12. Share-Based Compensation

The Company’s share-based compensation programs are long-term retention programs that are intended to attract, retain and provide incentives for talented employees, officers, and directors to align shareholder and employee interests. RGS primarily grants options under its 2008 Incentive Plan, but have also granted 300,000 non-shareholder approved options to its chief executive officer during 2012.

At December 31, 2013 the Company’s 2008 Incentive Plan provides for the granting of options to purchase up to the lesser of 3,000,000 shares of its Class A common stock or 10% of its then outstanding Class A common stock. Furthermore, the Board of Directors has resolved that all types of granted options shall not exceed 10% of the then outstanding Class A common stock. Both nonqualified stock options and incentive stock options may be issued under the provisions of the 2008 Incentive Plan. Employees, members of the Board of Directors, consultants, business partners, and certain key advisors are eligible to participate in the 2008 Incentive Plan, which terminates upon the earlier of a board resolution terminating the Incentive Plan or ten years after the effective date of the Incentive Plan. All outstanding options are nonqualified and are generally granted with an exercise price equal to the closing market price of the Company’s stock on the date of the grant. Options vest based on service conditions, performance (attainment of a certain amount of pre-tax income for a given year), or some combination thereof. Grants typically expire seven years from the date of grant.

The determination of the estimated fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatilities are based on a value calculated using the combination of historical volatility of comparable public companies in RGS’ industry and its stock price volatility since our initial public offering. Expected life is based on the specific vesting terms of the option and anticipated changes to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model is based on U.S. Treasury zero-coupon securities with remaining terms similar to the expected term on the options. RGS does not anticipate paying any cash dividends on its Class A common stock in the foreseeable future and, therefore, an expected dividend yield of zero is used in the option valuation model. RGS is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. RGS primarily uses plan life to-date forfeiture experience rate of 40% to estimate option forfeitures and records share-based compensation expense only for those awards that are expected to vest.

The following are the variables used in the Black-Scholes option pricing model to determine the estimated grant date fair value for options granted under the Company’s incentive plans for each of the years presented:


	2013	2012	2011
Expected volatility	83% - 104%	76% - 87%	74% - 88%
Weighted-average volatility	93%	80%	81%
Expected dividends	— %	— %	— %
Expected term (in years)	3.8 – 6.6	5.0 - 6.6	5.0 - 6.7
Risk-free rate	0.68% - 2.45%	0.57% - 1.26%	1.17% - 2.24%

The table below presents a summary of our option activity as of December 31, 2013 and changes during the year then ended:


	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Yrs)		Aggregate Intrinsic Value
Outstanding at January 1, 2013		1,825,320	$	1.88
Granted		928,000		1.57
Exercised		(117,030)		1.00
Forfeited or expired		(341,080)		1.08

Outstanding at December 31, 2013		2,295,210	$	1.51		5.0	$	3,468,464

Exercisable at December 31, 2013		609,090	$	2.00		2.6	$	621,573

The weighted-average grant-date fair value of options granted during the years 2013, 2012 and 2011 was $1.13, $0.76 and $1.67, respectively. The total fair value of shares vested was $305,000, $432,000 and $448,000 during the years ended December 31, 2013, 2012 and 2011, respectively. The Company’s share-based compensation cost charged against income was $509,000, $400,000, and $516,000 during the years 2013, 2012 and 2011, respectively, and is recorded as general and administrative expenses. The total income tax benefit recognized for share-based compensation was $nil, nil and $200,000 for the years ended December 31, 2013, 2012, and 2011, respectively. As of December 31, 2013, there was $787,230 of unrecognized cost related to nonvested shared-based compensation arrangements granted under the plans. The Company expects that cost to be recognized over a weighted-average period of 3.3 years.

Subsequent Event

On January 14, 2014, the Company’s shareholders approved an amendment to the 2008 Long-Term Incentive Plan. The amendment increases the number of options available for grant to 6,704,231, which was 15% of the Company’s then outstanding Class A common stock.