SHARE-BASED PAYMENTS

6 Months Ended

Aug. 31, 2013

Notes to Financial Statements

Note 4. SHARE-BASED PAYMENTS

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award. We use the Black-Scholes option pricing model to estimate the fair value of stock options and warrants. The determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.

Stock Option Exchange

On August 29, 2013, we completed a stock option exchange program. Subject to the terms of our exchange offer filed on August 2, 2013, eligible participants tendered, and we exchanged, 5,460,424 options for 1,261,710 new options affecting 73 employees and 2 independent directors. The new options have an exercise price of $0.42, which was the closing price of our common stock on August 29, 2013. The new options were granted with the same vesting proportions as the tendered options. Of the 1,261,710 new option granted, 846,516, or 67%, were vested on the grant date and 415,194 or 33% will vest over the remaining vesting periods of the original options. The tender offer did not result in the acceleration of vesting of any options. The new options have the same expiration dates as the options exchanged.

We are required to compare the fair value of the options immediately before and after modification and recognize additional compensation expense to the extent the new options have greater value than the exchanged options they replaced. The fair value of the stock options tendered for exchange and the replacement stock options was estimated on August 29, 2013 using the Black-Scholes option-pricing model with the following assumptions:

	Pre-modification			Post-modification
Weighted-average exercise price	$	2.40		$	0.42
Expected term (in years)		3.00			2.00
Weighted-average volatility		70	%		70	%
Risk-free rate		0.79	%		0.39	%
Expected dividends		0	%		0	%

None of the new options had a fair value which exceeded the exchanged options they replaced.

OPTIONS:

The estimated fair values of our stock option awards were determined using the following weighted average assumptions:

	Three Months Ended						Six Months Ended
	August 31,						August 31,
	2013			2012			2013			2012
Expected dividends		0	%		0	%		0	%		0	%
Expected term (in years)		3.50			3.50			3.50			3.50
Weighted-average volatility		70	%		60	%		70	%		60	%
Risk-free rate		0.51	%		0.41	%		0.51	%		0.45	%

The effect on our results of operations of option expense for the three and six months ended August 31, 2013 and 2012 was as follows:

	Three Months Ended				Six Months Ended
	August 31,				August 31,
	2013		2012		2013		2012
Selling and marketing	$	252,765	$	467,893	$	591,131	$	1,027,637
Technology and development		137,342		342,226		508,905		609,970
General and administrative		158,527		443,606		463,228		854,584
Total stock option expense	$	548,634	$	1,253,725	$	1,563,264	$	2,492,191

We maintain stock incentive plans for our employees. The 2010 Stock Incentive Plan provides for the grant to employees, officers, directors and consultants of incentive stock options, non-qualified stock options, restricted shares, and other stock based awards to purchase up to an aggregate of 15.0 million shares of our common stock. We have approximately 7.9 million stock options and restricted shares outstanding under this plan as of August 31, 2013.

We have also issued non-qualified stock options to consultants and vendors for services provided, as well as to directors and employees, including officers.

The summary of activity for our stock options is presented below:

	Number of options			Weighted Average Exercise Price		Average Remaining Contractual Term (In Years)
Options outstanding at February 28, 2013		17,373,932		$	2.00		2.99
Granted		2,600,635			0.41
Exercised		-			-
Cancelled or expired		(5,710,424	)		2.46
Forfeited		(2,567,830	)		2.19
Options outstanding at August 31, 2013		11,696,313		$	1.38		2.39
Options vested and expected to vest at August 31, 2013		11,409,124		$	1.41		2.34
Options exercisable at August 31, 2013		9,781,617		$	1.55		2.00

As of August 31, 2013, there was $1.9 million of unrecognized share-based payment expense related to options, which is expected to be recognized over a weighted average period of approximately 2.3 years.

The aggregate intrinsic value of the exercisable options at August 31, 2013 was approximately $31,000. The aggregate intrinsic value was calculated based on the positive differences between the market value of our common stock on August 31, 2013 of $0.39 per share and the exercise prices of the exercisable options.

The exercise prices of options outstanding at August 31, 2013 ranged from $0.25 to $3.90.  The weighted average fair value of options granted was $0.41 per option share for the three months ended August 31, 2013.

WARRANTS:

The fair values of our stock warrant awards issued during the three and six months ended August 31, 2013 and 2012, respectively, were estimated using the following weighted average assumptions:

	Three Months Ended						Six Months Ended
	August 31,						August 31,
	2013			2012			2013			2012
Expected dividends		0	%		0	%		0	%		0	%
Expected term (in years)		5.00			3.00			5.00			3.00
Weighted-average volatility		70	%		60	%		70	%		60	%
Risk-free rate		1.62	%		0.38	%		1.62	%		0.38	%

The warrant expense for the three and six months ended August 31, 2013 and 2012 is as follows, and is included in general and administrative expense:

	Three Months Ended				Six Months Ended
	August 31,				August 31,
	2013		2012		2013		2012
Total warrant expense	$	278,179	$	261,905	$	315,450	$	434,066

The summary of activity for our warrants is presented below:

	Number of Warrants			Weighted Average Exercise Price		Average Remaining Contractual Term (In Years)
Warrants outstanding at February 28, 2013		19,171,104		$	1.32		3.53
Granted		875,000			0.70
Exercised		-			-
Forfeited and expired		(181,250	)		1.24
Warrants outstanding at August 31, 2013		19,864,854		$	1.30		3.05
Warrants vested and expected to vest at August 31, 2013		19,864,854		$	1.30		3.05
Warrants exercisable at August 31, 2013		18,931,523		$	1.31		2.99

The exercisable warrants as of August 31, 2013 had no aggregate intrinsic value because the market value of our common stock on August 31, 2013 of $0.37 per share was lower than the exercise prices of the exercisable warrants. The exercise prices of warrants outstanding at August 31, 2013 ranged from $0.39 to $4.00.  

As of August 31, 2013, there was approximately $116,000 of unrecognized share-based payment expense related to warrants, which is expected to be recognized over a weighted average period of approximately 2.2 years.