Note 7 – Shareholders’ Equity

Preferred Stock

The Company's Amended Articles of Incorporation authorizes the issuance of 50,000,000 shares of Preferred Stock, subject to any limitations prescribed by law, without further vote or action by the stockholders, to issue from time to time shares of preferred stock in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by the Company's board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

Series A Convertible Preferred Stock

The Company has authorized a total of 10,000,000 shares of Series A Convertible Preferred Stock (the “Series A”). The Series A is convertible at any time into shares of the Company’s common stock at the conversion rate of two shares of Common Stock per each share of Series A converted. The Series A is treated on an “as converted” basis for both voting and liquidation rights. On November 20, 2014, the CEO of the Company converted 10,000,000 shares of preferred Series A to 20,000,000 shares of common stock. There are no shares of Series A preferred stock outstanding as of January 31, 2015.

Options

As of January 31, 2015, there were options issued and outstanding for the purchase of 1,800,000 shares of common stock under the 2010 Equity Incentive Plan and 2,500,000 shares of common stock under the 2014 Equity Incentive Plan.

2010 Equity Incentive Plan

On January 15, 2010, the Board and Stockholders approved and adopted the 2010 Equity Incentive Plan (the “2010 Plan”).

The 2010 Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors, officers and independent contractors (collectively referred to as the “Participants”), and enabling such Participants to participate in the long-term growth and financial success of the Company. Under the 2010 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Incentive Stock Options”), non-qualified stock options (the “Nonqualified Stock Options”), stock appreciation rights (“SARs”) and restricted stock awards (the “Restricted Stock Awards”), which are restricted shares of common stock (the Incentive Stock Options, the Nonqualified Stock Options, the SARs and the Restricted Stock Awards are collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2010 Plan for 10 years from the Effective Date.

From time to time, the Company may issue Incentive Awards pursuant to the 2010 Plan. Each of the awards will be evidenced by and issued under a written agreement. In accordance with the rules of the plan, the exercise price of options granted shall be not less than 110% of the average of the closing price for the 30 days preceding the grant date.

No options were granted under the 2010 Plan during the three and six months ended January 31, 2015 and January 31, 2014

At January 31, 2015,477,778 options remain available for future grant under the 2010 Plan.

As of January 31, 2015, there were options outstanding under the 2010 Plan to purchase 200,000 shares of common stock at a purchase price of $0.20 per share, 250,000 shares of common stock at a purchase price of $0.09 per share, 75,000 shares of common stock at a purchase price of $0.03 per share, 275,000 shares of common stock at a purchase price of $0.16 per share and 1,000,000 shares of common stock at a purchase price of $0.24 per share. No options have been exercised since the Plan was created.

2014 Equity Incentive Plan

On June 2, 2014, the Board and Stockholders approved and adopted the 2014 Equity Incentive Plan (the “2014 Plan”).

The 2014 Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors, officers and independent contractors (collectively referred to as the “Participants”), and enabling such Participants to participate in the long-term growth and financial success of the Company. Under the 2014 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Incentive Stock Options”), non-qualified stock options (the “Nonqualified Stock Options”), stock appreciation rights (“SARs”) and restricted stock awards (the “Restricted Stock Awards”), which are restricted shares of common stock (the Incentive Stock Options, the Nonqualified Stock Options, the SARs and the Restricted Stock Awards are collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2014 Plan for 10 years from the Effective Date.

From time to time, the Company may issue Incentive Awards pursuant to the 2014 Plan. Each of the awards will be evidenced by and issued under a written agreement. In accordance with the rules of the plan, the exercise price of options granted shall be not less than 110% of the average of the closing price for the 30 days preceding the grant date.

The Board reserved a total of 10,000,000 shares of Common Stock for issuance under the 2014 Plan. If an incentive award granted under the 2014 Plan expires, terminates, is unexercised, or is forfeited, or if any shares are surrendered in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the Plan.

The number of shares subject to the 2014 Plan, any number of shares subject to any numerical limit in the 2014 Plan, and the number of shares and terms of any Incentive Award may be adjusted in the event of any change in the Company outstanding Common Stock by reason of any stock dividend, spin-off, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares, or similar transaction.

On August 11, 2014, 1,750,000 options were granted to two employees at an exercise price of $0.24 per share. By using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 2.48%; volatility of 49%; expected life of 6.5 years; and zero dividend yield, the Company recognized a non-cash stock compensation charge of $27,129 and 54,258 for the three months and the six months ended January 31, 2015 respectively in connection with the issuance and vesting of these options.

On September 5, 2014, 750,000 options were granted to one employee at an exercise price of $0.24 per share. By using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 2.48%; volatility of 43%; expected life of 6.5 years; and zero dividend yield, the Company recognized a non-cash stock compensation charge of $8,067 and 13,445 for the three months and the six months ended January 31, 2015, respectively in connection with the issuance and vesting of these options.

As of January 31, 2015, there were options outstanding under the 2014 Plan to purchase 2,500,000 shares of Common Stock at a purchase price of $0.24 per share. No options have been exercised since the Plan was created.

Common Stock

In September 2011, the Company amended and restated its Articles of Incorporation to effectuate a 1 for 8 reverse stock split by decreasing the authorized shares for issuance from 1,000,000,000 shares of common stock, $0.001 par value per share to 125,000,000 shares of common stock, $0.008 par value per share. There were 48,561,924 and 26,162,093 shares of common stock outstanding as of January 31, 2015 and July 31, 2014, respectively.

During the six months ended January 31, 2015, the Company issued the following shares of common stock:

The CEO of the Company converted his 10,000,000 shares of preferred Series A stock to 20,000,000 shares of common stock.

The Company issued 15,760 shares of common stock to its preferred Series B shareholders for accrued annual dividends at the rate of 6% per year.

The Company issued a total of 1,208,118 shares of common stock to service providers in exchange for service provided.

The Company issued a total of 975,953 shares of common stock to an investor, Kodiak Capital Group, LLC.

The Company issued 200,000 shares of common stock in connection with convertible debt (Note 10- Convertible debt).

Kodiak Capital Group LLC Investment Agreement

On October 31, 2011, we entered into an Investment Agreement and a Registration Rights Agreement with Kodiak Capital Group, LLC (the “Investor”) to purchase up to $1,000,000 of the Company’s Common Stock. In accordance with these Equity Line Transaction agreements, the Company filed a registration statement on Form S-1, which was declared effective on January 25, 2013. The Investment Agreement allows the Company to sell Common Stock in increments of $25,000 at a per share purchase price equal to 80% of the volume weighted average price of the Common Stock over five consecutive trading days. The agreements provide for the Company to exercise put options that obligate the Investor to purchase common stock shares valued at $25,000 per each put option.

On March 25, 2014, the Company sold 120,193 shares of common stock for $25,000 to the Investor. The Company issued the following common stock to the Investor, each in exchange for a $25,000 investment: 208,333 shares on May 12, 2014; 100,806 shares on May 27, 2014; 148,810 shares on September 23, 2014; 168,919 shares on October 3, 2014; 219,491 shares on October 13, 2014; 223,215 shares on October 22, 2014; and 215,518 shares on November 4, 2014.