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Note 9 - Long-term Incentive Plan
6 Months Ended
Jun. 30, 2017
Notes to Financial Statements  
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
Note
9.
Long-T
erm Incentive Plan
 
The purpose of the Avalon Holdings Corporation
2009
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. Under the Plan,
1,300,000
shares have been reserved for the issuance of stock options of which
760,000
options were outstanding at
June 30, 2017.
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.
 
The grant-date fair values of these 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, the simplified method is 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. 
 
The expected volatility was based on the observed historical volatility of Avalon common stock for a period prior to the grant date. 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:
 
 
 
 
 
 
 
Weighted
 
 
Weighted
 
 
 
Number of
 
 
Average
 
 
Average
 
 
 
Options
 
 
Exercise
 
 
Fair Value at
 
 
 
Granted
 
 
Price
 
 
Grant Date
 
Outstanding at January 1, 2017
   
760,000
     
2.51
     
1.00
 
Options granted
   
-
     
-
     
-
 
Options exercised
   
-
     
-
     
-
 
Options cancelled or forfeited
   
-
     
-
     
-
 
Outstanding at June 30, 2017
   
760,000
    $
2.51
    $
1.00
 
Options Vested
   
688,000
     
 
     
 
 
Exercisable at June 30, 2017
   
268,000
     
 
     
 
 
 
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.
 
 
 
Begins
 
Ends
 
Predetermined
 
 
 
Vesting
 
Vesting
 
Vesting Price
 
Block 1
 
12 months after Grant Dates
 
48 months after Grant Dates
  $
3.43
 
Block 2
 
24 months after Grant Dates
 
60 months after Grant Dates
  $
4.69
 
Block 3
 
36 months after Grant Dates
 
72 months after Grant Dates
  $
6.43
 
Block 4
 
48 months after Grant Dates
 
84 months after Grant Dates
  $
8.81
 
Block 5
 
60 months after Grant Dates
 
96 months after Grant Dates
  $
12.07
 
 
Compensation costs were approximately
$2,000
and
$6,000
for the
three
months ended
June 30, 2017
and
2016,
respectively, and
$7,000
and
$16,000
for the
six
months ended
June 30, 2017
and
2016,
respectively, based upon the estimated grant date fair value calculations. As of
June 30, 2017,
there was approximately
$34,000
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
7.62
years.