note

INCENTIVE PLANS

Stock Options

May

2005,

the shareholders approved the

2005

Incentive Compensation Plan (the

2005

Plan) and eliminated the remaining

172,500

option shares available for grant under the prior

2003

Plan effective

February

23,

2005.

The total number of shares of common stock that

may

be granted under the

2005

Plan is

200,000.

The

2005

Plan has

not

been renewed, and therefore

further grants

may

be made under the

2005

Plan. The

2005

Plan provides that option shares granted come from our authorized but unissued common stock. The price of the option shares granted under the plan will

not

be less than

100%

of the fair market value of the common shares on the date of grant. Options are generally exercisable after

one

or more years and expire

later than

years from the date of grant. In

May 2017,

the shareholders approved the

2017

Stock Incentive Plan which authorized the issuance of

400,000

shares. There were

186,200

and

134,000

options granted during the year ended

December 31, 2019

and

2018,

respectively

We estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the consolidated statements of operations over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. We estimate forfeitures at the time of grant and revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We used the Black-Scholes option-pricing model to calculate the fair value of option-based awards. Our determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are

not

limited to, our expected stock price, volatility over the term of the awards, risk-free interest rate, and the expected life of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility and holding period are based on our historical experience. For all grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data.

A summary of option activity as of and for the years ended

December 31, 2019

and

2018

as follows:

	Shares			Weighted- Average Exercise Price Per Share			Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding – January 1, 2018		187,750		$	3.70
Granted		134,000			3.36
Exercised		-			-
Cancelled		(97,000	)		(3.84	)
Outstanding – December 31, 2018		224,750		$	3.44		8.60	$	52,715
Granted		186,200			4.31
Exercised		(2,250	)		(3.20	)
Cancelled		(36,500	)		(3.66	)
Outstanding – December 31, 2019		372,200		$	3.85		8.57	$	379,429
Exercisable on December 31, 2019		107,567		$	3.44		7.69	$	154,305

There were

2,250

options exercised during the year ended

December 31, 2019

and

options exercised during the year ended

December 31, 2018.

Total compensation expense related to stock options for the years ended

December 31, 2019

and

2018

was

$268

and

$126,

respectively. As of

December 31, 2019,

there was

$365

of unrecognized compensation which will vest over the next

2.9

years.

Equity Appreciation Rights Plan

November 2010,

the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the

2010

Plan). The total number of Equity Appreciation Right Units (Units) the Plan can issue shall

not

exceed an aggregate of

1,000,000

Units as amended and restated on

March 11, 2015

and approved by the shareholders on

May 6, 2015.

The

2010

Plan provides that Units issued shall fully vest

three

years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under this plan shall be paid in cash within

days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date. The Units are adjusted to each reporting period based on the expected appreciation of the Units as defined in the Plan.

During the year-ended

December 31, 2019,

we granted a total of

100,000

Units with a vesting date of

December 31, 2021.

There were

units granted in fiscal

2018.

Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately

for the years ended

December 31, 2019

and

2018.