Note

. 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

September 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;

) the exercise price of the option,

) 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,

) the current fair value of the underlying equity,

) the expected volatility of the value of the underlying share for the expected term of the option,

) the expected dividends on the underlying share for the expected term of the option and

) 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

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.

he expected volatility was based on the observed historical volatility of Avalon common stock for a period prior to the grant date. There were

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 ac

tivity:

			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 September 30, 2017		760,000	$	2.51	$	1.00
Options Vested		688,000
Exercisable at September 30, 2017		268,000

The stock options vest and become exercisable based upon achieving

two

critical metrics as follows:

)

Contract Vesting Term: The stock options vest ratably over a

five

year period.

)

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 we

re approximately

$3,000

and

$6,000

for the

three

months ended

September 30, 2017

and

2016,

respectively, and

$10,000

and

$22,000

for the

nine

months ended

September 30, 2017

and

2016,

respectively, based upon the estimated grant date fair value calculations. As of

September 30, 2017,

there was approximately

$32,000

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

7.08

years.