Note 7. Series B Convertible Redeemable Preferred Stock

In September 2011, the Company amended and restated its Articles of Incorporation. Before the amendment, there were 2,600,000 shares of Series B Convertible Preferred Stock authorized at $0.001 par value per share. After the amendment, the authorized number of shares of Series B Convertible Preferred Stock was changed to 325,000 at $0.008 par value per share.

As of July 31, 2015 and July 31, 2014, there were 262,475 shares of Series B Convertible Preferred Stock outstanding.

The Series B accrues annual dividends at the rate of 6% per year in shares of common stock at the conversion rate of $1.00 per share. The Series B, together with any unpaid dividends, is convertible at any time into shares of the Company’s common stock at the conversion price divided by the greater of forty cents ($0.40) or seventy percent (70%) of the daily volume weighted average price of the common stock for the twenty trading days immediately prior to the conversion. The Series B is redeemable by the Company, at any time prior to December 31, 2015, in cash at the redemption rate of $1.00 per share of Series B plus any accrued and unpaid dividends. On December 31, 2015, all outstanding shares of Series B shall be redeemed by the Company at a per share redemption price equal to $1.00 per share of Series B plus an amount of common stock equal to the amount of the accrued and unpaid dividend thereon. The Series B has a liquidation preference of $2,600,000 and has priority over the Series A Preferred Stock and the common stock. The Series B votes on an “as converted” basis.

Management determined that the Series B Preferred Stock meets the definition of a temporary equity instrument in accordance with ASC Topic 480-10-S99 “Accounting for Redeemable Equity Instruments”. Accordingly, the Company determined that the Series B should be classified as temporary equity and recorded at its redemption value (Note 12).