Stock Options and Stock Grants

12 Months Ended

Dec. 31, 2012

Stock Options and Stock Grants [Abstract]

Stock Options and Stock Grants

(10) Stock Options and Stock Grants

We have entered into stock option agreements with certain officers, employees and directors. The stock options generally expire ten years from the date of grant.

Employee Stock Options

The Company follows FASB ASC Topic 718, Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. The Company recognized compensation expense related to stock options of $293,154 and $392,153 for the years ended December 31, 2012 and 2011, respectively.

As of December 31, 2012, there was approximately $309,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 1.7 years.

The following table illustrates the various assumptions used to calculate the Black-Scholes option pricing model for options granted for all years presented:

	Years Ended December 31,
	2012			2011
Weighted-average risk-free interest rates:		1.10	%		2.51	%
Dividend yield:		0.00	%		0.00	%

Weighted-average expected life of the option:		7 years			7 years
Weighted-average expected stock price volatility:		85.71	%		74.20	%
Weighted-average fair value of the options granted:	$	0.23		$	0.89

The Company uses the Black–Scholes option pricing model to determine the fair value of stock based compensation. The Black–Scholes model requires the Company to make several assumptions, including the estimated length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and estimated forfeitures. Expected price volatility of the fiscal 2012 and 2011 grants is based on the daily market rate changes of the Company’s stock going back to January 1, 2004. The shares granted in fiscal 2012 and 2011 had a vesting period of three years and a contractual life of 10 years. Forfeitures were estimated at 4.54% and 4.49% for the years ended December 31, 2012 and 2011, respectively, based on the Company’s historical experience. The Black–Scholes model also requires a risk free interest rate, which is based on the U.S. Treasury yield curve in effect at the time of the grant, and the dividend yield on the Company’s common stock, which is assumed to be zero since the Company does not pay dividends and has no current plans to do so in the future. Changes in these assumptions can materially affect the estimate of fair value of stock based compensation and consequently, the related expense recognized on the statement of operations. The Company recognizes stock based compensation expense on a straight-line basis.

The following table summarizes the Company’s option activity for Nanophase Technologies Corporation employees and directors during the year ended December 31, 2012:

Options	Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding on January 1, 2012		1,587,432		$	2.47
Granted		599,000		$	0.23
Forfeited or expired		(329,233	)		3.78
Outstanding on December 31, 2012		1,857,199		$	1.69		7.26	$	23,360
Exercisable on December 31, 2012		935,587		$	2.63		5.55		—
Shares available for grant		1,277,138

The aggregate intrinsic value in the table above is based on Nanophase’s closing stock price of $0.34 on the last business day for the period ended December 31, 2012.

During the years ended December 31, 2012 and 2011 the total intrinsic value of Nanophase stock options exercised was $0 and $560, respectively. Cash received for option exercises was $0 and $4,080 during the years ended December 31, 2012 and 2011, respectively. We had no options exercised during the year ended December 31, 2012, compared to 4,000 in 2011. Based on the Company’s election of the “with and without” approach, no realized tax benefits from stock options were recognized for the years ended December 31, 2012 and 2011.

During 2012, 329,233 stock options were forfeited primarily due to expirations.

Stock Appreciation Rights

Prior to 2011, the Company granted its outside directors stock appreciation rights (SAR’s) under the Company’s Amended and Restated 2006 Stock Appreciation Rights Plan. The change in fair value of the awards granted during prior years is included in non-cash compensation expense for the year ended December 31, 2012. The SAR’s granted vested immediately and are payable upon the directors’ removal or resignation from the position of director. These awards are accounted for as liability awards, included in accrued expenses as of December 31, 2012 and 2011, and adjusted to fair value each reporting period. The fair value of the liability on December 31, 2012 and 2011 was $8,749 and $10,873, respectively.

Restricted Stock

As of December 31, 2012 and 2011, respectively, the Company did not have any unvested non-director restricted stock or performance shares outstanding.