STOCK WARRANTS AND OPTIONS

6 Months Ended

Aug. 31, 2014

Notes to Financial Statements

STOCK WARRANTS AND OPTIONS

Stock Options

The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values

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The Company has adopted a stock option and award plan to attract, retain and motivate its directors, officers, and employees. Options provide the opportunity to acquire a proprietary interest in the Company and to benefit from its growth. Vesting terms and conditions are determined by the Board of Directors at the time of the grant. The current Plan provides for the issuance of up to 2,823,199 common shares for directors, officers, and employees. The Company amended the original plan to increase the available issuance of common shares up to 4,000,000. The amendment will require shareholder ratification and is expected to occur at the next annual meeting planned for January 2015.

The Company did not grant any new options during the quarter ending August 31, 2014, while 105,000 qualified options where canceled due to terminations. The Company granted 2,375,000 new qualified options during the fiscal year ending February 28, 2014. During the same period, 965,000 qualified options were canceled due to terminations and the Company also issued a non-qualified option for 700,000 to its former Chairman under a settlement arrangement. The Company did not grant any stock options to employees in fiscal 2013. The Company estimated the fair value of employee options issued in fiscal 2014 as of the grant dates at $590,588 using the Black-Scholes option pricing model. Compensation expense is being recognized over the vesting periods of the options which range from immediate vesting to vesting over two years. Previously recognized compensation expense is reversed if an employee terminates service prior to exercise and expiration of the option.

Key assumptions used by the Company are summarized as follows: 

	Employee Stock Options
Stock Price		$0.17-$2.20
Exercise Price		$.35-$1.25
Expected volatility		73.4% - 98%
Expected dividend yield		0.00	%
Risk-free rate		2.0-3.37%
Vesting period		0-4 years
Expected term		7 years

Options issued to employees are classified as compensation expense. Stock option expense recognized in net earnings amounted to $28,190 and $62,766 during the quarter ending August 31, 2014 and 2013, respectively. Unrecognized expense of $382,329 remains to be recognized through 2017.

A summary of changes in stock options during the quarter ended August 31, 2014 and years ended February 28, 2014 and February 28, 2013 is as follows: 

	Stock Options			Weighted Average Exercise Price		Expiry Date
Outstanding, February 28, 2012		2,475,000		$	1.13	FY 2019
Issued		0			0
Exercised		0			0
Expired/Cancelled		(380,000	)		1.13
Outstanding, February 29, 2013		2,095,000			1.13
Issued		2,375,000			0.368	FY 2020
Exercised		0			0
Expired/Cancelled		(1,085,000	)		1.14
Outstanding, February 28, 2014		3,385,000		$	0.618
Issued		0			0
Exercised		0			0
Expired/Cancelled		(105,000	)	$	0.793
Outstanding, August 31, 2014		3,280,000		$	0.612

Because the Company’s stock-based compensation options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, amounts estimated using the Black-Scholes option pricing model may differ materially from the actual fair value of the Company’s stock-based compensation options.

Stock Warrants

The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees.  In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined.  The fair value of the equity instrument is charged directly to compensation expense or prepaid expense and additional paid-in capital, and amortized over the period during which services are rendered. All warrants issued were valued using the Black-Scholes pricing model.

During the six months ending August 31, 2014, the Company granted 2,645,000 warrants in connection with an amendment to its previous credit facility, which provided for an increase in the total borrowing limit to $11,033,000. Those warrants were valued at $603,165 and were initially recorded as a debt discount. On August 21, 2014, the original credit facility was fully paid off and as a result, the remaining debt discount was fully expensed during the August 2014 quarter.

During fiscal year 2014, the Company granted 8,935,000 warrants in connection with its new credit facility and amendments made to certain existing credit facilities previously outstanding. Those warrants were valued at $757,491 and were recorded as a debt discount. During the August 31, 2013 quarter, the Company granted an additional 2,070,000 warrants in connection with an increase provided in its new credit facility. Those warrants were valued at $519,727 and were also recorded as a debt discount. During the November 30, 2013 quarter, the Company granted an additional 493,393 warrants in connection with a further increase provided in the credit facility. Those warrants were valued at $111,026 and were also recorded as a debt discount. Additionally, 12,128,572 warrants valued at $956,229 were issued to certain consultants. These warrants are amortized over an 18 month period beginning April 1, 2013. On August 21, 2014, the senior credit facility was fully paid off and as a result, the remaining debt discounts associated with that facility were fully expensed during the August 2014 quarter. The remaining, related-party notes and their corresponding debt discount amounts are being amortized over the previously amended term. The unamortized portion of those debt discounts was $13,497 at August 31, 2014.

During fiscal year 2013, the Company granted 2,142,857 warrants in connection with its series A Preferred Stock. A fair value of $345,000 was allocated to the warrants based upon the Black-Scholes pricing model. A total of 695,000 warrants valued at $85,204 were issued in connection with purchase order financing and were recorded as a debt discount. The debt discount is being amortized over the term of the financing and has been fully amortized.

During fiscal year 2012, the Company granted 5,207,649 stock warrants valued at $1,841,318 in connection with its common stock private placements. These warrants were accounted for as an equity transaction. Additionally, 1,250,000 warrants valued at $189,875 were issued to an advisor. These warrants were amortized over a 12 month period beginning February 1, 2012. The issuance of new warrants at a reduced exercise price triggered a reset provision on 1,777,225 previously issued warrants resulting in a modification of value of $194,784.

A range of stock prices from $0.16 to $1.05 was used in valuing the warrants. The stock price was based on open market trading prices or the per share issuance prices from unrelated third party private placements in the event no active market price was available as occurred in some of the Company’s earlier transactions. Volatility was computed based on the average volatility of similar companies in the wind turbine business. The risk-free interest rate is the Treasury Constant Maturity Rate on the date of grant for a period equivalent to the expected term of the instrument. The expected term is the same as the contractual term for the above valuations.

Key assumptions used by the Company are summarized as follows:

	Warrants
Stock Price		$0.16-$1.05
Exercise Price		$0.35-$1.50
Expected volatility		73.4% - 98%
Expected dividend yield		0.00	%
Risk-free rate		0.16% - 2.62%
Vesting period		—
Expected term		2-5 years

A summary of changes in share purchase warrants during the six months ending August 31, 2014 and years ended February 28, 2014 and February 28, 2013 is as follows:

	Number of Warrants			Weighted Average Exercise Price		Expiry Date
Outstanding, February 29, 2012		9,041,967			1.14	Various through 3/18/2016
Issued		2,837,857			0.39	Various through 10/22/2017
Exercised		0
Cancelled/Expired		0
Outstanding, February 28, 2013		11,879,824			0.96
Issued		26,126,965			0.353	Various through 4/4/2017
Exercised		(7,627,875	)		0.36
Cancelled/Expired		(529,350	)
Outstanding, February 28, 2014		29,849,564		$	0.59
Issued		2,645,000		$	0.35	4/16/2018
Exercised		(3,653,084	)	$	0.35
Cancelled/Expired		0
Outstanding, August 31, 2014		28,841,480		$	0.60