AVALON HOLDINGS CORP - Quarter Report: 2020 June (Form 10-Q)

 

 

2020

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

__________________________________

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2020

 

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from _______________ to ________________

 

Commission file number 1-14105

__________________________________

 

AVALON HOLDINGS CORPORATION

 (Exact name of registrant as specified in its charter) 

 

Ohio		34-1863889
(State or other jurisdiction  of incorporation or organization)		(I.R.S. Employer Identification No.)
One American Way, Warren, Ohio		44484-5555
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (330) 856-8800

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.01 par value	AWX	NYSE American

 

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☑

Emerging Growth Company ☐

                       

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

 

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

 

The registrant had 3,263,647 shares of its Class A Common Stock and 611,784 shares of its Class B Common Stock outstanding as of August 3, 2020.

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		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2020				2019				2020				2019
Net operating revenues:
Waste management services		$	9,088			$	12,902			$	20,221			$	24,336
Food, beverage and merchandise sales			1,361				2,358				2,396				3,440
Other golf and related operations			2,618				3,165				4,853				5,257
Total golf and related operations			3,979				5,523				7,249				8,697
Total net operating revenues			13,067				18,425				27,470				33,033
Costs and expenses:
Waste management services operating costs			7,211				10,296				16,080				19,544
Cost of food, beverage and merchandise			564				999				1,092				1,514
Golf and related operations operating costs			2,875				3,563				5,507				6,095
Depreciation and amortization expense			712				618				1,411				1,218
Selling, general and administrative expenses			1,927				2,380				4,159				4,611
Operating income (loss)			(222	)			569				(779	)			51
Other income (expense):
Interest expense			(304	)			(215	)			(611	)			(378	)
Other income, net			103				148				181				216
Income (loss) before income taxes			(423	)			502				(1,209	)			(111	)
Provision for income taxes			24				57				68				97
Net income (loss)			(447	)			445				(1,277	)			(208	)
Less net loss attributable to non-controlling interest in subsidiary			(12	)			(34	)			(29	)			(49	)
Net income (loss) attributable to Avalon Holdings Corporation common shareholders		$	(435	)		$	479			$	(1,248	)		$	(159	)
Income (loss) per share attributable to Avalon Holdings Corporation common shareholders:
Basic net income (loss) per share		$	(0.11	)		$	0.12			$	(0.32	)		$	(0.04	)
Diluted net income (loss) per share		$	(0.11	)		$	0.12			$	(0.32	)		$	(0.04	)
Weighted average shares outstanding - basic			3,875				3,875				3,875				3,875
Weighted average shares outstanding - diluted			3,875				3,894				3,875				3,875

 

		June 30,				December 31,
		2020				2019
Assets
Current Assets:
Cash and cash equivalents		$	5,529			$	1,446
Accounts receivable, less allowance for doubtful accounts of $271 at June 30, 2020 and $275 at December 31, 2019			7,809				12,009
Unbilled membership dues receivable			1,109				602
Inventories			1,072				813
Prepaid expenses			559				725
Other current assets			15				15
Total current assets			16,093				15,610
Property and equipment, net			50,341				48,978
Property and equipment under finance leases, net			6,053				5,878
Operating lease right-of-use assets			1,500				1,466
Restricted cash			4,934				7,185
Noncurrent deferred tax asset			8				8
Other assets, net			37				39
Total assets		$	78,966			$	79,164
Liabilities and Equity
Current liabilities:
Current portion of long-term debt		$	2,146			$	1,015
Current portion of obligations under finance leases			353				295
Current portion of obligations under operating leases			528				513
Accounts payable			8,661				11,719
Accrued payroll and other compensation			1,052				961
Accrued income taxes			41				93
Other accrued taxes			252				434
Deferred membership dues revenue			4,776				3,153
Other liabilities and accrued expenses			919				839
Total current liabilities			18,728				19,022
Long-term debt, net of current portion			22,703				21,570
Obligations under finance leases, net of current portion			773				555
Obligations under operating leases, net of current portion			972				953
Asset retirement obligation			100				100
Equity:
Avalon Holdings Corporation Shareholders' Equity:
Class A Common Stock, $.01 par value			33				33
Class B Common Stock, $.01 par value			6				6
Paid-in capital			59,150				59,147
Accumulated deficit			(23,404	)			(22,156	)
Total Avalon Holdings Corporation Shareholders' Equity			35,785				37,030
Non-controlling interest in subsidiary			(95	)			(66	)
Total equity			35,690				36,964
Total liabilities and equity		$	78,966			$	79,164

 

		For the Three Months Ended June 30, 2020
																										Total
		Common Stock																								Avalon				Non-controlling
		Shares								Amount								Paid-in				Accumulated				Shareholders'				Interest in
		Class A				Class B				Class A				Class B				Capital				Deficit				Equity				Subsidiary				Total
Balance at April 1, 2020			3,263,647				611,784			$	33			$	6			$	59,148			$	(22,969	)		$	36,218			$	(83	)		$	36,135
Stock options - compensation costs			-				-				-				-				2				-				2				-				2
Net loss			-				-				-				-				-				(435	)			(435	)			(12	)			(447	)
Balance at June 30, 2020			3,263,647				611,784			$	33			$	6			$	59,150			$	(23,404	)		$	35,785			$	(95	)		$	35,690

		For the Three Months Ended June 30, 2019
																										Total
		Common Stock																								Avalon				Non-controlling
		Shares								Amount								Paid-in				Accumulated				Shareholders'				Interest in
		Class A				Class B				Class A				Class B				Capital				Deficit				Equity				Subsidiary				Total
Balance at April 1, 2019			3,263,647				611,784			$	33			$	6			$	59,142			$	(22,339	)		$	36,842			$	(1	)		$	36,841
Stock options - compensation costs			-				-				-				-				2				-				2				-				2
Net income (loss)			-				-				-				-				-				479				479				(34	)			445
Balance at June 30, 2019			3,263,647				611,784			$	33			$	6			$	59,144			$	(21,860	)		$	37,323			$	(35	)		$	37,288

		For the Six Months Ended June 30, 2020
																										Total
		Common Stock																								Avalon				Non-controlling
		Shares								Amount								Paid-in				Accumulated				Shareholders'				Interest in
		Class A				Class B				Class A				Class B				Capital				Deficit				Equity				Subsidiary				Total
Balance at January 1, 2020			3,263,647				611,784			$	33			$	6			$	59,147			$	(22,156	)		$	37,030			$	(66	)		$	36,964
Stock options - compensation costs			-				-				-				-				3				-				3				-				3
Net loss			-				-				-				-				-				(1,248	)			(1,248	)			(29	)			(1,277	)
Balance at June 30, 2020			3,263,647				611,784			$	33			$	6			$	59,150			$	(23,404	)		$	35,785			$	(95	)		$	35,690

		For the Six Months Ended June 30, 2019
																										Total
		Common Stock																								Avalon				Non-controlling
		Shares								Amount								Paid-in				Accumulated				Shareholders'				Interest in
		Class A				Class B				Class A				Class B				Capital				Deficit				Equity				Subsidiary				Total
Balance at January 1, 2019			3,263,647				611,784			$	33			$	6			$	59,141			$	(21,701	)		$	37,479			$	14			$	37,493
Stock options - compensation costs			-				-				-				-				3				-				3				-				3
Net loss			-				-				-				-				-				(159	)			(159	)			(49	)			(208	)
Balance at June 30, 2019			3,263,647				611,784			$	33			$	6			$	59,144			$	(21,860	)		$	37,323			$	(35	)		$	37,288

 

		Six Months Ended June 30,
		2020				2019
Cash flows from operating activities:
Net loss		$	(1,277	)		$	(208	)
Reconciliation of net loss to cash provided by operating activities:
Depreciation and amortization expense			1,411				1,218
Amortization of debt issuance costs			21				13
Compensation costs - stock options			3				3
Provision for losses on accounts receivable			14				18
(Gain) loss from disposal of equipment			3				(45	)
Change in operating assets and liabilities, net of effect of acquisition
Accounts receivable			4,186				(92	)
Unbilled membership dues receivable			(507	)			(547	)
Inventories			(259	)			(93	)
Prepaid expenses			166				131
Other assets			2				(27	)
Accounts payable			(3,303	)			46
Accrued payroll and other compensation			91				350
Accrued income taxes			(52	)			18
Other accrued taxes			(182	)			(109	)
Deferred membership dues revenue			1,623				1,598
Other liabilities and accrued expenses			80				114
Net cash provided by operating activities			2,020				2,388
Cash flows from investing activities:
Capital expenditures			(2,316	)			(2,867	)
Payments related to acquisition of New Castle Country Club			-				(90	)
Proceeds from disposal of vehicle			-				45
Net cash used in investing activities			(2,316	)			(2,912	)
Cash flows from financing activities:
Proceeds under term loan facility			-				3,000
Proceeds under Paycheck Protection Program			2,765				-
Payments of debt issuance costs			-				(47	)
Principal payments on term loan facilities			(522	)			(338	)
Repayment under line of credit facility			-				(134	)
Principal payments on finance lease obligations			(115	)			(84	)
Net cash provided by financing activities			2,128				2,397
Increase in cash, cash equivalents and restricted cash			1,832				1,873
Cash, cash equivalents and restricted cash at beginning of period			8,631				1,908
Cash, cash equivalents and restricted cash at end of period		$	10,463			$	3,781
Supplemental disclosure of cash flow information:
Significant non-cash operating and investing activities:
Capital expenditures included in accounts payable		$	245			$	1,598
Significant non-cash investing and financing activities:
Operating lease right-of-use assets in exchange for lease obligations		$	266			$	1,807
Finance lease obligations incurred		$	391			$	33
Acquisition of New Castle Country Club real property in exchange for assumption of outstanding debt		$	-			$	787
Cash paid during the period for interest		$	585			$	353
Cash paid during the period for income taxes		$	120			$	79

 

Note 1. Description of Business

 

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

 

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

 

Note 2. Basis of Presentation

 

The unaudited condensed consolidated financial statements of Avalon and related notes included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted consistent with such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in Avalon’s 2019 Annual Report to Shareholders.

 

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

 

In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position of Avalon as of June 30, 2020, and the results of its operations and cash flows for the interim periods presented.

 

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

 

The coronavirus/COVID-19 pandemic (collectively referred to herein as "COVID-19") has adversely impacted our financial position, results of operations, and cash flows for the first six months of 2020. The unaudited Condensed Consolidated Financial Statements presented herein reflect our current estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods presented. Due to the ongoing uncertainty, we cannot predict the future impact that COVID-19 may have on our financial condition, results of operations or cash flows.

 

Note 3. Recent Accounting Pronouncements

 

Adopted Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement as either rental expense for operating leases and depreciation and interest expense for finance leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. On January 1, 2019, the Company adopted ASU 2016-02 under the modified retrospective method with the available practical expedients. As a result of adoption, on January 1, 2019, the Company recorded a ROU asset and related lease liability of approximately $1.7 million for its existing golf carts, machinery and equipment for the landfill operations, furniture and fixtures for The Grand Resort and office copiers under operating leases (See Note 7).

 

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduced an approach to estimate credit losses on certain types of financial instruments, including trade receivables, based on expected losses. ASU 2016-13, which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, required companies to make a cumulative-effect adjustment to retained earnings as of January 1, 2020. The Company adopted ASU 2016-13 effective January 1, 2020. The adoption of ASU 2016-13 did not have an impact on the Company’s financial position or results of operations (See Note 5).

 

Note 4. Cash, Cash Equivalents and Restricted Cash

 

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

 

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

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows. Cash, cash equivalents and restricted cash consist of the following at June 30, 2020 and December 31, 2019 (in thousands):

 

 

 

Note 5. Revenues

 

Revenue Recognition

 

The Company identifies a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when obligations under the terms of the contract with our customer are satisfied; generally this occurs with the transfer of control of the good or service to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The Company does not incur incremental costs to obtain contracts or costs to fulfill contracts that meet the criteria for capitalization. In addition, the Company does not have material significant payment terms as payment is received at or shortly after the point of sale.

 

Waste Management Services

 

Avalon’s waste management services provide hazardous and nonhazardous waste brokerage and management services, captive landfill management services and salt water injection well operations. Waste management services are provided to industrial, commercial, municipal and governmental customers primarily in selected northeastern and midwestern United States markets.

 

Avalon’s waste brokerage and management business assists customers with managing and disposing of wastes at approved treatment and disposal sites based upon a customer’s needs. Avalon provides a service to its customers whereby Avalon, arranges for, and accepts responsibility for the removal, transportation and disposal of waste on behalf of the customer.

 

 

Avalon’s landfill management business provides technical and operational services to customers owning captive disposal facilities. A captive disposal facility only disposes of waste generated by the owner of such facility. The Company provides turnkey services, including daily operations, facilities management and management reporting for its customers. Currently, Avalon manages one captive disposal facility located in Ohio. The net operating revenues of the captive landfill operations are almost entirely dependent upon the volume of waste generated by the owner of the landfill for whom Avalon manages the facility.

 

Avalon is a minority owner with managerial control over two salt water injection wells and its associated facility. Operations of the salt water injection wells have been suspended in accordance with the Chief of the Division of Oil and Gas Resources Management order (See Note 15). Due to the suspension of the salt water injection wells, there were no operating revenues for the three and six months ended June 30, 2020 and 2019.

 

For both the three months ended June 30, 2020 and 2019, the net operating revenues related to waste management services represented approximately 70% of Avalon’s total consolidated net operating revenues. For both the six months ended June 30, 2020 and 2019, the net operating revenues related to waste management services represented approximately 74% of Avalon’s total consolidated net operating revenues. For both the six months ended June 30, 2020 and 2019, no one customer individually accounted for 10% or more of Avalon’s waste management services segment revenues.

 

For our waste management services contracts, the customer contracts with us to provide a series of distinct waste management services over time which integrates a set of tasks (i.e. removal, transportation and disposal of waste) into a single project. Avalon provides substantially the same service over time and the same method is used to measure the Company’s progress toward complete satisfaction of the performance obligation to transfer each distinct service in the series to the customer. The series of distinct waste management services, which are the same over time, meets the series provision criteria, and as such, the Company treats that series as a single performance obligation. The Company allocates the transaction price to the single performance obligation and recognizes revenue by applying a single measure of progress to that performance obligation. Avalon transfers control of the service over time and, therefore, satisfies the performance obligation and recognizes the revenue over time as the customer simultaneously receives and consumes the benefits provided by Avalon’s performance as we perform.

 

In addition, as the promise to provide services qualifies as a series accounted for as a single performance obligation, the Company applied the practical expedient guidance that allows an entity that is recognizing revenue over time by using an output method to recognize revenue equal to the amount that the entity has the right to invoice if the invoiced amount corresponds directly to the value transferred to the customer. The Company applied the standard's practical expedient that permits the omission of disclosures relating to unsatisfied performance obligations as most of the Company’s waste management service contracts (i) have an original expected length of one year or less and (ii) the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.

 

Avalon evaluated whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). Avalon reports waste management services on a gross basis, that is, amounts billed to our customers are recorded as revenues, and amounts paid to vendors for providing those services are recorded as operating costs. As principal, Avalon is primarily responsible for fulfilling the promise to provide waste management services for the customer. Avalon accepts credit risk in the event of nonpayment by the customer and is obligated to pay vendors who provide the service regardless of whether the customer pays the Company. Avalon does have a level of discretion in establishing the pricing for its service.

 

Our payment terms vary by the type and location of our customer and the service offered. Avalon does not have any financing arrangements with its customers. The term between invoicing and when payment is due is not significant.

 

The Company assesses each contract amendment individually. Typically, amendments made to our contracts do not materially change the terms of the agreement or performance obligation of the Company. The Company accounts for such contract amendments as if it were part of the existing contract as the material terms contained in the contract do not change. In cases where Avalon views there is a material change in the terms of the agreement, the Company will reevaluate and determine if the contract should be viewed as an entirely new contract, replacement contract or a continuation of the existing contract.

 

Consideration promised in our waste management contracts do not typically include material variable amounts such as discounts, rebates, refunds, credits, price concessions, incentives, penalties or other such items, and, as such, no estimate is made by the Company for such items.

 

 

Golf and Related Operations

 

Avalon’s golf and related operations include the operation and management of four golf courses and associated clubhouses, recreation and fitness centers, tennis courts, salon and spa services, dining and banquet facilities and a travel agency. The golf and related operations also include the operation of a hotel and its related amenities including dining, banquet and conference facilities, fitness center, indoor junior Olympic size swimming pool and tennis courts. Revenues for the golf and related operations consists primarily of food beverage and merchandise sales, membership dues, greens fees and associated cart rentals, room rentals, fitness activities, salon and spa services. Due to adverse weather conditions, net operating revenues relating to the golf courses, which are located in northeast Ohio and Pennsylvania, were minimal during the first three months of 2020 and 2019.

 

For both the three months ended June 30, 2020 and 2019, the net operating revenues related to the golf and related operations represented approximately 30% of Avalon’s total consolidated net operating revenues. For both the six months ended June 30, 2020 and 2019, the net operating revenues related to the golf and related operations represented approximately 26% of Avalon’s total consolidated net operating revenues. For both the six months ended June 30, 2020 and 2019, no one customer individually accounted for 10% or more of Avalon’s golf and related operations segment revenues.

 

For Avalon’s golf and related operations, the Avalon Golf and Country Club offers membership packages for use of the country club facilities and its related amenities. Membership agreements are a one year noncancellable commitment and pricing varies based on the membership type selected by the customer. Based on the terms and conditions of the membership contract, resignations received within the membership period do not relieve the member of their annual commitment. Memberships automatically renew on the member’s anniversary date unless the member resigns for the upcoming membership period prior to the renewal date.

 

Membership for the Avalon Golf and Country Club does not contain up-front initiation fees or require monthly minimum spending at the facilities. Annual membership dues do not cover the cost of food, beverage or any other ancillary paid services which are made available to the member nor do they typically provide for discounts on these goods or services. Members have no obligation to purchase or utilize any of these additional goods or services. Avalon is not required to provide such goods or services unless requested and paid for at the point of sale by the member.

 

Under the terms of the contract, Avalon will provide unlimited use and access to the country club facilities. Avalon’s performance obligation in the contract is the “stand ready obligation” to provide access to these facilities for the member for the entire membership term. Avalon providing the “stand ready obligation” for use of the facilities to the member over the entire term of the membership agreement represents a single performance obligation of which Avalon expects the member to receive and consume the benefits of its obligation throughout the membership term, and as such, the Company recognizes membership dues on a straight line basis over the term of the contract. The Company applied the standard's practical expedient that permits the omission of disclosures relating to unsatisfied performance obligations for contracts with an original expected length of one year or less as Avalon Golf and Country Club membership agreements are one year in length.

 

For our hotel operations, Avalon’s performance obligation is to provide lodging facilities. The separate components of providing these services (hotel room, toiletry items, housekeeping, and amenities) are not distinct within the context of the contract as they are all highly dependent and interrelated as part of the obligation to provide the lodging facility. Room sales are driven by a fixed fee charged to a hotel guest to stay at The Grand Resort for an agreed upon period. The Company agrees to provide a room to the hotel guest for a specified time period for that agreed-upon rate. Our hotel room reservations are performance obligations satisfied over time as the hotel guest simultaneously receives and consumes the benefits provided by the hotel. For performance obligations satisfied over time, our hotel operations measure the progress toward complete satisfaction of the performance obligation and recognize revenue proportionately over the course of the customer’s stay.

 

For food, beverage, and merchandise sales, greens fees and associated cart rental, fitness activities, salon and spa services and other ancillary services, the transaction price is the set price charged by the Company for those goods or services. Upon purchase of the good or service, the Company transfers control of the good or service to the customer and the customer immediately consumes the benefits of the Company’s performance and, as such, we recognize revenue at the point of sale. Amounts paid in advance, such as deposits on overnight lodging or for banquet or conferences facilities, are recorded as a liability until the goods or services are provided to the customer (see Contract Liabilities below).

 

 

The following table presents our net operating revenues disaggregated by revenue source for the three and six months ended June 30, 2020 and 2019 (in thousands). Sales and other taxes are excluded from revenues.

 

 

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

 

Receivables, Net

 

Receivables, net, include amounts billed and currently due from customers. The amounts due are stated at their net realizable value. At June 30, 2020 and December 31, 2019, accounts receivable, net, related to our waste management services segment were approximately $6.1 million and $11.0 million, respectively. No one customer of the waste management services segment accounted for 10% or more of Avalon’s waste management services segment or consolidated net receivables at June 30, 2020. At December 31, 2019 one customer accounted for approximately 14% of the waste management services segment’s receivables and 13% of the consolidated receivables. Accounts receivable, net, related to our golf and related operations segment were approximately $1.7 million at June 30, 2020 and $1.0 million at December 31, 2019. No one customer of the golf and related operations segment accounted for 10% or more of Avalon’s golf and related operations segment or consolidated net receivables at June 30, 2020 or December 31, 2019.

 

The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. Customer accounts that are outstanding longer than the contractual payment terms are considered past due. Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, Avalon’s previous accounts receivable loss history, the customer’s current ability to pay its obligation to Avalon and the condition of the general economy and the industry as a whole. Avalon writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances. Allowance for doubtful accounts was approximately $0.3 million at both June 30, 2020 and December 31, 2019.

 

On January 1, 2020, the Company adopted the guidance under ASU 2016-13. ASU 2016-13 introduced a methodology for measuring estimated credit losses on certain types of financial instruments, including trade receivables, based on expected losses and the timing of when such losses are recorded. The adoption, which was applied on a modified retrospective basis, did not have an impact on the Company's financial condition and results of operations and therefore did not result in an adjustment to retained earnings as of January 1, 2020.

 

 

The following table presents changes in our allowance for doubtful accounts during the three and six months ended June 30, 2020 and 2019 (in thousands):

 

 

Contract Assets

 

Contract assets include unbilled membership dues receivables related to the Avalon Golf and Country Club for the customers membership commitment which are billed on a monthly basis over the course of the annual agreement. Such amounts are stated at their net realizable value. Contract assets related to unbilled membership dues are classified as current as revenue related to such agreements is recognized within the annual membership period. Unbilled membership receivables in our Condensed Consolidated Balance Sheets were approximately $1.1 million at June 30, 2020 and $0.6 million at December 31, 2019.

 

The following table presents changes in our contract assets during the three and six months ended June 30, 2020 and 2019 (in thousands):

 

 

Contract Liabilities

 

Contract liabilities include unrecognized or deferred revenues relating to membership dues and customer advance deposits. We record deferred revenue when cash payments are received in advance of satisfying our performance obligation. We classify deferred membership dues revenue as current based on the timing of when we expect to recognize revenue for the membership commitment based on the Company satisfying the stand ready performance obligation throughout the annual membership period. The unrecognized or deferred revenues related to membership dues in our Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019 were $4.8 million and $3.2 million, respectively. Customer advance deposits are recorded as a liability until the goods or services are provided to the customer. Generally, customer advances, and corresponding performance obligation are satisfied within 12 months of the date of receipt of advance payment. The unrecognized revenues related to customer advance deposits are recorded in “Other liabilities and accrued expenses” in our Condensed Consolidated Balance Sheets. Customer advance deposits were approximately $0.7 million at June 30, 2020 and $0.6 million at December 31, 2019.

 

 

The following table presents changes in our contract liabilities during the three and six months ended June 30, 2020 and 2019 (in thousands):

 

 

 

Note 6. Property and Equipment

 

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

 

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

 

Property and equipment at June 30, 2020 and December 31, 2019 consists of the following (in thousands):

 

 

At June 30, 2020, the Company did not have any significant fixed contractual commitments for construction projects.

 

Avalon reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If indicators of impairment exist, Avalon would determine whether the estimated undiscounted sum of the future cash flows of such assets and their eventual disposition is less than its carrying amount. If less, an impairment loss would be recognized if, and to the extent that the carrying amount of such assets exceeds their respective fair value. Avalon would determine the fair value by using quoted market prices, if available, for such assets; or if quoted market prices are not available, Avalon would discount the expected estimated future cash flows. During the first six months of 2020 and 2019, no triggering events were present.

 

 

 

Note 7. Leases

 

Operating Leases

 

Avalon leases golf carts, machinery and equipment for the landfill operations, furniture and fixtures for The Grand Resort and office copiers under operating leases. On January 1, 2019, as a result of the adopted ASU 2016-02, the Company recorded a ROU asset and related lease liability of approximately $1.7 million. Our operating leases have remaining lease terms ranging from 1 to 5 years. The weighted average remaining lease term on operating leases was approximately 3.1 years at June 30, 2020.

 

In connection with the purchase of New Castle Country Club’s real property assets on May 13, 2019, the Company assumed the remaining term of New Castle Country Club’s golf cart operating lease. At acquisition, the Company recorded an operating lease right-of-use asset and corresponding obligation under operating leases of approximately $126,000. The golf cart operating lease had a remaining lease term of 3 years at the acquisition date (See Note 16). In addition, subsequent to the purchase, the Company entered into new operating lease agreements for golf and maintenance carts. The Company recorded an operating lease right-of-use asset and corresponding obligation under operating leases of approximately $194,000.

 

During the first six months of 2020, the Company entered into a new operating lease agreement for hotel furniture. The Company recorded an operating lease right-of-use asset and corresponding obligation under the operating lease of approximately $266,000.

 

Leased property and associated obligations under operating leases at June 30, 2020 and December 31, 2019 consists of the following (in thousands):

 

 

The weighted average discount rate on operating leases was 4.96% at June 30, 2020 and 5.01% at December 31, 2019.

 

Finance Leases

 

In November 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations. Based upon the amount of leasehold improvements already made, Avalon expects to exercise all its remaining renewal options. At June 30, 2020 there were approximately 33.3 years remaining on the golf course and related facilities finance lease.

 

In addition, the golf and related operations also entered into lease agreements for vehicles, golf course maintenance and restaurant equipment and the captive landfill operations entered into lease agreements for equipment which were determined to be finance leases. At June 30, 2020, the vehicles, golf course maintenance and restaurant equipment and the landfill operations equipment have remaining lease terms ranging from 1 to 5 years. The weighted average remaining lease term on the vehicles and equipment leases was approximately 3.2 years at June 30, 2020.

 

 

Leased property and associated obligations under finance leases at June 30, 2020 and December 31, 2019 consists of the following (in thousands):

 

 

The weighted average discount rate on finance leases was 4.7% at June 30, 2020 and 5.2% at December 31, 2019.

 

For the three and six months ended June 30, 2020 and 2019, components of lease expense were as follows (in thousands):

 

 

Future commitments under long-term, operating and finance leases at June 30, 2020 are as follows (in thousands):

 

 

 

Note 8. Basic and Diluted Net Income (Loss) per Share

  

Basic net loss per share attributable to Avalon Holdings Corporation common shareholders is computed by dividing the net loss by the weighted average number of common shares outstanding. For both the three and six months ended June 30, 2020 and 2019, the weighted average number of common shares outstanding was 3,875,431.

 

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

 

 

For both the three and six months ended June 30, 2020, the diluted per share amount reported is equal to the basic per share amount because Avalon was in a net loss position and as a result, such dilution would be considered anti-dilutive. Assuming dilution, the diluted per share amount is equal to the basic per share amount because the average market price of Avalon’s common shares during the period was less than the exercise price of the stock options outstanding.

 

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

 

 

Note 9. Term Loans and Line of Credit Agreements

 

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 million 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.

 

 

The Company capitalized approximately $0.4 million of debt issuance costs in connection with the New Term Loan Agreement. The Company will amortize these costs over the life of the New Term Loan Agreement. In accordance with ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, these costs are presented in the Condensed Consolidated Balance Sheets as a direct reduction from the carrying amount of the term loan liability.

 

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.

 

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. The Company is accounting for the loans in accordance with Accounting Standards Codification (“ASC”) 470 – Debt. Under ASC 470, the debt will be derecognized when the debt is extinguished in accordance with the guidance in ASC 405-20, Liabilities: Extinguishments of Liabilities. When the debt is forgiven in accordance with the Program, any amount that is forgiven will be recognized in the Condensed Consolidated Statements of Operations as a gain on debt extinguishment. The Company will repay amounts that are not forgiven or utilized.

 

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.

 

 

Obligations under the Company’s debt agreements at June 30, 2020 and December 31, 2019 consist of the following (in thousands):

 

 

 

At June 30, 2020, future maturities of long-term debt are as follows (in thousands):

 

 

 

Note 10. Income Taxes

 

During the three month period ended June 30, 2020, net loss attributable to Avalon Holdings Corporation shareholders was $0.4 million compared to net income attributable to Avalon Common shareholders of $0.5 million for the three month period ended June 30, 2019. During the six month periods ended June 30, 2020 and 2019, net loss attributable to Avalon Holdings Corporation shareholders was $1.2 million and $0.2 million, respectively. Avalon recorded a state income tax provision in both the three and six month periods ended June 30, 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.

 

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.

 

 

 

Note 11. Long-Term Incentive Plan

 

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

 

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

 

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

 

At June 30, 2020, options to purchase 280,000 shares have been granted under the 2009 Plan. Of these, 12,000 shares have been exercised, and options for 268,000 shares remain outstanding. In March 2020, unexercised options to purchase 420,000 shares previously granted under the 2009 Plan expired as the options were not exercised within ten years after the grant date.

 

NQSO’s may be granted with an exercise price which is not less than 100% of the fair market value of the Class A Common Stock on the date of grant. Options designated as ISO’s shall not be less than 110% of fair market value for employees who are ten percent shareholders and not less than 100% of fair market value for other employees. The Board of Directors may, from time to time in its discretion, grant options to one or more outside directors, subject to such terms and conditions as the Board of Directors may determine, provided that such terms and conditions are not inconsistent with other applicable provisions of the Option Plan. Options shall have a term of no longer than ten years from the date of grant; except that for an option designated as an ISO which is granted to a ten percent shareholder, the option shall have a term no longer than five years.

 

No option shall be exercisable prior to one year after its grant, unless otherwise provided by the Option Committee of the Board of Directors (but in no event before 6 months after its grant), and thereafter options shall become exercisable in installments, if any, as provided by the Option Committee. Options must be exercised for full shares of common stock. To the extent that options are not exercised when they become initially exercisable, they shall be carried forward and be exercisable until the expiration of the term of such options. No option may be exercised by an optionee after his or her termination of employment for any reason with Avalon or an affiliate, except in certain situations provided by the Option Plan.

 

The stock options, vest ratably over a five year period and have a contractual term of ten years from the date of grant. At the end of each contractual vesting period, the share price of the Avalon common stock, traded on a public stock exchange (NYSE Amex), must reach a predetermined price within three years following such contractual vesting period before the stock options are exercisable (See table below). If the Avalon common stock price does not reach the predetermined price, the stock options will either be cancelled or the period will be extended at the discretion of the Board of Directors. In 2018, the Board of Directors extended the period of time for certain vested options that were not exercisable due to those options not meeting the predetermined stock price within the three years following the contractual vesting period.

 

The grant-date fair values of the stock option awards were estimated using the Monte Carlo Simulation. The Monte Carlo Simulation was selected to determine the fair value because it incorporates six minimum considerations; 1) the exercise price of the option, 2) the expected term of the option, taking into account both the contractual term of the option, the effects of employees’ expected exercise and post-vesting employment termination behavior, as well as the possibility of change in control events during the contractual term of the option agreements, 3) the current fair value of the underlying equity, 4) the expected volatility of the value of the underlying share for the expected term of the option, 5) the expected dividends on the underlying share for the expected term of the option and 6) the risk-free interest rate(s) for the expected term of the option.

 

 

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

 

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

 

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

 

The following table is a summary of the stock option activity during 2020:                     

 

 

The stock options vest and become exercisable based upon achieving two critical metrics as follows:

1)	Contract Vesting Term: The stock options vest ratably over a five year period.

2)	The Avalon common stock price traded on a public stock exchange (NYSE Amex) must reach the predetermined vesting price within three years after the options become vested under the contractual vesting term.

 

The table below represents the period and predetermined stock price needed for vesting.

 

 

Compensation costs were approximately $2,000 for both the three months ended June 30, 2020 and 2019, and $3,000 for both the six months ended June 30, 2020 and 2019, based upon the estimated grant date fair value calculations. As of June 30, 2020, there was approximately $15,000 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.92 years.

 

 

 

Note 12. Legal Matters

 

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

 

Note 13. Business Segment Information

 

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

 

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

 

Avalon’s golf and related operations segment consists of four golf courses and associated clubhouses which provide dining and banquet facilities, a hotel which provides lodging and resort related amenities including dining, banquet and conference facilities, a multipurpose recreation center and a travel agency. Revenue for the golf and related operations segment consists primarily of membership dues, greens fees, cart rentals, room rentals, merchandise sales, tennis and fitness activities, salon and spa services and food and beverage sales.

 

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

 

For both the six months ended June 30, 2020 and 2019, no one customer accounted for 10% of Avalon’s consolidated or reportable segment net operating revenues.

 

The accounting policies of the segments are consistent with those described for the consolidated financial statements in the summary of significant accounting policies included in Avalon’s 2019 Annual Report to Shareholders. Avalon measures segment profit for internal reporting purposes as income (loss) before taxes.

 

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

 

 

 

 

 

In comparing the total assets at June 30, 2020 with those at December 31, 2019, the decrease in the total assets of the waste management services segment of $3.1 million is primarily a result of a decrease in accounts receivable partially offset by an increase in intersegment transactions, which are eliminated in consolidation. The increase in total assets of the golf and related operations segment of $3.2 million was primarily due to an increase in accounts receivable and capital expenditures related to the expansion of The Grand Resort partially offset by current year depreciation on property and equipment. The increase in corporate total assets of approximately $2.8 million is primarily due to an increase in cash and cash equivalents and intersegment transactions, which are eliminated in consolidation, partially offset by a decrease in restricted cash utilized for the expansion of The Grand Resort.