INCOME TAXES

12 Months Ended

Jul. 31, 2012

Income Tax Disclosure [Text Block]

NOTE 3 – INCOME TAXES

The income tax (benefit) is comprised of the following:

	2012			2011
Current:
Federal	$	—		$	—
State		(226,361	)		3,792
Deferred:
Federal		—			—
State		—			—
Total tax benefit	$	(226,361	)	$	3,792

The U.S. federal statutory income tax rate is reconciled to the effective rate at July 31, 2012 and 2011, as follows:

	2012			2011
Income tax expense at U.S. federal statutory rate		(34.0	%)		(34.0	%)
New Jersey state statutory rate		(5.8	%)		(5.8	%)
Change in valuation allowance		23.6	%		22.6	%
Loss on derivative financial instruments		0.0	%		0.0	%
Common stock issue for services		2.3	%		0.7	%
Amortization of debt discount and deferred financing fees		0.0	%		10.2	%
Benefits and modification of debt		0.0	%		0.0	%
Induced conversion cost		0.0	%		6.2	%
Effective tax benefit		(13.9	)%		0.1	%

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 (“NOL”) Carryover and Research and Development Tax Credits (“R&D” Credits) to corporate taxpayers in New Jersey. During the fiscal year ended July 31, 2012, the Company entered into agreements to sell up to $5,707,131 of its unused tax losses. The Company received net proceeds of $227,945, during the fiscal year ended July 31, 2012, related to the sale and accordingly recorded them as a tax benefit in the period received. During the fiscal year ended July 31, 2011, the Company did not enter into such agreements and did not receive such tax benefits.

Deferred taxes are recognized for temporary differences between the bases of assets and liabilities for financial statement and income tax purposes, and net operating losses. The temporary differences causing deferred tax benefits are primarily due to net operating loss carry forwards.

At July 31, 2012 and 2011, the Company has net operating loss carry forward for federal income tax purpose of approximately $30,341,000 and $29,218,000 respectively, which is available to offset future Federal taxable income through 2030. At July 31, 2012 and 2011, the Company has net operating loss carryforward toward state income tax purposes of approximately $4,242,000 and $9,223,000 respectively, to offset future state taxable income through 2030.

The tax provision for the fiscal year ended July 31, 2012, was a tax benefit of $226,361 which consists of a tax benefit for the sale of NJ NOL’s of $227,945, New Jersey State tax refunds of $4,800 and New Jersey state tax expense of $6,384 and for the fiscal year ended July 31, 2011, was a tax expense of $3,792. The Company has no open tax years for the State of New Jersey or federal income tax purposes, which are subject to examination.

The components of the net deferred tax assets (liabilities) at July 31, 2012 and 2011 are as follows:

	2012			2011
Deferred tax asset
Net operating loss	$	10,633,000		$	10,689,000
Reserves		14,000			20,000
Total deferred tax assets		10,677,000			10,709,000
Deferred tax liability		—			—
Net deferred tax asset		10,677,000			10,709,000
Less: Valuation allowance		(10,677,000	)		(10,709,000	)
Net deferred tax asset	$	—		$	—

The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets and determines if a valuation allowance is necessary. As a result of this analysis the Company concluded that it is more likely than not that its deferred tax assets will not be recovered and, accordingly, recorded 100% of the deferred tax asset to a valuation allowance as of July 31, 2012 and July 31, 2011.

The Company accounts for the recognition, measurement, presentation and disclosure of uncertain tax positions in accordance with the provisions of ASC 740-10 (Accounting for Uncertainty in Income Taxes). The Company evaluates these unrecognized tax benefits each reporting period. As of July 31, 2012, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $135,000. The unrecognized tax benefit is the result of the Company’s position to deduct the write off of the obsolete inventory for income tax purposes. The Company maintains some of its obsolete inventory utilization in repairing its products previously sold in accordance with the Company’s warranty program.

The Company, over the years, has discarded obsolete inventory; however, the company did not keep a detailed log of the inventory that was discarded. These inventory items were written down to zero in the Company’s inventory system as they were deemed to have no value and therefore the Company deducted the amounts on its income tax returns.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	July 31, 2012		July 31, 2011
Balance at beginning of period	$	135,000	135,000
Additions based on tax positions related to current year		—	—
Balance at end of period	$	135,000	135,000

The Company and its subsidiaries are subject to United States federal income tax as well as income tax of multiple state jurisdictions. These uncertain tax positions are related to the Sale of the Company’s NJ NOL’s and are within the tax years that remain subject to examination by the relevant taxing authorities.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months. These changes may be the result of new state audits. The balance of the unrecognized tax benefits is primarily related to uncertain tax positions for which there are no current ongoing federal or state audits and therefore, an estimate of the range of the reasonably possible outcomes cannot be made.

The Company has recorded accrued interest of $31,000 and $16,000 as of July 31, 2012 and July 31, 2011 respectively, which has been included in accrued expenses in the Balance Sheet. During the fiscal years ended July 31, 2012 and July 31, 2011 the Company included $15,000 and $11,000 of interest expense in the statement of operations.