0000930413-13-000239.txt : 20130118 0000930413-13-000239.hdr.sgml : 20130118 20130118144500 ACCESSION NUMBER: 0000930413-13-000239 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20120731 FILED AS OF DATE: 20130118 DATE AS OF CHANGE: 20130118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONOLOG CORP CENTRAL INDEX KEY: 0000023503 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 520853566 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08174 FILM NUMBER: 13537305 BUSINESS ADDRESS: STREET 1: 5 COLUMBIA RD CITY: SOMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087228081 MAIL ADDRESS: STREET 1: 5 C0LUMBIA ROAD CITY: SOMERVILLE STATE: NJ ZIP: 08876-3588 FORMER COMPANY: FORMER CONFORMED NAME: DSI SYSTEMS INC DATE OF NAME CHANGE: 19751218 FORMER COMPANY: FORMER CONFORMED NAME: DATA SCIENCES INC DATE OF NAME CHANGE: 19751218 FORMER COMPANY: FORMER CONFORMED NAME: MICROSEARCH SYSTEMS INC DATE OF NAME CHANGE: 19690115 10-K/A 1 c71996_10ka.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No.1)

 

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the year ended: July 31, 2012

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to

 

Commission File Number: 000-8174

 

Conolog Corporation

(Exact Name of registrant as specified in its charter)

 

Delaware 22-1847286
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

 

5 Columbia Road

Somerville, NJ 08876

(Address of principal executive offices)

 

(908) 722-8081

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

 

¨ Large Accelerated Filer ¨ Accelerated Filer
       
¨ Non-Accelerated Filer x Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨   No x

As of January 15, 2013, there were 21,683,066 shares outstanding of the registrant’s common stock, par value $0.01.

 

EXPLANATORY NOTE

 

The purpose of this Amendment No.1 (the “Amendment”) to the Conolog Corporation (the “Company”) annual report on Form 10-K for the year ended July 31, 2012, originally filed with the U.S. Securities and Exchange Commission on January 7, 2013 (the “Form 10-K”), is solely to furnish Exhibit 101 to the Form 10-K in accordance with Rule 405 of Regulation S-T.

 

No other changes have been made in this Amendment to the Form 10-K. This Amendment speaks as of the original date of the Form 10-K, does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way disclosures made in the original Form 10-K.

 

Pursuant to rule 406T of Regulation S–T, the interactive data files on Exhibit 101 attached hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

Item 6.Exhibits.

 

Exhibit No.   Description
     
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase*
101.DEF   XBRL Taxonomy Extension Definition Linkbase*
101.LAB   XBRL Taxonomy Extension Label Linkbase*
101.PRE   XBRL Taxonomy Extension Presentation Linkbase*

 

*furnished herewith

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

CONOLOG CORPORATION

  
     
     

Date: January 16, 2013

By:

/s/Robert Benou

  
   

Name: Robert Benou

Title: Chief Executive Officer

(Principal Executive Officer)

Chief Financial Officer

(Principal Financial Officer)

  

 

 

 

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All of these items were determined to be Level 1 fair value measurements.</font> </p><br/><p align="justify"> <font size="2">The carrying amounts of cash and equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and notes payable &#8211; officer approximates fair value because of the short maturity of these instruments.</font> </p><br/><p align="justify"> <font size="2"><u><b>Deferred Financing Costs</b></u></font> </p><br/><p align="justify"> <font size="2">The Company follows authoritative guidance for accounting for financing costs as it relates to convertible debt issuance cost. These costs are deferred and amortized over the term of the debt period or until redemption of the convertible debentures. As of July 31, 2012 and July 31, 2011, $0 of deferred financing costs remained to be amortized. 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Amortization of debt discounts amounted to $0 and $720,687 for the fiscal years ended July 31, 2012 and 2011, respectively.</font> </p><br/><p align="justify"> <font size="2"><u><b>Impairment of Long-Lived Assets</b></u></font> </p><br/><p align="justify"> <font size="2">We review our long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. 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Revenue from product sales is recognized at the time of shipment (when title and risks and rewards of ownership have passed) upon fulfillment of acceptance terms. Products are not sold on a conditional basis. Therefore, when delivery has occurred the sale is complete, as long as the collection of the resulting receivable is probable.</font> </p><br/><p> <font size="2"><u><b>Research and Development</b></u></font> </p><br/><p align="justify"> <font size="2">Research and Development costs are expensed as incurred. 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A valuation allowance is recorded when the expected recognition of a deferred tax asset is considered to be unlikely. The guidance also requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement. Based on the Company&#8217;s evaluation, management has concluded that there are significant uncertain tax positions requiring recognition in the consolidated financial statements with respect to the sale of the Company&#8217;s New Jersey Net Operating Loss Carryovers. In the event the Company receives an assessment for interest and/or penalties by major tax jurisdiction it would be classified in the financial statements as general and administrative expense.</font> </p><br/><p> <font size="2"><u><b>Other State Tax Benefits</b></u></font> </p><br/><p align="justify"> <font size="2">In 1998, the State of New Jersey enacted legislation allowing emerging technology and/or biotechnology companies to sell their unused New Jersey Net Operating Loss (&#8220;NOL&#8221;) Carryover and Research and Development Tax Credits (&#8220;R&amp;D&#8221; Credits) to corporate taxpayers in New Jersey. During fiscal year ended 2012, the Company entered into agreements to sell its unused NOLs. Recognition of this asset and income have been in accordance with the guidance of SAB Topic 13 and are recorded upon the State of New Jersey&#8217;s approval of the technology tax benefit transfer certificate and receipt of a contract to purchase a fixed amount of these NOLs.</font> </p><br/><p> <font size="2"><u><b>Warranty</b></u></font> </p><br/><p align="justify"> <font size="2">The Company provides a 12 year warranty on its commercial products and 25 years on its military products; the warranty covers parts and labor. The Company, at its option, repairs or replaces products that are found defective during the warranty period provided that proper preventive maintenance procedures have been followed by customers. Repairs necessitated by misuse of such products are not covered by our warranty. In cases of defective products, the customer typically returns them to the Company&#8217;s facility in Somerville, New Jersey. The Company&#8217;s service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Company&#8217;s main facility and customers are charged a fee for those service items that are not covered by the warranty. We do not offer our customers any formal written service contracts. Our warranty costs have historically been insignificant and therefore a provision was not warranted. Management continues to monitor the costs and will provide a warranty provision if circumstances change.</font> </p><br/><p> <font size="2"><u><b>Stock Based Compensation</b></u></font> </p><br/><p align="justify"> <font size="2">The Company follows the authoritative guidance for accounting for stock-based compensation. This guidance requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and stock, be recognized in the financial statements based upon their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company also follows the guidance for equity instruments issued to consultants. During the fiscal year ended July 31, 2012, the company issued 1,100,000 shares of Common Stock (par value $0.01) at $.09 per share valued at $99,000. In addition, an officer of the Company granted 45,000 shares at $.07 per share to an employee. This grant was valued at $3,600 and was treated as contributed capital.</font> </p><br/><p> <font size="2"><u><b>Loss Per Share of Common Stock</b></u></font> </p><br/><p align="justify"> <font size="2">Basic loss per share of common stock is computed by dividing the Company&#8217;s net loss by the weighted average number of shares of Common Stock outstanding during the period. The preferred dividends are not reflected in arriving at the net loss as they are not material and would have no effect on loss per share available to common shareholders. Diluted loss per shares is based on the treasury stock method and includes the effect from potential issuance of common stock such as shares issuable pursuant to the exercise of warrants and conversions of debentures. Potentially dilutive securities at July 31, 2012, consist of 2,502,087 common shares from outstanding warrants and 155,006 common shares from preferred stock. Potentially dilutive securities at July 31, 2011, consisted of 982,837 common shares from outstanding warrants and 155,006 common shares from preferred stock. Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.</font> </p><br/><p> <font size="2"><u><b>Use of Estimates</b></u></font> </p><br/><p align="justify"> <font size="2">The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions made by management are based upon available current information, historical experience and other factors that are believed to be reasonable under the circumstances. The estimates and assumptions made by management involve risks and uncertainties which could cause reported amounts to differ materially from actual future results. If management&#8217;s estimates and assumptions are inaccurate, the Company&#8217;s reported amounts and disclosures of contingent assets and liabilities could be materially and adversely affected. Management considers its reserve for inventory and accounting for derivative liabilities to be significant estimates.</font> </p><br/><p> <font size="2"><u><b>Advertising / Public Relations Costs</b></u></font> </p><br/><p align="justify"> <font size="2">Advertising/Public Relations costs are charged to operations when incurred. These expenses were $3,750 and $15,000 for the fiscal years ended July 31, 2012 and 2011, respectively.</font> </p><br/><p> <font size="2"><u><b>Future Impact of Recently Issued Accounting Standards</b></u></font> </p><br/><p align="justify"> <font size="2">In July 2012, the Financial Accounting Standards Board (&#8220;FASB&#8221;) issued ASU No. 2012-02, &#8220;<i>Testing Indefinite-Lived Intangible Assets for Impairment&#8221;</i> (&#8220;ASU 2012-02&#8221;). ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. ASU 2012-02 is not expected to have a material impact on the Company&#8217;s financial position or results of operations.</font> </p><br/><p align="justify"> <font size="2">In December 2011, the Financial Accounting Standards Board (&#8220;FASB&#8221;) issued ASU No. 2011-11, &#8220;<i>Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities</i>&#8221; (&#8220;ASU 2011-11&#8221;)<i>.</i> ASU 2011-11 enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared on the basis of U.S. GAAP and financial statements prepared on the basis of IFRS. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 is not expected to have a material impact on the Company&#8217;s financial position or results of operations.</font> </p><br/><p align="justify"> <font size="2">In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (&#8220;ASU 2011-08&#8221;), which updates the guidance in ASC Topic 350, <i>Intangibles &#8211; Goodwill &amp; Other</i>. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the examples are not intended to be all-inclusive and an entity may identify other relevant events and circumstances to consider in making the determination. The examples in this ASU 2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity should consider in determining whether it should test for impairment between annual tests, and also supersede the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test. Under the amendments in ASU 2011-08, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit&#8217;s fair value from a prior year as previously permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have a material impact on the Company&#8217;s financial position or results of operations.</font> </p><br/><p align="justify"> <font size="2">In May 2011, the FASB issued Accounting Standards Update 2011-04 (&#8220;ASU 2011-04&#8221;), which updated the guidance in ASC Topic 820, <i>Fair Value Measurement.</i> The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the Company&#8217;s financial position or results of operations.</font> </p><br/><p> <font size="2">Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period</font> </p><br/> <p><font size="2"><u><b>Cash and Equivalents</b></u></font> </p><br/><p align="justify"> <font size="2">For the purpose of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. The Company maintains cash and cash equivalents balances at financial institutions and are insured by the Federal Deposit Insurance Corporation up to $250,000. At times, balances in certain bank accounts may exceed the FDIC insured limits. Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. At July 31, 2012 and 2011, the Company did not have any cash equivalents</font></p> 250000 <p><font size="2"><u><b>Receivables and Allowance for Doubtful Accounts</b></u></font> </p><br/><p align="justify"> <font size="2">Trade Receivables are non-interest bearing, uncollateralized customer obligations and are stated at the amounts billed to customers. The preparation of financial statements requires our management to make estimates and assumptions relating to the collectivity of our accounts receivable. Management specifically analyzes historical bad debts, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. 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Typical raw material products include PC boards, digital screen assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates.</font> </p><br/><p align="justify"> <font size="2">The Company provides a twelve-year warranty on all commercial products and is required by government regulation to design and produce military products with a minimum 25-year operating life in addition to shelf life.</font> </p><br/><p align="justify"> <font size="2">The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our inventory reserve review. 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Revenue from product sales is recognized at the time of shipment (when title and risks and rewards of ownership have passed) upon fulfillment of acceptance terms. Products are not sold on a conditional basis. Therefore, when delivery has occurred the sale is complete, as long as the collection of the resulting receivable is probable</font></p> <p><font size="2"><u><b>Research and Development</b></u></font> </p><br/><p align="justify"> <font size="2">Research and Development costs are expensed as incurred. 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A valuation allowance is recorded when the expected recognition of a deferred tax asset is considered to be unlikely. The guidance also requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement. Based on the Company&#8217;s evaluation, management has concluded that there are significant uncertain tax positions requiring recognition in the consolidated financial statements with respect to the sale of the Company&#8217;s New Jersey Net Operating Loss Carryovers. In the event the Company receives an assessment for interest and/or penalties by major tax jurisdiction it would be classified in the financial statements as general and administrative expense</font></p> <p><font size="2"><u><b>Other State Tax Benefits</b></u></font> </p><br/><p align="justify"> <font size="2">In 1998, the State of New Jersey enacted legislation allowing emerging technology and/or biotechnology companies to sell their unused New Jersey Net Operating Loss (&#8220;NOL&#8221;) Carryover and Research and Development Tax Credits (&#8220;R&amp;D&#8221; Credits) to corporate taxpayers in New Jersey. During fiscal year ended 2012, the Company entered into agreements to sell its unused NOLs. Recognition of this asset and income have been in accordance with the guidance of SAB Topic 13 and are recorded upon the State of New Jersey&#8217;s approval of the technology tax benefit transfer certificate and receipt of a contract to purchase a fixed amount of these NOLs</font></p> <p><font size="2"><u><b>Warranty</b></u></font> </p><br/><p align="justify"> <font size="2">The Company provides a 12 year warranty on its commercial products and 25 years on its military products; the warranty covers parts and labor. The Company, at its option, repairs or replaces products that are found defective during the warranty period provided that proper preventive maintenance procedures have been followed by customers. Repairs necessitated by misuse of such products are not covered by our warranty. In cases of defective products, the customer typically returns them to the Company&#8217;s facility in Somerville, New Jersey. The Company&#8217;s service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Company&#8217;s main facility and customers are charged a fee for those service items that are not covered by the warranty. We do not offer our customers any formal written service contracts. Our warranty costs have historically been insignificant and therefore a provision was not warranted. Management continues to monitor the costs and will provide a warranty provision if circumstances change</font></p> <p><font size="2"><u><b>Stock Based Compensation</b></u></font> </p><br/><p align="justify"> <font size="2">The Company follows the authoritative guidance for accounting for stock-based compensation. This guidance requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and stock, be recognized in the financial statements based upon their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company also follows the guidance for equity instruments issued to consultants. During the fiscal year ended July 31, 2012, the company issued 1,100,000 shares of Common Stock (par value $0.01) at $.09 per share valued at $99,000. In addition, an officer of the Company granted 45,000 shares at $.07 per share to an employee. This grant was valued at $3,600 and was treated as contributed capital</font></p> 1100000 0.09 99000 45000 0.07 3600 <p><font size="2"><u><b>Loss Per Share of Common Stock</b></u></font> </p><br/><p align="justify"> <font size="2">Basic loss per share of common stock is computed by dividing the Company&#8217;s net loss by the weighted average number of shares of Common Stock outstanding during the period. The preferred dividends are not reflected in arriving at the net loss as they are not material and would have no effect on loss per share available to common shareholders. Diluted loss per shares is based on the treasury stock method and includes the effect from potential issuance of common stock such as shares issuable pursuant to the exercise of warrants and conversions of debentures. Potentially dilutive securities at July 31, 2012, consist of 2,502,087 common shares from outstanding warrants and 155,006 common shares from preferred stock. Potentially dilutive securities at July 31, 2011, consisted of 982,837 common shares from outstanding warrants and 155,006 common shares from preferred stock. Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive</font></p> 2502087 155006 982837 155006 <p><font size="2"><u><b>Use of Estimates</b></u></font> </p><br/><p align="justify"> <font size="2">The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions made by management are based upon available current information, historical experience and other factors that are believed to be reasonable under the circumstances. The estimates and assumptions made by management involve risks and uncertainties which could cause reported amounts to differ materially from actual future results. If management&#8217;s estimates and assumptions are inaccurate, the Company&#8217;s reported amounts and disclosures of contingent assets and liabilities could be materially and adversely affected. Management considers its reserve for inventory and accounting for derivative liabilities to be significant estimates</font></p> <p><font size="2"><u><b>Advertising / Public Relations Costs</b></u></font> </p><br/><p align="justify"> <font size="2">Advertising/Public Relations costs are charged to operations when incurred. These expenses were $3,750 and $15,000 for the fiscal years ended July 31, 2012 and 2011, respectively</font></p> 3750 15000 <p><font size="2"><u><b>Future Impact of Recently Issued Accounting Standards</b></u></font> </p><br/><p align="justify"> <font size="2">In July 2012, the Financial Accounting Standards Board (&#8220;FASB&#8221;) issued ASU No. 2012-02, &#8220;<i>Testing Indefinite-Lived Intangible Assets for Impairment&#8221;</i> (&#8220;ASU 2012-02&#8221;). ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. ASU 2012-02 is not expected to have a material impact on the Company&#8217;s financial position or results of operations.</font> </p><br/><p align="justify"> <font size="2">In December 2011, the Financial Accounting Standards Board (&#8220;FASB&#8221;) issued ASU No. 2011-11, &#8220;<i>Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities</i>&#8221; (&#8220;ASU 2011-11&#8221;)<i>.</i> ASU 2011-11 enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared on the basis of U.S. GAAP and financial statements prepared on the basis of IFRS. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 is not expected to have a material impact on the Company&#8217;s financial position or results of operations.</font> </p><br/><p align="justify"> <font size="2">In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (&#8220;ASU 2011-08&#8221;), which updates the guidance in ASC Topic 350, <i>Intangibles &#8211; Goodwill &amp; Other</i>. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the examples are not intended to be all-inclusive and an entity may identify other relevant events and circumstances to consider in making the determination. The examples in this ASU 2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity should consider in determining whether it should test for impairment between annual tests, and also supersede the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test. Under the amendments in ASU 2011-08, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit&#8217;s fair value from a prior year as previously permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have a material impact on the Company&#8217;s financial position or results of operations.</font> </p><br/><p align="justify"> <font size="2">In May 2011, the FASB issued Accounting Standards Update 2011-04 (&#8220;ASU 2011-04&#8221;), which updated the guidance in ASC Topic 820, <i>Fair Value Measurement.</i> The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. 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Officer and Chairman of the Company&#8217;s Board of Directors, pursuant to which the Company sold to Robert Benou a total of 277,777 shares of its Common Stock at a price per share of $0.36 for an aggregate purchase price of $100,000.</font> </p><br/><p align="justify"> <font size="2">At various times during the year ended July 31, 2011, $1,000,000 of convertible debt was converted into 3,333,333 shares of common stock.</font> </p><br/><p align="justify"> <font size="2">At various times during the year ended July 31, 2011, $88,177 of interest expense was converted into 229,666 shares of common stock.</font> </p><br/><p align="justify"> <font size="2">At various times during the year ended July 31, 2011, an aggregate 1,955,782 Class C Warrants were exercised in cashless exercises into 1,646,723 shares of common stock.</font> </p><br/><p align="justify"> <font size="2">On January 31, 2011, the Company received notice from the Listing Qualifications Staff of the NASDAQ Stock Market 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The exercise price for nonqualified stock options may not be granted at less than eighty-five percent (85%) of the fair market value of the shares on the date of grant.</font> </p><br/><p align="justify"> <font size="2">The Plan terminated in April 2012.</font> </p><br/><p align="justify"> <font size="2">As of July 31, 2012 and July 31, 2011, there had been no shares granted under the 2002 Plan.</font> </p><br/><p> <font size="2"><u><b>Stock Incentive Plans</b></u></font> </p><br/><p align="justify"> <font size="2">The Company has Stock Incentive Plans pursuant to which the Company may grant a number of shares of the Company&#8217;s Common Stock to the Company&#8217;s officers, directors, employees and consultants. 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His annual base salary as of July 31, 2012, was $450,000 and increases by $20,000 annually on January 1<sup>st</sup> of each year. In addition, the Chief Executive Officer is entitled to an annual bonus equal to 6% of the Company&#8217;s annual &#8220;income before income tax provision&#8221; as stated in its annual Form 10-K. The employment agreement also entitles Chief Executive Officer to the use of an automobile and to employee benefit plans, such as; life, health, pension, profit sharing and other plans. Under the employment agreement, employment terminates upon death or disability of the employee and the employee may be terminated by the Company for cause. During the fiscal years ended July 31, 2012, and 2011, the Company&#8217;s CEO did not receive any payment of his salary and forgave $0 and $107,500 of his salary, respectively. The Company has accrued and expensed $450,000 for the unpaid portion of his salary for the fiscal year ended July 31, 2012 and accrued and expensed $334,167 for the unpaid portion of his salary for the fiscal year ended July 31, 2011.</font> </p><br/><p align="justify"> <font size="2">The Company&#8217;s President and Chief Operating Officer is serving under an employment agreement commencing May 3, 2012 and ending May 3, 2016, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or employee. His annual base salary as of July 31, 2012 was $199,000 and he receives annual increases of $3,000 on May 3rd of each year. The Company&#8217;s President and Chief Operating Officer is entitled to an annual bonus equal to 6% of the Company&#8217;s annual &#8220;income before income tax provision&#8221; as stated in its annual Form 10-K. The employment agreement also entitles him to the use of an automobile and to employee benefit plans, such as life, health, pension, profit sharing and other plans. Under the employment agreement, employment is terminated upon death or disability of the employee and employee may be terminated by the Company for cause. During the fiscal years ended July 31, 2012 and 2011, the Company&#8217;s President and Chief Operating Officer was paid $84,467 and $61,873 of his salary, respectively. During the fiscal year ended July 31, 2011, the Company&#8217;s president forgave $24,167 of his salary. 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