Note 10 - Incentive Plans

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

NOTE 10. INCENTIVE PLANS

Stock Options

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were additional shares authorized by the shareholders in March 2020 totaling 50,000. Since the last shareholders’ meeting, the Board of Directors has approved and is seeking shareholder approval of an additional 175,000 to be authorized under the plan. There were 49,000 and 42,300 options granted during the years ended December 31, 2021 and 2020, 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, 2021 and 2020 as follows:

	Shares			Weighted- Average Exercise Price Per Share			Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding – January 1, 2020		372,200		$	3.85
Granted		42,300			4.34
Exercised		(14,133	)		(3.78	)
Cancelled		(37,727	)		(3.37	)
Outstanding – December 31, 2020		362,640		$	3.96			7.78	$	1,164
Granted		49,000			8.50
Exercised		(13,400	)		3.43
Cancelled		(10,740	)		3.42
Outstanding – December 31, 2021		387,500		$	4.57			7.17	$	2,250
Exercisable on December 31, 2021		186,700		$	3.79			6.31	$	1,225

There were 13,400 options exercised during the year ended December 31, 2021 and 14,133 options exercised during the year ended December 31, 2020. Total compensation expense related to stock options for the years ended December 31, 2021 and 2020 was $111 and $68, respectively. As of December 31, 2021, there was $400 of unrecognized compensation which will vest over the next 3.5 years.

Equity Appreciation Rights Plan

In 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 90 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 years ended December 31, 2021 and 2020, no Units were granted.

Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $143 and $108 for the years ended December 31, 2021 and 2020, respectively.