Executive Summary / Key Takeaways

• Avalon Holdings operates a diversified business across waste management services and golf/resort operations, a structure shaped by its history and strategic acquisitions like The Grand Resort.
• Recent performance in Q1 2025 saw a significant decline in overall revenue and increased net loss, primarily driven by a slowdown in the Waste Management segment's event work and increased costs in the Golf segment.
• The company faces ongoing, material risks from protracted legal battles concerning its suspended saltwater injection wells and challenges inherent to its smaller scale and limited technological investment compared to larger industry peers.
• Despite operational expertise in niche areas and strategic investments in its resort properties, AWX's financial health, characterized by working capital deficits and lower margins than competitors, remains pressured by economic conditions, labor costs, and competitive intensity.
• Future performance hinges on the successful execution of internal growth strategies in waste management, the ability to drive membership and room revenue in golf operations amidst cost pressures, and the resolution (or continued management) of significant legal and regulatory uncertainties.

A Dual Identity in Challenging Markets

Avalon Holdings Corporation, trading under the ticker $AWX, presents investors with a unique proposition: a company operating across two seemingly disparate industries – waste management services and golf and related resort operations. This dual identity is rooted in the company's formation in 1998 as a spin-off from American Waste Services and has evolved through strategic moves, including the significant 2014 acquisition of The Grand Resort. This history has shaped a business model that seeks stability through diversification, aiming to leverage operational expertise in niche waste services while capitalizing on the hospitality and leisure market.

In the waste management sector, AWX focuses on specialized services like hazardous and nonhazardous waste brokerage, captive landfill management, and historically, saltwater injection wells. Unlike larger, integrated players, Avalon does not own a vast network of landfills or collection fleets. Instead, its strength lies in its brokerage network and technical services, providing tailored solutions to industrial, commercial, municipal, and governmental clients, primarily in the northeastern and midwestern U.S. This approach allows for flexibility and responsiveness, particularly for complex or one-time projects. However, this also positions AWX against formidable national competitors like Waste Management (WM), Republic Services (RSG), Clean Harbors (CLH), and Waste Connections (WCN). These larger rivals benefit from significant economies of scale, extensive infrastructure, and often, more advanced technological capabilities. While AWX's regional focus and specialized expertise can offer cost efficiencies in specific niches (e.g., potentially lower per-unit costs in localized landfill management), it generally operates with lower gross, operating, and net margins compared to these industry giants. For instance, AWX's latest TTM Gross Profit Margin stands at 19.18%, significantly below WM's 39% or RSG's 42%. The competitive landscape is further intensified by industry consolidation, which can limit disposal options and increase pricing pressure, challenging AWX's ability to pass on rising costs.

The Golf and Related Operations segment, anchored by four golf courses, country clubs, and The Grand Resort hotel, represents Avalon's foray into leisure and hospitality. The strategic intent behind integrating these assets, particularly the year-round operation of the resort, is to create a self-contained destination that drives membership and utilization across all facilities. Revenue streams include membership dues, room rentals, food and beverage sales, and various amenity services. This segment operates in a localized, competitive environment, vying with other public and private clubs. Success here depends heavily on consumer discretionary spending, membership retention and growth, and the ability to manage operating costs, which are subject to volatility in areas like labor and utilities.

From a technological standpoint, AWX's differentiation appears to stem more from operational know-how and established networks rather than proprietary, cutting-edge technology in the way larger waste companies invest in AI-driven logistics or advanced sorting. Despite lacking proprietary, quantifiable technology differentiators, the company's technical services in landfill management are a form of specialized expertise. However, the lack of significant R&D investment (negligible compared to competitors' modest spending) suggests a potential vulnerability to rivals whose technological advancements could lead to superior efficiency and cost structures over time. The "so what" for investors is that while AWX can compete effectively in specific regional or service niches based on its operational model, it may struggle to match the scale-driven efficiencies and technological advantages of larger competitors, potentially limiting its long-term growth and margin expansion potential in the waste sector.

Recent Performance Under Pressure

The first quarter of 2025 revealed significant headwinds for Avalon. Total net operating revenues decreased by 14.8% to $16.1 million, down from $18.9 million in Q1 2024. This decline was primarily attributable to a substantial 22.4% drop in the Waste Management Services segment's revenue, which fell from $12.5 million to $9.7 million. Management attributed this decrease to lower activity in both continuous work and event work projects. Event work, characterized as one-time bid projects, saw a notable decrease of approximately $2.2 million, highlighting the volatility inherent in this type of business. Continuous work also declined by about $0.8 million due to reduced activity from multiple customers. Despite the revenue decrease, the waste brokerage and management business saw a slight improvement in its gross margin percentage, rising from 21% to 22%, primarily linked to increased gross profit from continuous work. However, segment income before income taxes still decreased from $1.2 million to $0.9 million. The captive landfill management operations provided a small offset, with revenues increasing from $0.7 million to $0.9 million. Critically, the saltwater injection well operations continued to generate losses ($0.1 million in both periods) due to legal and professional costs, as operations remain suspended.

The Golf and Related Operations segment's revenue remained relatively flat year-over-year at approximately $6.4 million. However, the segment's loss before income taxes widened significantly, increasing from $0.8 million in Q1 2024 to $1.1 million in Q1 2025. This deterioration was primarily driven by a decrease in membership dues revenue ($1.8 million vs. $2.0 million), attributed to a lower membership count, coupled with increased operating costs. These cost increases were mainly due to higher wages and utility expenses. On a positive note, room rental revenue increased from $1.0 million to $1.1 million due to higher average room rates, and other revenues (athletic, fitness, salon/spa) also saw a modest increase. As expected due to seasonality and weather, greens fees remained minimal in both periods.

Consolidated results reflected the segment performance, with the operating loss increasing from $0.5 million in Q1 2024 to $1.2 million in Q1 2025. The net loss attributable to Avalon Holdings common shareholders widened to $1.5 million, or $0.38 per share, compared to a net loss of $1.0 million, or $0.25 per share, in the prior-year quarter.

Financially, the company's working capital position deteriorated, moving from a deficit of approximately $0.9 million at December 31, 2024, to a deficit of $2.3 million at March 31, 2025. This was primarily due to increases in accounts payable, accrued payroll, and deferred membership dues revenue (driven by the timing of annual renewals), partially offset by increases in accounts receivable (also influenced by golf membership renewals), inventory, and prepaid assets.

Strategic Focus and Forward Outlook

Avalon's strategy centers on driving internal growth within its existing segments and managing its capital structure. In the waste management segment, the focus is on retaining existing customers and securing new business through sales and marketing efforts, emphasizing tailored solutions and cost efficiency. The company also seeks opportunities for integrated service offerings and bids on specialized projects.

For the golf and related operations, the strategy involves leveraging the integrated resort and golf facilities to attract and retain members and guests. Marketing efforts, including local advertising and promotions, are key to addressing the ongoing challenge of membership levels. The company also remains open to opportunistic acquisitions of struggling private clubs.

Capital expenditures for 2025 are projected to be in the range of $2.5 million to $3.5 million, primarily directed towards continued renovations at The Grand Resort, building improvements, and equipment purchases. These investments are expected to be funded by cash from a restricted project fund established from the 2022 Term Loan Agreement (which held approximately $8.9 million at March 31, 2025) and cash generated from operations.

Management expresses belief that anticipated cash from future operations, supplemented by potential borrowings from the existing $5 million line of credit (with $1.8 million available at March 31, 2025), will be sufficient to cover operating requirements and debt obligations. The company was in compliance with its debt covenants as of March 31, 2025.

However, the outlook remains clouded by significant uncertainties, particularly the protracted legal and regulatory challenges surrounding the saltwater injection wells. Despite favorable court rulings in the past, appeals continue, and the wells remain suspended. This situation not only eliminates a potential revenue stream but also incurs ongoing legal costs, contributing to segment losses. The conditions set for a potential restart, including a seismicity limit, introduce the risk of future indefinite suspensions.

Key Risks and Challenges

Several risks could impact Avalon's ability to execute its strategy and improve financial performance.

• Regulatory and Legal Headwinds: The ongoing suspension and legal battles over the saltwater injection wells represent a material risk, potentially resulting in continued losses, significant legal expenses, and uncertainty regarding future operations or potential damages from a regulatory taking.
• Economic Sensitivity: Both segments are vulnerable to economic downturns and inflation. Waste management can be impacted by reduced industrial activity, while golf and resort operations are sensitive to discretionary consumer spending. Rising costs (labor, utilities, commodities) due to inflation may be difficult to fully pass on in competitive markets, pressuring margins.
• Competitive Intensity: The waste management segment faces intense competition from larger, more efficient national players. AWX's smaller scale and potentially less advanced technology could limit its ability to compete on price and efficiency, risking market share erosion. The golf segment faces local competition for members and guests.
• Labor Availability and Cost: Challenges in recruiting and retaining qualified staff, particularly in a competitive labor market and for specialized roles in the waste segment, can increase operating costs and potentially impact service delivery.
• Contract Dependency: A significant portion of waste management revenue is not under long-term contracts, and golf memberships are annual. This creates dependency on ongoing customer relationships and renewals, which could be impacted by economic conditions or competitive offerings.
• Debt Obligations: While currently compliant, the company's loan agreements contain covenants. Failure to meet these could trigger early repayment obligations, requiring refinancing or other actions.

Conclusion

Avalon Holdings operates a complex business model spanning two distinct sectors, each with its own set of opportunities and challenges. The company's historical evolution has led to a diversified structure that provides some insulation but also exposes it to varied market dynamics and competitive pressures. Recent performance in the first quarter of 2025 highlights the sensitivity of the waste management segment to project timing and the cost pressures impacting the golf and resort operations.

The investment thesis for AWX appears to rest on its ability to leverage its niche operational expertise in waste management and capitalize on the integrated amenities of its golf and resort properties to drive consistent revenue and improve profitability. However, this is set against a backdrop of significant risks, most notably the unresolved legal status of the saltwater injection wells and the inherent challenges of competing with larger, technologically advanced players in the waste sector while managing cost volatility in hospitality.

Investors considering AWX must weigh the potential for operational improvements and strategic growth initiatives against the material uncertainties posed by ongoing litigation, macroeconomic sensitivity, and competitive disadvantages related to scale and technology. The company's ability to navigate these persistent headwinds and translate its strategic vision into improved financial health will be critical factors to monitor.