4.0 million in the first
quarter of 2021. The increase in net operating revenues of the golf and related
operations was a result of increased business operations related to both The
Grand Resort and the country clubs during the first quarter of 2022 compared to
the first quarter of 2021.
Total cost of operations related to the waste management services segment
decreased to $7.6 million in the first quarter of 2022 compared with $8.7
million in the first quarter of 2021. The decrease in the cost of operations
between periods for the waste management services segment is primarily due to
the decreased net operating revenues as these costs vary directly with the
associated revenues.
Total cost of operations related to the golf and related operations segment
increased to $4.8 million in the first quarter of 2022 compared to $3.5 million
in the first quarter of 2021. The increase between periods was primarily a
result of higher product costs and employee related costs associated with an
increase in business operations and wage increases during the period.
Depreciation and amortization expense was approximately $0.8 million in both the
first quarter of 2022 and 2021.
Consolidated selling, general and administrative expenses were approximately
$2.3 million in both the first quarter of 2022 and 2021.
Gain on debt extinguishment was approximately $1.1 million in the first quarter
of 2021 representing the Paycheck Protection Program loans that were forgiven by
the Small Business Administration received under the CARES Act.
Interest expense was approximately $0.3 million in both the first quarter of
2022 and 2021. During the first quarter of 2022, the decrease in interest
expense due to the lower average outstanding debt was offset by a higher
weighted average interest rate on the outstanding borrowings. During the three
months ended March 31, 2022 and 2021, the weighted average interest rate on
outstanding borrowings was 5.00% and 4.80%, respectively.
Net loss attributable to Avalon Holdings Corporation common shareholders was
$1.3 million, or $0.32 per share, in the first quarter of 2022 compared with net
income attributable to Avalon Holdings Corporation common shareholders of $0.7
million, or $0.18 per share, in the first quarter of 2021.
Segment Performance
Segment performance should be read in conjunction with Note 14 to the Condensed
Consolidated Financial Statements.
Waste Management Services Segment
The net operating revenues of the waste management services segment decreased to
$9.3 million in the first quarter of 2022 compared with $11.1 million in the
first quarter of 2021. The waste management services segment includes waste
disposal brokerage and management services, captive landfill management
operations and salt water injection well operations.
The net operating revenues of the waste disposal brokerage and management
services business were approximately $8.7 million in the first quarter of 2022
compared to $10.5 million in the first quarter of 2021. Continuous work of the
waste disposal brokerage business decreased approximately $1.3 million between
periods as a result of decreased work from multiple customers. Net operating
revenues related to continuous work were approximately $5.6 million in the first
quarter of 2022 compared with $6.9 million in the first quarter of 2021. In
addition, event work net operating revenues related to multiple projects
decreased by approximately $0.5 million during first quarter of 2022 when
compared to first quarter of 2021. 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. Event work net operating revenues
were approximately $3.1 million in the first quarter of 2022 compared with $3.6
million in the first quarter of 2021.
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The net operating revenues of the captive landfill management operations were
approximately $0.6 million in both the first quarter of 2022 and 2021. 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.
Costs of operations related to the waste management services segment decreased
to $7.6 million in the first quarter of 2022 compared with $8.7 million in the
first quarter of 2021. 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 19% in the first quarter of 2022 compared to 22% in the first
quarter of 2021. The decrease in the overall gross margin percentage was
primarily attributable to the lower gross profit generated from both continuous
and event work projects during first quarter of 2022.
Income before income taxes for the waste management services segment were
approximately $0.7 million in the first quarter of 2022 compared to $1.1 million
in the first quarter of 2021. Income before income taxes of the waste brokerage
and management services business was approximately $0.7 million in the first
quarter of 2022 compared to $1.1 million in the first quarter of 2021. The
decreased income before income taxes was primarily attributable to the decreased
net operating revenues and associated lower gross profit during the first
quarter of 2022 compared to the first quarter of 2021. Income before income
taxes of the captive landfill operations were approximately $0.1 million in both
the first quarter of 2022 and 2021. During both the first quarter of 2022 and
2021, the salt water injection wells incurred a loss before income taxes of
approximately $0.1 million primarily due to legal and professional costs
incurred relating to Avalon's mandamus processes.
Golf and Related Operations Segment
Net operating revenues of the golf and related operations segment were
approximately $5.0 million in the first quarter of 2022 compared to $4.0 million
in the first quarter of 2021. Avalon's golf and related operations segment
consists of the operation and management of four golf courses and related
country clubs which provide dining and banquet facilities, a hotel which
provides lodging, dining, banquet and conference facilities and other resort
related amenities, a multipurpose recreation center and a travel agency.
Food, beverage and merchandise sales increased to approximately $1.7 million in
the first quarter of 2022 compared to $1.4 million in the first quarter of 2021.
Food, beverage and merchandise sales increased between periods as a result of an
increase in business activity at both The Grand Resort and the country clubs.
Other net operating revenues related to the golf and related operations were
approximately $3.3 million in the first quarter of 2022 compared to $2.6 million
in the first quarter of 2021. Membership dues revenue was approximately $1.7
million in the first quarter of 2022 compared to $1.6 million in the first
quarter of 2021. The increase in membership dues revenue was attributable to
both an increase in membership dues rates and the average number of members
between periods. Net operating revenues related to room rental was approximately
$0.7 million in the first quarter of 2022 compared to $0.5 million in the first
quarter of 2021. The increase in room revenue was a result of both higher
occupancy and an increase in average room rates when compared to the prior
period. Other revenues consisting of athletic, fitness, travel agency, salon and
spa related activities were approximately $0.8 million in the first quarter of
2022 compared to $0.4 million in the first quarter of 2021. The increase between
periods was primarily due to an increase in salon and spa revenue associated
with The Grand Resort. Greens fees and associated cart rentals were
approximately $0.1 million both the first quarter of 2022 and 2021. 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 first quarter of 2022 and first quarter of
2021.
Total cost of operations for the golf and related operations segment were $4.8
million in the first quarter of 2022 compared with $3.5 million in the first
quarter of 2021. Cost of food, beverage and merchandise was approximately $0.7
million in the first quarter of 2022 compared to $0.6 million in the first
quarter of 2021. The increase in total food, beverage and merchandise costs
between periods is primarily due to higher revenues from increased business
operations, and to a lesser extent, higher product costs. The cost of food,
beverage and merchandise sales was approximately 45% of associated revenue in
the first quarter of 2022 compared to 44% in the first quarter of 2021. Golf and
related operations operating costs increased to approximately $4.1 million in
the first quarter of 2022 compared with $2.9 million in the first quarter of
2021. The increase in operating costs between periods, primarily employee
related costs, was directly attributable to both an increase in business
operations and higher employee wages paid per hour during the first quarter of
2022 compared to the first quarter of 2021.
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The golf and related operations recorded a loss before income taxes of $0.8
million in the first quarter of 2022 compared with income before income taxes of
$0.2 million in the first quarter of 2021. The change between periods was
primarily a result of higher employee related costs in the first quarter of 2022
and, in the first quarter of 2021, the golf and related operations recorded a
gain on debt extinguishment of approximately $0.6 million representing the
Paycheck Protection Program loan that was forgiven by the Small Business
Administration received under the CARES Act.
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 $0.9 million in the first quarter of 2022
compared to $0.8 million in the first quarter of 2021. The increase was
primarily attributable to higher employee related costs.
Gain on Debt Extinguishment
Gain on debt extinguishment was approximately $1.1 million in the first quarter
of 2021 representing the Paycheck Protection Program loans that were forgiven by
the Small Business Administration received under the CARES Act.
Interest Expense
Interest expense was approximately $0.3 million in both first quarter of 2022
and 2021. During first quarter of 2022, the decrease in interest expense due to
the lower average outstanding debt was offset by a higher weighted average
interest rate on the outstanding borrowings. During the three months ended March
31, 2022 and 2021, the weighted average interest rate on outstanding borrowings
was 5.00% and 4.80%, respectively.
Net Income (Loss)
Net loss attributable to Avalon Holdings Corporation common shareholders was
$1.3 million in the first quarter of 2022 compared to net income attributable to
Avalon Holdings Corporation common shareholders of $0.7 million in the first
quarter of 2021. Avalon recorded a state income tax provision in both the first
quarter of 2022 and 2021, 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 reflect taxes owed in certain U.S state jurisdictions. Avalon's
income tax on the income (loss) before taxes was offset by a change in the
valuation allowance. A valuation allowance is provided when it is more likely
than not that deferred tax assets relating to certain federal and state loss
carryforwards will not be realized. Avalon continues to maintain a valuation
allowance against the majority of its deferred tax amounts until it is evident
that the deferred tax asset will be utilized in the future.
Trends and Uncertainties
Financial impact of COVID-19 pandemic
In March 2020, both federal and state governmental bodies took unprecedented
measures to try and control the spread of the COVID-19 coronavirus including the
issuance of temporary stay at home orders, the temporary closing of
non-essential businesses and in-house dining and restrictions on gatherings and
events. Although the various government mandates impacting our business
operations have currently been lifted, we may experience weakened demand in
light of travel restrictions or warnings, consumer fears and reduced consumer
discretionary spending and general economic uncertainty. The full extent of the
impact of the COVID-19 pandemic on our operations and financial performance will
depend on future developments, including the duration and spread of the pandemic
and the impact of COVID-19 variants, all of which are uncertain and cannot be
predicted at this time. Governmental bodies may impose restrictions, which could
include additional shutdowns, to stop the spread of infection. These
restrictions would have a negative impact on our financial condition, results of
operations and cash flows.
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Paycheck Protection Program Loan
The Coronavirus Aid, Relief, and Economic Security Act, or ("CARES") Act, which
was signed into law in March 2020, authorized the Small Business Administration
to temporarily guarantee loans under a 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, the borrower is eligible for loan forgiveness up to the amount the
borrower spends on certain eligible costs during the covered 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. Collateral
or guarantor support is not required for the loan.
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 utilized the entire balance of the loan
proceeds in accordance with the Program's guidelines and subsequently applied
for forgiveness with the Small Business Administration.
During the three months ended March 31, 2021, approximately $1.1 million of the
loans and $8,000 of associated interest were forgiven by the Small Business
Administration. As of March 31, 2022, all loan proceeds received under the
Program and related interest has been forgiven by the Small Business
Administration. Debt forgiven in accordance with the Program is recognized in
the Condensed Consolidated Statements of Operations as a gain on debt
extinguishment.
Government regulations
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.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19
pandemic. The CARES Act, among other things, permits net operating loss
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 adoption of these provisions did not have a
material impact on the Company's financial position or results of operations.
On December 27, 2020, the Consolidated Appropriations Act, 2021 (the
"Appropriations Act") was enacted in response to the COVID-19 pandemic. The
Appropriations Act, among other things, temporarily extends through December 31,
2025, certain expiring tax provisions, including look-through treatment of
payments of dividends, interest, rents, and royalties received or accrued from
related controlled foreign corporations. Additionally, the Appropriations
Act enacts new provisions and extends certain provisions originated within the
CARES Act, including an extension of time for repayment of the deferred portion
of employees' payroll tax through December 31, 2021, and a temporary allowance
for full deduction of certain business meals. Avalon has elected not to defer
the employees' portion of payroll tax. The adoption of the Appropriations Act
did not result in a material tax or cash benefit.
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.
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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.
Unfavorable general economic conditions could adversely affect our business and
financial results
Our operations are substantially affected by economic conditions, including
inflationary pressures, which can impact consumer disposable income levels and
spending habits. Economic conditions can also be impacted by a variety of
factors including epidemics, pandemics and actions taken by governments to
manage economic matters, whether through initiatives intended to control wages,
unemployment, inflation, taxation and other economic drivers. Adverse economic
conditions could pressure Avalon's business and operating performance and
financial results may suffer.
Challenges with respect to labor, including availability and cost, could impact
our business and results of operations
Avalon's success depends in part on our ability to recruit, motivate and retain
qualified individuals to work in an intensely competitive labor market. We have
experienced, and may continue to experience, challenges in adequately staffing,
which can negatively impact operations. Our ability to meet labor needs is
generally subject to external factors, including the availability of sufficient
workforce, unemployment levels and prevailing wages in the markets in which we
operate. Increased costs and competition associated with recruiting, motivating
and retaining qualified employees could have a negative impact on Avalon's
operating margins and profitability.
Changes in commodity and other operating costs could adversely affect our
results of operations
The profitability of our golf and related operations segment depends on our
ability to anticipate and react to changes in commodity costs, including food,
supplies, fuel, utilities and other operating costs, including labor. Volatility
in certain commodity prices and fluctuations in labor costs have adversely
affected, and in the future, could adversely affect Avalon's operating results.
An increase in commodity costs could have an adverse impact on our
profitability.
Effective succession planning is important to our continued success
Effective succession planning is important to our long-term success. Failure to
effectively identify, develop and retain key personnel, recruit high-quality
candidates and ensure smooth management and personnel transitions could disrupt
our business and adversely affect our results.
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.
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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 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 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.
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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, the Company
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. 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. On October 6, 2020 and in response to a motion from the Division,
the Court dismissed this complaint for writ of mandamus.
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 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. 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. On September 23, 2020, the Supreme Court of Ohio
ruled in favor of the Company. The Supreme Court of Ohio reversed the decision
of the 11th Appellate District Court and remanded the case back to that court
for a trial on the merits. The trial occurred in September and October 2021. The
Company is currently awaiting judgment from the 11th Appellate District Court.
On May 24, 2021, the Company received Chief's Orders from the Division vacating
the September 3, 2014 suspension orders for AWMS #2 and setting conditions for
restart of that well. Among these conditions was a limit placed on the
seismicity within three miles of the well. Under the Order, if a seismic event
with a magnitude 2.1 or above occurs, the well must cease operations for an
indefinite period of time until concurrence for subsequent restart is received
from the Division. The Company appealed the May 2021 Chief's Order to the Ohio
Oil and Gas Commission, seeking reasonable operating conditions that will allow
the facility to operate profitably while protecting human health and property. A
hearing in this matter occurred in February 2022. The Company is currently
awaiting judgment.
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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 golf facilities and The Grand Resort will result in
additional memberships in the Avalon Golf and Country Club. The ability to
retain current members and attract new members has been an ongoing challenge.
Although Avalon was able to increase the number of members of the Avalon Golf
and Country Club, as of March 31, 2022, Avalon has not attained its membership
goals. There can be no assurance as to when such goals will be attained. 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.
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AVALON HOLDINGS CORPORATION 
