Note 10 - Incentive Plans

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

NOTE 10. INCENTIVE PLANS

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. An additional 50,000 and 175,000 shares were authorized by the shareholders in March 2020 and May 2022, respectively. There were 115,000 options and restricted stock units and 49,000 options granted during the years ended December 31, 2022 and 2021, respectively.

Stock Options

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.

We granted 21,000 market condition options to our Chief Executive Officer during the twelve months ended December 31, 2022. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. We granted 73,000 service-based options during the twelve months ended December 31, 2022. There were 49,000 stock options granted during the twelve months ended December 31, 2021.

Total compensation expense related to stock options was $237 for the twelve months ended December 31, 2022. Total compensation expense related to stock options was $116 for the twelve months ended December 31, 2021. As of December 31, 2022, there was $762 of unrecognized compensation which will vest and expense over the next 3.61 years.

A summary of option activity as of and for the years ended December 31, 2022 and 2021 as follows:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding – January 1, 2021		362,640		$	3.96
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	$	1,225
Granted		94,000			11.18
Exercised		(19,800	)		3.40
Cancelled		(9,000	)		4.19
Outstanding – December 31, 2022		452,700		$	5.97		6.87	$	2,855
Exercisable on December 31, 2022		223,300		$	4.11		5.76	$	1,817

Restricted Stock Units

During the twelve months ended December 31, 2022, we granted 21,000 restricted stock units (“RSUs”) under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. Total compensation expense related to the RSUs were $97 for the twelve months ended December 31, 2022. There was no compensation expense related to RSUs for the twelve months ended December 30, 2021. Total unrecognized compensation expense related to the RSUs was $155, which will vest over the next 1.24 years. The RSUs granted in the twelve months ended December 31, 2022 had an average grant price of $12.00 per share with a weighted average remaining contractual term of 9.24 years. No RSUs vested during the twelve months ended December 31, 2022.

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, 2022 and 2021, no Units were granted. Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $0 and $143 for the year ended December 31, 2022 and 2021, respectively.