At a Special Meeting of the shareholders held on August 2, 2006 a proposal to amend the Certificate of Incorporation to give effect to a one-for-six reverse stock split of the common stock of the Company was approved by the stockholders. The reverse split was effected on August 4, 2006.
At a Special Meeting of the shareholders held on May 21, 2008 a proposal to amend the Certificate of Incorporation to give effect to a one-for-four reverse stock split of the common stock of the Company was approved by the stockholders. The reverse split was effected on May 22, 2008. The number of shares outstanding before the date of change (May 21, 2008) was 5,718,664. The number of shares outstanding after this date was 1,429,666.
Pursuant to a Subscription Agreement dated January 19, 2006, the Company sold and issued to three Subscribers Convertible Notes having an aggregate principal balance of $1,250,000 which as a result of the reverse split are convertible into 166,667 (the “Note Shares”) post split shares of (post 1-for-6 stock reverse split) common stock at a post split conversion price of $7.50, and warrants to purchase 166,668 shares of (post 1-for-6 stock reverse split) common stock at a post split exercise price of $5.7474 per share (the “Conversion Price”). Pursuant to an agreement dated as of September 28, 2006, between the Company and the selling shareholders who were parties to the January 19, 2006 Subscription Agreement (the “Subscribers”), the Company reduced the warrant exercise price of warrants held by the Subscribers to $1.25 so long as such warrants were exercised by October 31, 2006, after which time the warrant exercise price would revert to $5.7474, subject to adjustment as provided in the warrants. Pursuant to an agreement between the Company and First Montauk Securities Corp. (the placement agent in the private placement with the selling shareholders who were parties to the January 19, 2006 Subscription Agreement) the Company reduced the exercise price of warrants issued to First Montauk Securities Corp. and/or its transferees to $1.25. As of January 31, 2007 all of the warrants attached to these convertible notes were exercised along with some of the warrants issued to First Montauk Securities Corp., amounting to 191,667 warrants at a conversion price of $1.25 per share. The Company received a Gross amount of $239,584 for these warrants.
As permitted by the January 19, 2006 Subscription Agreement, the Company reduced the Conversion Price to $1.10 per share. Any shares in excess of the Notes Shares will not be registered under the Securities Act of 1933, as amended, and, therefore, may not be offered for sale, pledged or hypothecated in the absence of an effective registration statement or an opinion of counsel reasonably satisfactory to the Company that such registration is not required.
In January 2007, the Company reduced the original conversion prices of their outstanding debentures from $7.50 to $1.10. Subsequent to the reduction in the conversion price the debt holders exercised their rights to convert. The incremental consideration of the shares issued in the conversion was valued at $2,705,457 and recorded as induced conversion costs in the accompanying statement of operations.
In connection with this conversion, the amortization of deferred loan costs of $174,147 and the amortization of deferred loan discount of $363,610 were fully written off.
On March 12, 2007 we completed a private placement of an aggregate of $2,825,000, principal amount, of Convertible Debentures with eight investors. The Convertible Debentures are convertible into an aggregate of 1,412,500 shares of the common stock of the Company.
The Conversion Price of the Convertible Debentures is $2.00 per share. The investors have also received warrants to purchase an aggregate of 1,412,500 shares of the Company’s common stock at an exercise price of $2.88 per share, exercisable beginning at any time on the sooner of September 8, 2007 or the date the Company’s stockholders approves the issuance of the Company’s common stock issuable on conversion of the Convertible Debentures (if such approval is required by the applicable rules of the Nasdaq) through the fifth anniversary of the issuance. In addition, the selling agent (including certain of its employees and affiliates) was granted a warrant to acquire 282,500 shares of the Company’s common stock. The Company received net proceeds of $2,487,500. The private placement was approved by the Company’s shareholders, as required by applicable Nasdaq rules, on May 15, 2007.
On September 7, 2007, the Company’s Board of Directors voted unanimously to adjust the original conversion price of their outstanding debentures from $2.00 to $1.40 resulting in the reduction in Notes payable of $1,246,171.
On December 26, 2007, the Company’s Board of Directors voted unanimously to further adjust the original conversion price of their outstanding debentures from $1.40 to $1.05. There has been no reduction in Notes payable as of this filing.
On June 12, 2008, the Company’s Board of Directors voted unanimously to adjust the original conversion price of their outstanding debentures from $4.20 (post reversal) to $1.20 resulting in the reduction in Notes payable of $627,071.
On November 2, 2007, the Company issued and sold in a private placement (the “Private Placement”), an aggregate of 953,000 shares of common stock (the “Common Shares”) at a purchase price of $1.40 per share, and warrants to purchase 476,500 shares of the Company’s common stock, which are exercisable for a periodcommencing six months from November 2, 2007 for five years to November 2, 2012, at an exercise price of $1.66 per share (the “Subscriber Warrants”). From the sale of the Common Shares, the Company received net proceeds of $1,163,268 after deducting attorneys' fees, printing fees and other miscellaneous fees related to the Private Placement.
On March 20, 2008 Conolog received a Nasdaq Staff Deficiency Letter stating that, as the bid price of the Company’s common stock has closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market set forth in Marketplace Rule 4310(c)(4), in accordance with Marketplace Rule 4310(c) (8)(D), the Company will be provided 180 calendar days , or until September 16, 2008, to regain compliance. If at any time before September 16, 2008, the bid price of the Company’s stock closes at $1.00 per share or more for a minimum of 10 consecutive business days Nasdaq will provide written notification that the Company complies with the rule.
On June 25, 2008 Conolog received a Nasdaq Notification Letter stating that the bid price of the Company’s common stock has closed above the minimum $1.00 per share requirement for at least 10 consecutive trading days and accordingly has regained compliance with Marketplace Rule 4310 (c) (4).
On August 26, 2008 Conolog received a Nasdaq Staff Deficiency Letter stating that, as the bid price of the Company’s common stock has closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market set forth in Marketplace Rule 4310(c)(4), in accordance with Marketplace Rule 4310(c) (8)(D). As a result of Nasdaq’s recent suspension of its enforcement of the rules requiring a minimum $1.00 closing bid price, the Company has until May 29, 2009 to regain compliance with Nasdaq’s bid price rule.. If at any time before May 29, 2009, the bid price of the Company’s stock closes at $1.00 per share or more for a minimum of 10 consecutive business days Nasdaq will provide written notification that the Company complies with the rule.
RESULTS OF OPERATIONS
2008 COMPARED to 2007
Product revenue for the fiscal year ended July 31, 2008 totaled $1,220,993 an increase of 136% or $703,288 from the product revenue reported for the fiscal year ended July 31, 2007 of $517,705. The Company attributes this increase in revenues to new long-term contract awards received during this fiscal year. Deliveries on these contracts began in early 2008.
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Product cost (Material and Direct labor) for the fiscal year ended July 31, 2008 amounted to $467,081 or 38.2% of product revenues. Product cost for the fiscal year ended July 31, 2007 amounted to $378,563 or 73.1% of product revenues. The Company attributes the increase in the current year’s product cost of $88,518 and corresponding increase in the current year’s Gross Profit of $614,770 (excluding the write down of obsolete inventory) to the standardizing of costs to build our new PDR-2000 system. Outsourcing of assemblies and the continued use of assembly standards under ISO-9000 also added to this lower cost.
For fiscal year ended July 31, 2008 the Company, in compliance with its inventory management policy, expensed $112,171 of cost relating to obsolete inventory parts. This compares to $1,256,155 of obsolete inventory parts expensed during the fiscal year July 31, 2007.
Total Operating expenses for fiscal July 31, 2008 were $4,373,078 an increase of $817,318 from $3,555,760 reported for fiscal July 31, 2007. The Company attributes this increase to higher legal fees to defend against lawsuits and an increase in the value of stock compensation costs, offset by reduced research and develop costs and stock compliance costs.
Other expenses for the fiscal year ended July 31, 2008 decreased by $391,136 to $3,348,754 from $3,739,890 for fiscal July 31, 2007. Included in this expense is a non-cash expense related to the induced conversion benefit of $1,387,087; a non-cash interest expense related to conversion of debt for $606,598; the amortization of fees related to the conversion of debt for $504,740 and the write off of discount on converted debt of $864,892.
As a result of the foregoing, the Company reported a net loss applicable to common shares of $6,967,606 or $4.70 per share for fiscal 2008, compared to a net loss applicable to common shares of $8,121,067 or $12.78 per share (as restated for stock reversal for fiscal 2007.
2007 COMPARED to 2006
Product revenue for the fiscal year ended July 31, 2007 totaled $517,705 a decrease of $30,062 from the product revenue reported for the fiscal year ended July 31, 2006 of $547,767. The Company attributes this decrease in revenues to delays in contract awards during the last quarter of the fiscal year. Deliveries on these delayed contracts began in early 2008.
Product cost (Material and Direct labor) for the fiscal year ended July 31, 2007 amounted to $378,563 or 73.1% of product revenues. Product cost for the fiscal year ended July 31, 2006 amounted to $282,932 or 51.6% of product revenues. The Company attributes the increase in the current year’s product cost of $95,631 and corresponding decrease in the current year’s Gross Profit of $95,631 (excluding the write down of obsolete inventory) to the increase in costs to build our new PDR-2000 system and the CM-100 Communication system (introduced in February 2007). This higher cost was offset by the continued outsourcing of assemblies and the introduction of assembly standards under ISO-9000.
For fiscal year ended July 31, 2007 the Company, in compliance with its inventory management policy, expensed $1,256,155 of cost relating to obsolete inventory parts. This compares to $245,326 of obsolete inventory parts expensed during the fiscal year July 31, 2006.
Total Operating expenses for fiscal July 31, 2007 were $3,555,760 an increase of $153,476 from $3,402,284 reported for fiscal July 31, 2006. The Company attributes this increase loan acquisition costs.
Other expenses for the fiscal year ended July 31, 2007 included a non-cash expense related to the induced conversion benefit of $2,705,457; a non-cash interest expense related to conversion of debt for $812,147 and the amortization of fees related to the conversion of debt for $363,676.
As a result of the foregoing, the Company reported a net loss applicable to common shares of $8,121,067 or $12.44 per share for fiscal 2007, compared to a net loss applicable to common shares of $3,330,089 or $10.76 per share for fiscal 2006.
13
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 2008 was $2,049,641 compared to $3,628,738 at year ended July 31, 2007. This decrease in the working capital is attributable to the reduction of cash and cash equivalents.
Accounts receivable have increased from $64,768 at July 31, 2007 to $360,846 at July 31, 2008. This increase of $296,077 is the result of new contacts generating increases to sales during the year.
The Company expects to meet its cash requirements for the next twelve months through existing cash balances and cash generated from operations. In addition, the Company believes that it can obtain financing from institutional investors secured by its assets, if necessary.
INFLATION
Management believes that the results of operations have not been affected by inflation and management does not expect inflation to have a significant effect on its operations in the future.
CRITICAL ACCOUNTING POLICIES
The Company’s consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which require 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 financial statements and reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external professional advice and other assumptions believed to be reasonable. The following critical accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect the Company’s consolidated financial statements.
INCOME RECOGNITION
Revenue is recorded in accordance with the guidance of the SEC’s Staff Accounting Bulletin (SAB) No. 104, which supersedes SAB No. 101. Revenue from product sales are recognized at the time of shipment (when title has 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.
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
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. The Company has a concentration risk in trade accounts receivable with significant sales to the government and local agencies. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations.
INVENTORY VALUATIONS, COMPONENTS AND AGING
Inventories are valued at the lower cost or market. Determined by a first-in, first-out (“FIFO”) method.The Company’s products are used in radio and other transmissions, telephone and telephone exchanges, air and traffic controls, automatic transmission of data for utilities, tele-printing of transmission data such as news and stock market information and for use by electric utilities in monitoring power transmissions lines for faults and/or failures.
The Company currently manufactures and supports over 400 products and assemblies that have been in the market place since 1970. The Company’s inventory represents approximately 10,000 different components and 2,500 assemblies. The Company presents its inventory in three categories, Finished Goods, Work-in-Process and Raw Materials. Finished Goods represents products that have been completed in connection with specific orders and are awaiting shipment. Finished Goods can consist of produces like the PDR-2000, PTR-1500 and 1000, Gen 1, 98 and 68 series. Work-in-Process represents components that have been requisitioned from the warehouse and are being assembled in the assembly areas. Depending on the configurations required by a customer, products are completed and tested within 8 to 10 business days. Raw Materials represent components in their original packaging stored in a secured warehouse area, and may consist, in part, of Face plates, PC boards, Digital screen assemblies, Guide rails, Capacitors, Terminals, Power supplies, Process ships, Chassis and racks, Relays, Keypads and Resistors.
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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.
Every component, regardless of age, has been purchased to meet the above criteria and may be used in any and all above said assemblies. Management believes that this inventory, which is minimally adequate, is required to implement the Company’s commitments to military requirements for present and delivered orders.
The Company, following inventory analysis and repeated annual testing, established a 3-year rule for maintaining inventory, which requires a write-down policy for inventory parts depending on their age. The inventory is tested annually applying its 3-year rule and the Company classifies as current assets only that amount of inventory it expects to realize in the next one-year operating cycles, any balance of the inventory is classified as non-current. Any parts which have not been used for 3 years are valued at zero. Any parts, written down to a zero value under the 3-year rule, are maintained in inventory to satisfy the requirements under our long-term warranty programs.
WARRANTY
The Company provides a twelve-year warranty on its products; the warranty covers parts and labor. The Company, at its option, repairs or replaces products that are found defective during the warranty period providing 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’s facility in Somerville, New Jersey. The Company’s service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Company’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.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future federal and state income taxes.
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of Conolog Corporation, together with notes and the Independent Registered Public Accountants’ Report, are set forth immediately following Item 14 of this Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Our management, including our principal executive officer and our principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of a within ninety (90) days of the filing date of this Form 10-K Annual Report. Based upon their evaluation as of the end of the period covered by this report, the Company’s chief executive officer and chief financial officer concluded that, the Company’s disclosure controls and procedures are not effective to ensure that information required to be included in the Company’s periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.
The Company’s board of directors was advised by Bagell, Josephs, Levine & Company, L.L.C., the Company’s independent registered public accounting firm, that during their performance of audit procedures for 2008 Bagell, Josephs, Levine & Company, L.L.C. identified a material weakness as defined in Public Company Accounting Oversight Board Standard No. 2 in the Company’s internal control over financial reporting.
The deficiency consisted primarily of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. However, the size of the Company prevents us from being able to employ sufficient resources to enable us to have adequate segregation of duties within our internal control system. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10K that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of July 31,2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework.Based on our assessment our management has concluded that our control and procedures were not effective as of the end of the period covered by this Report due to the existence of the significant internal control deficiencies described below.
The deficiency consisted primarily of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely effective reviews.
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ITEM 9B - OTHER INFORMATION
None
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth certain information regarding the officers and directors of the Company as of October 15, 2008.
| Name | | Age | | Position |
| Robert S. Benou | | 73 | | Chairman, Chief Executive Officer, Chief Financial Officer and Director |
| | | | | |
| Marc R. Benou | | 40 | | President, Chief Operating Officer, Secretary and Director |
| | | | | |
| Louis S. Massad | | 71 | | Director |
| | | | | |
| Edward J. Rielly | | 40 | | Director |
| | | | | |
| David M. Peison | | 40 | | Director |
| | | | | |
| Thomas Fogg | | 71 | | Officer, Vice President-Engineering |
Robert S, Benou
Robert S. Benou has been the Company’s Chairman and Chief Executive Officer since May 1, 2001. He is also the Company’s Chief Financial Officer. From 1968 until May 1, 2001, he served as the Company’s President. Mr. Benou is responsible for material purchasing and inventory control. From June 2001 until August 2005, Mr. Benou served as a director of Henry Bros. Electronics, Inc. (formerly known as Diversified Security Solutions, Inc.), a publicly held company that is a single-source/turn-key provider of technology-based security solutions for medium and large companies and government agencies. Mr. Benou is also served as a member of the Board of Directors of eXegenics Inc. from February 2004 to December 2006. The common stock of eXegenics Inc. is traded on the OTC Bulletin Board. Mr. Benou is a graduate of Victoria College and holds a BS degree from Kingston College, England and a BSEE from Newark College of Engineering, in addition to industrial management courses at Newark College of Engineering. Robert S. Benou is the father of Marc R. Benou.
Marc R, Benou
Marc R. Benou has been the Company’s President and Chief Operating Officer since May 1, 2001. Mr. Benou joined the Company in 1991 and is responsible for new product development and supervision of sales and marketing. From March 1995 until May 1, 2001, he served as Vice President. Mr. Benou has been on the company’s Board and has served as the Company’s assistant secretary since March 1995. Mr. Benou attended Lehigh and High Point University and holds a BS degree in Business Administration and Management. Marc R. Benou is the son of Robert S. Benou, the Company’s Chairman and Chief Executive Officer.
Louis S. Massad
Louis S. Massad has been a Director of the Company since April 1995. Mr. Massad was Chief Financial Officer and a Director of Henry Bros. Electronics, Inc. (formerly known as Diversified Security Solutions, Inc.), from 2000 until August 2003. From 1997 to 2000, Mr. Massad was a consultant to Diversified Security Solutions, Inc. From 1986 to 1997, Mr. Massad was a Vice President, Chief Financial Officer and Director of Computer Power Inc. Mr. Massad holds a BS and MS degree from Cairo University (Egypt) and an MBA from Long Island University, New York.
Edward J. Rielly
Edward J. Rielly has been a Director of the Company since January 1998. Mr. Rielly is a Senior Application Developer with Household International, a financial corporation. From March 2000 to November 2001, Mr. Rielly was a Senior Consultant with Esavio Corporation. From February 1998 to February 2000, Mr. Rielly was an Application Developer with Chubb Corporation. From 1993 to 1998, Mr. Rielly was an Application Developer withthe United States Golf Association. Mr. Rielly is a graduate of Lehigh University and holds a BS in Computer Science.
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Thomas R. Fogg
Thomas R. Fogg joined the Company in 1976 as Chief Engineer responsible for analog and guidance projects. Since 1986, Mr. Fogg has served as Vice President-Engineering; he led the design team in the development of the Company’s commercial products. Mr. Fogg holds a BSEE degree from Lafayette College and a MSEE degree from Rutgers University. Mr. Fogg is a fellow of the Institute of Electrical and Electronic Engineers and has published articles on delay equalization and the use of crystal resonators.
David M. Peison
David M. Peison has been a Director of the Company since October 2004. Since 2005, Mr. Peison has been vice president with the emerging markets division of HSBC. From 2002 until 2005, Mr. Peison was with Deutsche Bank’s global markets division in New York City. From 1992 to 2000, Mr. Peison was in a Private Law Practice in Florida and New York City. Mr. Peison holds an MBA from Emory University in Atlanta, Ga., a JD from The Dickinson School of Law of Pennsylvania State University and is admitted to Florida, New York and Massachusetts Bars. Mr. Peison obtained his BA degree from Lehigh University in Bethlehem, Pa.
Directors hold office until the annual meeting of the Company’s stockholders and the election and qualification of their successors. Officers hold office, subject to removal at anytime by the Board, until the meeting of directors immediately following the annual meeting of stockholders and until their successors are appointed and qualified.
Audit Committee
The Company’s Board of Directors has determined that David M. Peison is the Audit Committee’s Financial Expert and that he is “independent” defined under National Association of Securities Dealers Automated Quotations system.
The Company has a standing Audit Committee, the members of which are, Louis Massad, Edward J. Rielly and David M. Peison.
Changes in Nominating Procedures
None
Section 16(a) Compliance
Section 16(a) of the Exchange Act, requires our directors and officers, and persons who own more than 10% of our Common Stock, to file with the Securities and Exchange Commission initial reports of beneficial ownership and reports of changes in beneficial ownership of our Common Stock and other equity securities. Our officers, directors and greater than 10% beneficial owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended July 31, 2008, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.
Code of Ethics
The Corporation has adopted a Code of Ethics. This Code is publicly available on the Company’s internet website www.conolog.com.
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ITEM 10 A- EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to and accrued by each executive officer during fiscal 2008.
| Annual Compensation | | | Long-Term Compensation | |
| |
| |
| | | | | | | | | | | | | | | Closing Price | | | | | | |
| | | | | | | | | | | | | | | of Common | | | | | | |
| | | | | | | | | | | | | | | Stock | | | | | | |
| | | | | | | | | | | | | | | on the Date of | | | | | | |
| | | Fiscal | | | | | | | | | Restricted | | | the | | Securities | | | | |
| | | Year- | | | | | | | | | Stock | | | Restricted | | Underlying | | | Other | |
| | | End | | | | | | | | | Awards | | | Stock | | Option/ | | | Compen- | |
| Name and Principal | | 31-July | | | Salary | | | Bonus | | | (3) | | | Award | | SARS | | | sation | |
| |
| Robert Benou, Chairman | | 2008 | | $ | 348,333 | | $ | 70,000 | (1) | | 237,500 | | $ | 0.67 | | — | | $ | 21,500 | * |
| Chief Executive Officer, | | 2007 | | $ | 337,300 | | $ | 150,000 | | | 144,000 | | $ | 0.41 | | — | | $ | 18,000 | * |
| Chief Financial Officer and Director | | 2006 | | $ | 341,625 | | $ | 140,000 | | | | | $ | | | — | | $ | 18,000 | * |
| |
| Marc Benou, President | | 2008 | | $ | 173,949 | | $ | 40,000 | (2) | | 237,000 | | $ | 0.67 | | — | | | | |
| Chief Operating Officer, | | 2007 | | $ | 143,625 | | $ | 100,000 | | | 140,000 | | $ | .41 | | — | | | | |
| Secretary and Director | | 2006 | | $ | 111,000 | | $ | 80,000 | | | | | $ | | | — | | | | |
| |
| Thomas Fogg | | 2008 | | $ | 43,040 | | $ | — | | | 25,000 | | $ | 0.67 | | — | | | | |
| Vice-President - | | 2007 | | $ | 40,602 | | $ | — | | | 10,000 | | $ | 0.41 | | — | | | | |
| Engineering | | 2006 | | $ | 40,602 | | $ | — | | | | | $ | | | — | | | | |
* Other compensation consisted of a car allowance.
| 1. | The Company paid Robert Benou’s 2008 bonus by July 31, 2008. |
| |
| 2. | The Company paid Marc Benou’s bonus by July 31, 2008. |
| |
| 3. | On May 21, 2008, our stockholders approved the granting of 800,000 shares of our common stock to our directors, officers and employees. |
| |
On July 9, 2002 our stockholders approved our 2002 Stock Option Plan under which up to 190,000 shares of our common stock may be granted to our employees, directors and consultants. To date, no options have been granted under this plan. The exercise price of options granted under the 2002 Stock Option Plan will be the fair market value of our common stock on the date immediately preceding the date on which the option is granted.
EMPLOYMENT AGREEMENTS
Mr. Robert Benou is serving under an employment agreement commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or Mr. Benou. Mr. Benou’s annual base salary as of July 31, 2008 was $357,300 and increases by $20,000 annually on June 1st of each year. In addition, Mr. Benou is entitled to an annual bonus equal to 6% of the Company’s annual “income before income tax provision” as stated in its annual Form 10-K. The employment agreement also entitles Mr. Benou 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.
Mr. Marc Benou is serving under an employment agreement commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or Mr. Benou. Mr. Benou’s annual base salary as of July 31, 2008 was $179,900 and he receives annual increases of $6,000 on June 1st of each year. Mr. Benou is entitled to an annual bonus equal to 3% of the Company’s annual “income before income tax provision” as stated in its annual Form 10-K. The employment agreement also entitles Mr. Benou to the use of an automobile and to employee benefit plans, such as; life, health, pension, profit sharing and other plans. Under theemployment agreement, employment is terminated upon death or disability of the employee and employee may be terminated by the Company for cause.
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ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of July 31, 2008, certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated.
This table is prepared based on information supplied to us by the listed security holders, any Schedules 13D or 13G and Forms 3 and 4, and other public documents filed with the SEC.
Under the rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest.
Unless otherwise noted, the address for each of the named individuals is c/o Conolog Corporation, 5 Columbia Road, Somerville, New Jersey 08876.
Shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. The applicable percentage of ownership is based on 2,787,469 shares issued and outstanding.
| | | Amount and Nature | | Percent of | |
| Name and Title | | of Beneficial Ownership | | Class | |
| Robert S. Benou, Chairman, Chief Executive Officer | | 316,751 | | 11.36 | % |
| Chief Financial Officer and Director | | | | | |
| Marc R. Benou, President, Chief Operating Officer, | | 318,700 | | 11.43 | % |
| Secretary and Director | | | | | |
| Louis Massad, Director | | 35,000 | | 1.25 | % |
| Edward J. Rielly, Director | | 35,000 | | 1.25 | % |
| David M. Peison, Director | | 45,834 | | 1.64 | % |
| Thomas Fogg, Vice President -Engineering | | 29,250 | | 1.05 | % |
| All Officers and Directors as a Group (6 persons) | | 780,535 | | 27.98 | % |
20
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTORS INDEPENENCE
Certain relationships and Related Transactions
None
Board determination of Independence
Messrs. Massad, Rielly and Peison are each “independent” as that term is defined under the National Association of Securities Dealers Automated Quotation system.
ITEM 13 - EXHIBITS
(a) Exhibits.
Index of Exhibits
| Exhibit No. | | Description of Exhibits |
| |
| 3.1 | | Certificate of Incorporation - incorporated by reference to the Registrant’s Exhibit 3.01 to Registration Statement on Form S-1 (File No. 2-31302). |
| |
| 3.1.1 | | Certificate of Amendment of Certificate of Incorporation - incorporated by reference to Exhibit 3.02 to the Registrant’s Registration Statement on Form S-1 (File No. 2-31302). |
| |
| 3.1.2 | | Certificate of Amendment of Certificate of Incorporation incorporated by reference to Exhibit 4 to the Registrant’s Current Report on Form 8-K for July 1971. |
| |
| 3.1.3 | | Certificate of Ownership and Merger with respect to the merger of Data Sciences (Maryland) into the Registrant and the change of Registrant’s name from “Data Sciences Incorporated” to “DSI Systems, Inc.” - incorporated by reference to Exhibit 3.03(a) to the Registrant’s Registration Statement on Form S-1 (File No. 2-31302). |
| |
| 3.1.4 | | Certificate of the Designation, Preferences and Relative, Participating, Option or Other Special Rights and Qualifications, Limitations or Restrictions thereof of the Series A Preferred Stock (par value $.50) of DSI Systems, Inc. - incorporated by reference to Exhibit 3.04 to the Registrant’s Registration Statement on Form S-1 (File No. 2-31302). |
| |
| 3.1.5 | | Certificate of the Designation, Preferences and Relative, Participating, Option or Other Special Rights and Qualifications, Limitations or Restrictions thereof of the Series B Preferred Stock (par value $.50) of DSI Systems, Inc. - incorporated by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K for November 1972. |
| |
| 3.1.6 | | Certificate of Ownership and Merger respecting merger of Conolog Corporation into the Registrant and the changing of the Registrant’s name from “DSI Systems, Inc.” to “Conolog Corporation” - incorporated by reference to Exhibit 3 to the Registrant’s Current Report on Form 8-K for June 1975. |
| |
| 3.2 | | Amended By-Laws - incorporated by reference to Exhibit 3(h) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1981. |
| |
| 4.1 | | Specimen Certificate for shares of Common Stock (1) |
| |
| 4.2 | | Form of common Stock Purchase Warrant, dated January 19, 2006 (2) |
| |
| 4.3 | | Form of Convertible Note, dated January 19, 2006 (2) |
| | | |
| 4.4 | | Form of Common Stock Purchase Warrant, dated March 12, 2007 (3) |
| |
| 4.5 | | Form of Convertible Note, dated March 12, 2007 (3) |
| | | |
| 4.6 | | Form of Broker’s Common Stock Purchase Warrant, dated March 12, 2007 (3) |
| | | |
| 10.1 | | Employment Agreement dated June 1, 1997 between Robert Benou and Conolog Corporation(4) |
| | | |
| 10.2 | | Employment Agreement dated June 1, 1997 between Marc Benou and Conolog Corporation (4) |
21
| 10.3 | | Conolog Corporation 2002 Stock Option Plan (5) |
| | | |
| 10.4 | | Subscription Agreement dated as of January 19, 2006, among Conolog Corporation and the subscribers named therein (2) |
| | | |
| 10.5 | | Form of Selling Agent Agreement, dated as of January 18, 2006 (2) |
| | | |
| 10.6 | | Subscription Agreement dated as of March 12, 2007 (3). |
| | | |
| 14.1 | | Code of Ethics(6) |
| | | |
| 21.1 | | List of Subsidiaries* |
| | | |
| 31.1 | | Rule 13a-14a/15d-14a Certification of Robert Benou (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER)* |
| | | |
| 32.1 | | Section 1350 Certification of Robert Benou (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER)* |
| ---------------------------------- |
| * | | Filed herewith |
| (1) | | Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 33-92424). |
| (2) | | Incorporated by reference to Registrant’s Report on Form 8-K filed on January 25, 2006. |
| (3) | | Incorporated by reference to Registrant’s Report on Form 8-K filed on March 14, 2007 |
| (4) | | Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 0- 8174) as filed on September 12, 1997. |
| (5) | | Incorporated by reference to the Registrant’s Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934 filed on June 25, 2003. |
| (6) | | Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the fiscal year ended July 31, 2003, filed with the SEC on November 14, 2003. |
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Bagell, Josephs, Levine & Company LLC was retained by the Company on September 21, 2004 to serve as its independent registered public accountants. Prior to that date, Bagell, Josephs, Levine & Company LLC did not perform any services nor receive any fees from the Company.
Audit Fee
Bagell Josephs Levine & Company LLC billed the Company in the aggregate amount of $45,000 and $40,000 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Forms 10-QSB for the years ended July 31, 2008 and 2007, respectively.
Audit-Related Fees
No fees were billed for the years ended July 31, 2008 and 2007 for assurance and related services by Bagell, Josephs, Levine & Company LLC that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under the category Audit Fees described above.
Tax Fees
No fees were billed for the years ended July 31, 2008 and 2007 for tax compliance, tax advice, or tax planning services by Bagell, Josephs, Levine & Company LLC that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under the category Audit Fees described above.
All Other Fees
No fees were billed to the company by Bagell, Joseph, Levine & Company LLC for the years ended July 31, 2008 and 2007 for services not described above.
It is the policy of the Company’s Board of Directors that all services other than audit, review or attest services, must be pre-approved by the Board of Directors. All of the services described above were approved by the Board of Directors.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | By:/s/ Robert S. Benou |
| October 29, 2008 | | Chairman, Chief Executive Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons, on behalf of the registrant and in the capacities and on the dates indicated.
| October 29, 2008 | | /s/Robert S. Benou |
| | | Chairman, Chief Executive Officer and |
| | | Chief Financial Officer |
| |
| October 29, 2008 | | /s/Marc R. Benou |
| | | President, Chief Operating Officer, Secretary and |
| | | Director |
| |
| October 29, 2008 | | /s/Louis S. Massad |
| | | Director |
| |
| October 29, 2008 | | /s/Edward J. Rielly |
| | | Director |
| |
| October 29, 2008 | | /s/David M. Peison |
| | | Director |
23
Conolog Corporation and Subsidiaries
Consolidated Financial Statements
July 31, 2008 and 2007
Annual Report on Form 10-K
Item 8
Consolidated Financial Statements
July 31, 2008 and 2007
Conolog Corporation and Subsidiaries
Somerville, New Jersey
Form 10-K
Index to the Consolidated Financial Statements
Conolog Corporation and Subsidiaries
July 31, 2008 and 2007
| | | Page |
| The following consolidated financial statements of the registrant are included in Item 8: | | |
| | | |
| Report Of Independent Registered Public Accounting Firm | | F-1 |
| | | |
| Consolidated Balance Sheets as of July 31, 2008 and 2007 | | F-2 - F-3 |
| | | |
| Consolidated Statements of Operations for the years ended July 31, 2008 and 2007 | | F-4 |
| | | |
Consolidated Statement of Stockholders’ Equity for the years
ended July 31, 2008 and 2007 | | F-5 |
| | | |
| Consolidated Statements of Cash Flows for the years ended July 31, 2008 and 2007 | | F-6 |
| | | |
| Notes to Consolidated Financial Statements | | F-7 - F-18 |
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
Certified Public Accountants
Suite J
406 Lippincott Drive
Marlton, New Jersey 08053
(856) 346-2828 Fax (856) 396-0022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Conolog Corporation
Somerville, New Jersey
We have audited the accompanying consolidated balance sheets of Conolog Corporation and Subsidiaries (the “Company”) as of July 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two year period ended July 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Conolog Corporation and Subsidiaries at July 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the years in the two year period ended July 31, 2007, in conformity with U.S. generally accepted accounting principles.
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
Certified Public Accountants
Marlton, New Jersey
OCTOBER 23, 2008 |
F-1
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2008 AND 2007
| ASSETS | | | | | | | | |
| | | | 2008 | | | | 2007 | |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 680,647 | | | $ | 687,011 | |
| Certificate of deposit | | | 600,182 | | | | 2,037,330 | |
| Accounts receivable, net of allowance | | | 360,846 | | | | 64,768 | |
| Prepaid expenses | | | 26,477 | | | | 2,320 | |
| Current portion of note receivable | | | 14,864 | | | | 14,864 | |
| Inventory | | | 850,507 | | | | 538,854 | |
| Other current assets | | | 568,529 | | | | 445,136 | |
| |
Total Current Assets | | | 3,102,052 | | | | 3,790,283 | |
| |
| Property and equipment: | | | | | | | | |
| Machinery and equipment | | | 1,357,053 | | | | 1,357,053 | |
| Furniture and fixtures | | | 429,765 | | | | 429,765 | |
| Automobiles | | | 34,097 | | | | 34,097 | |
| Computer software | | | 209,380 | | | | 209,380 | |
| Leasehold improvements | | | 30,265 | | | | 30,265 | |
| Total property and equipment | | | 2,060,560 | | | | 2,060,560 | |
| Less: accumulated depreciation | | | (1,951,725 | ) | | | (1,927,725 | ) |
| Net Property and Equipment | | | 108,835 | | | | 132,835 | |
| |
| Other Assets: | | | | | | | | |
| Deferred financing fees, net of amortization | | | 295,030 | | | | 799,770 | |
| Note receivable, net of current portion | | | 80,495 | | | | 94,140 | |
| |
| Total Other Assets | | | 375,525 | | | | 893,910 | |
| |
| TOTAL ASSETS | | $ | 3,586,412 | | | $ | 4,817,028 | |
The accompanying notes are an integral part of the consolidated financial statements
F-2
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2008 AND 2007
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | 2008 | | | | 2007 | |
| Current Liabilities: | | | | | | | | |
| Accounts payable | | $ | 165,601 | | | $ | 134,112 | |
| Accrued expenses | | | 61,957 | | | | 27,433 | |
| Current Convertible debenture, net of discount | | | 824,853 | | | | - | |
| Total Current Liabilities | | | 1,052,411 | | | | 161,545 | |
| |
| |
| Non-Current Liabilities: | | | | | | | | |
| |
| Convertible debenture, net of discount | | | - | | | | 1,226,605 | |
| Total Liabilities | | | 1,052,411 | | | | 1,388,150 | |
| |
| |
| Stockholders' Equity: | | | | | | | | |
| Preferred stock, par value $.50; Series A; 4% cumulative; | | | | | | | | |
| 500,000 shares authorized; 155,000 shares issued and | | | | | | | | |
| outstanding at July 31, 2008 and 2007, respectively. | | | 77,500 | | | | 77,500 | |
| Preferred stock, par value $.50; Series B; $.90 cumulative; | | | | | | | | |
| 500,000 shares authorized; 1,197 shares issued and outstanding | | | | | | | | |
| at July 31, 2008 and 2007, respectively. | | | 597 | | | | 597 | |
| Common stock, par value $0.01; 30,000,000 shares authorized; | | | | | | | | |
| 2,787,469 and 968,886 shares issued and outstanding at | | | | | | | | |
| July 31, 2008 and 2007 respectively including 9 shares | | | | | | | | |
| held in treasury. | | | 27,875 | | | | 9,692 | |
| Contributed capital | | | 50,003,695 | | | | 44,765,149 | |
| Accumulated deficit | | | (46,819,932 | ) | | | (39,852,326 | ) |
| Treasury shares at cost | | | (131,734 | ) | | | (131,734 | ) |
| Deferred compensation | | | (604,110 | ) | | | (1,319,400 | ) |
| Prepaid consulting | | | (19,890 | ) | | | (120,600 | ) |
| |
| Total Stockholders’ Equity | | | 2,534,001 | | | | 3,428,878 | |
| |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 3,586,412 | | | $ | 4,817,028 | |
The accompanying notes are an integral part of the consolidated financial statements.
F-3
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
| | | | 2008 | | | | 2007 | |
| OPERATING REVENUES | | | | | | | | |
| Product revenue | | $ | 1,220,993 | | | $ | 517,705 | |
| |
| Cost of product revenue | | | | | | | | |
| Materials and labor used in production | | | 467,081 | | | | 378,563 | |
| Write down of obsolete inventory parts | | | 112,171 | | | | 1,256,155 | |
| Total Cost of product revenue | | | 579,252 | | | | 1,634,718 | |
| |
| Gross Profit (Loss) from Operations | | | 641,741 | | | | (1,117,013 | ) |
| Selling, general and administrative expenses | | | | | | | | |
| General and adminitsrative | | | 2,094,819 | | | | 2,149,542 | |
| Stock compensation | | | 1,319,400 | | | | 184,500 | |
| Stock compliance | | | 230,396 | | | | 444,465 | |
| Research and development | | | 150,173 | | | | 372,723 | |
| Professional fees | | | 412,119 | | | | 252,850 | |
| Marketing and trade shows | | | 166,171 | | | | 151,680 | |
| Total selling, general and admintrative expenses | | | 4,373,078 | | | | 3,555,760 | |
| Loss Before Other Income (Expenses) | | | (3,731,337 | ) | | | (4,672,773 | ) |
| OTHER INCOME (EXPENSES) | | | | | | | | |
| Interest expense | | | (77,922 | ) | | | - | |
| Interest income | | | 92,485 | | | | 141,390 | |
| Induced conversion cost | | | (1,387,087 | ) | | | (2,705,457 | ) |
| Write off of discount on converted debt | | | (864,892 | ) | | | - | |
| Amortization of deferred loan discount | | | (606,598 | ) | | | (812,147 | ) |
| Amortization of deferred financing fees | | | (504,740 | ) | | | (363,676 | ) |
| Total Other Income (Expense) | | | (3,348,754 | ) | | | (3,739,890 | ) |
| Loss before provision for income taxes | | | (7,080,091 | ) | | | (8,412,663 | ) |
| Benefit for income taxes | | | 112,485 | | | | 291,596 | |
| NET LOSS APPLICABLE TO COMMON SHARES | | $ | (6,967,606 | ) | | $ | (8,121,067 | ) |
| NET LOSS PER BASIC AND DILUTED COMMON SHARE | | $ | (4.70 | ) | | $ | (12.78 | ) |
| WEIGHTED AVERAGE NUMBER OF COMMON | | | | | | | | |
| SHARES OUTSTANDING | | | 1,483,380 | | | | 653,511 | |
The accompanying notes are an integral part of the consolidated financial statements.
F-4
CONOLOGCORPORATION ANDSUBSIDIARIES
CONSOLIDATEDSTATEMENT OFCHANGES INSTOCKHOLDEREQUITY
FOR THEYEARSENDED JULY 31, 2008 AND 2007
| | | Series A | | Series B | | | | | | | | | | | Contributed | | | | | | | | | | | | | | | | | | Total | |
| | | Preferred Stock | | Preferred Stock | | Common Stock* | | | Contributed* | | | Capital - | | | Accumulated | | | | Treasury | | | | Deferred | | | | Prepaid | | | Stockholders' | |
| | | Shares | | | Amount | | Shares | | | Amount | | Shares | | | Amount | | | Capital | | | Warrants | | | Deficit | | | | Stock | | | | Compensation | | | | Consulting | | | | Equity | |
| |
| |
| Balance at July 31, 2006 | | 155,000 | | $ | 77,500 | | 1,197 | | $ | 597 | | 311,801 | | $ | 3,118 | | $ | 32,167,722 | | $ | 3,857,593 | | $ | (31,726,207 | ) | | $ | (131,734 | ) | | $ | - | | | $ | - | | | $ | 4,248,589 | |
| |
| Conversion of common stock warrants | | | | | | | | | | | | 47,917 | | | 479 | | | 239,105 | | | | | | | | | | | | | | | | | | | | | | 239,584 | |
| Conversion of convertible debenture | | | | | | | | | | | | 284,091 | | | 2,841 | | | 1,247,160 | | | | | | | | | | | | | | | | | | | | | | 1,250,000 | |
| Shares issued for services provided | | | | | | | | | | | | 13,000 | | | 130 | | | 93,470 | | | | | | | | | | | | | | | | | | (93,600) | | | | | |
| Shares issued for services to be provided | | | | | | | | | | | | 16,563 | | | 166 | | | 78,085 | | | | | | | | | | | | | | | | | | (27,000) | | | | 51,250 | |
| Induced conversion cost | | | | | | | | | | | | | | | | | | 2,705,457 | | | | | | | | | | | | | | | | | | | | | | 2,705,457 | |
| Value of warrants assigned to convertible debenture | | | | | | | | | | | | | | | | | | 2,691,595 | | | | | | | | | | | | | | | | | | | | | | 2,691,595 | |
| Common shares issued to officers, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| directors and employees for fiscal 2006 | | | | | | | | | | | | 112,500 | | | 1,125 | | | 183,375 | | | | | | | | | | | | | | (184,500) | | | | | | | | | |
| Common shares issued to officers, | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| directors and employees for fiscal 2007 | | | | | | | | | | | | 183,250 | | | 1,833 | | | 1,317,567 | | | | | | | | | | | | | | (1,319,400) | | | | | | | | | |
| Disgorgement | | | | | | | | | | | | | | | | | | 184,022 | | | | | | | | | | | | | | | | | | | | | | 184,022 | |
| Amortization officers, directors and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 184,500 | | | | | | | | 184,500 | |
| Exchange lots / escheatment | | | | | | | | | | | | | | | | | | | | | | | | (872) | | | | | | | | | | | | | | | | (872) | |
| Net loss for the Year | | | | | | | | | | | | | | | | | | | | | | | | (8,121,067) | | | | | | | | | | | | | | | | (8,121,067) | |
| Dividends | | | | | | | | | | | | | | | | | | | | | | | | (4,180) | | | | | | | | | | | | | | | | (4,180) | |
| Balance at July 31, 2007 | | 155,000 | | | 77,500 | | 1,197 | | | 597 | | 969,122 | * | | 9,692 | | | 40,907,558 | | | 3,857,593 | | | (39,852,326) | | | | (131,734) | | | | (1,319,400) | | | | (120,600) | | | | 3,428,878 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion of convertible debenture | | | | | | | | | | | | 745,090 | | | 7,451 | | | 1,865,793 | | | | | | | | | | | | | | | | | | | | | | 1,873,244 | |
| Amortization of prepaid consulting | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 120,600 | | | | 120,600 | |
| Shares issued for services to be provided | | | | | | | | | | | | 25,000 | | | 255 | | | 19,635 | | | | | | | | | | | | | | | | | | (19,890) | | | | | |
| Induced conversion cost | | | | | | | | | | | | | | | | | | 1,387,087 | | | | | | | | | | | | | | | | | | | | | | 1,387,087 | |
| Sale of Equity | | | | | | | | | | | | 238,250 | | | 2,382 | | | 1,331,818 | | | | | | | | | | | | | | | | | | | | | | 1,334,200 | |
| Interest paid with stock | | | | | | | | | | | | 35,007 | | | 350 | | | 37,848 | | | | | | | | | | | | | | | | | | | | | | 38,198 | |
| Common shares issued to officers, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| directors and employees for fiscal 2007 | | | | | | | | | | | | 774500 | | | 7,745 | | | 596,365 | | | | | | | | | | | | | | (604,110) | | | | | | | | | |
| Amortization officers, directors and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,319,400 | | | | | | | | 1,319,400 | |
| Net loss for the Year | | | | | | | | | | | | | | | | | | | | | | | | (6,967,606) | | | | | | | | | | | | | | | | (6,967,606) | |
| Dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at July 31, 2008 | | 155,000 | | $ | 77,500 | | 1,197 | | $ | 597 | | 2,786,969 | * | $ | 27,875 | | $ | 46,146,102 | | $ | 3,857,593 | | $ | (46,819,932) | | | $ | (131,734) | | | $ | (604,110) | | | $ | (19,890) | | | $ | 2,534,001 | |
*Representsretroactiveapplication of 1:4 reverse stock split.
Theaccompanying notes are anintegral part of theconsolidatedfinancialstatements.
F-5
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
| | | | 2008 | | | | 2007 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
| Net loss | | $ | (6,967,606 | ) | | $ | (8,121,067 | ) |
| Adjustments to reconcile net loss to net cash used in operations: | | | | | | | | |
| Depreciation | | | 24,000 | | | | 20,831 | |
| Amortization of deferred compensation | | | 1,319,400 | | | | 184,500 | |
| Amortization of prepaid consulting expense | | | 120,600 | | | | 51,251 | |
| Write off of discount on converted debt | | | 864,892 | | | | - | |
| Induced conversion cost | | | 1,387,087 | | | | 2,705,457 | |
| Amortization of discount on debenture | | | 606,598 | | | | 812,147 | |
| Amortization of deferred financing fees | | | 504,740 | | | | 363,676 | |
| Write down of obsolete inventory parts | | | 112,171 | | | | 1,256,155 | |
| Changes in assets and liabilities | | | | | | | | |
| (Increase) decrease in accounts receivable | | | (296,078 | ) | | | 118,854 | |
| Decrease in accounts receivable - other | | | - | | | | 4,377 | |
| (Increase) decrease in prepaid expenses | | | (24,157 | ) | | | 24,056 | |
| (Increase) in inventories | | | (423,824 | ) | | | (71,329 | ) |
| (Increase) in other current assets | | | (123,393 | ) | | | (298,772 | ) |
| Increase (decrease) in accounts payable and accrued expenses | | | 104,213 | | | | (30,259 | ) |
| Net cash used in operations | | | (2,791,357 | ) | | | (2,980,123 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Purchase of certificates of deposit | | | (3,697,670 | ) | | | (2,445,877 | ) |
| Redemption of certificates of deposit | | | 5,134,818 | | | | 3,031,359 | |
| Purchase of equipment and leasehold improvements | | | - | | | | (83,693 | ) |
| Net cash used in investing activities | | | 1,437,148 | | | | 501,789 | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from issuance of stock and warrants | | | 1,334,200 | | | | 239,584 | |
| Proceeds from convertible debenture | | | - | | | | 2,487,500 | |
| Proceeds from disgorgement | | | - | | | | 184,022 | |
| Proceeds from note receivable | | | 13,645 | | | | 16,102 | |
| Net cash provided by financing activities | | | 1,347,845 | | | | 2,927,208 | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (6,364 | ) | | | 448,874 | |
| CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | | | 687,011 | | | | 238,137 | |
| CASH AND CASH EQUIVALENTS - END OF YEAR | | | 680,647 | | | $ | 687,011 | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| CASH PAID DURING THE YEAR FOR: | | | | | | | | |
| Interest expense | | $ | 15,323 | | | $ | - | |
| Income Taxes | | | - | | | | 7,926 | |
| SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: | | | | | | | | |
| Warrants assigned to convertible debentures | | $ | - | | | $ | 2,691,595 | |
| Debt converted to equity | | $ | 1,873,244 | | | $ | 1,250,000 | |
| Common stock issued for serices to be provided | | $ | 19,890 | | | $ | 120,600 | |
| Common stock issued for services provided | | $ | - | | | $ | 51,250 | |
| Common stock issued for deferred compensation | | $ | 604,110 | | | $ | 1,503,900 | |
| Common stock issued for accrued interest | | $ | 38,198 | | | | - | |
The accompanying notes are an integral part of the consolidated financial statements.
F-6
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
| NOTE 1- | | NATURE OF ORGANIZATION |
| |
| | | Conolog Corporation (the “Company”) is in the business of design, manufacturing and distribution of small electronic and electromagnetic components and subassemblies for use in telephone, radio and microwave transmissions and reception and other communication areas. The Company’s products are used for transceiving various quantities, data and protective relaying functions in industrial, utility and other markets. The Company’s customers include primarily industrial customers, which include power companies, and various branches of the military. |
| |
| | | The Company formed a wholly owned Subsidiary, Nologoc Corporation. In September 1998, Nologoc Corporation purchased the assets of Atlas Design, Incorporated. In January, 2001, Nologoc Corporation purchased the assets of Prime Time Staffing, Incorporated and Professional Temp Solutions Incorporated. Atlas Design, Prime Time Staffing and Professional Temp Solutions provide short-term and long-term qualified engineering and technical staff, as well as human resource consulting to various industries. In March 2004 the Company ceased operating its staffing business. The assets of the Company's wholly-owned subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to the Company's vice-president of operations of Atlas Design. |
| |
| NOTE 2- | | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| |
| | | Principles of Consolidation |
| | | The consolidated financial statements include the accounts of Conolog Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. |
| |
| | | Cash and Equivalents |
| | | 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 twelve 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 during the year, balances in certain bank accounts may exceed the FDIC insured limits. |
| |
| | | Certificates of Deposits |
| | | At July 31, 2008 and 2007, the Company had one six month and one nine month, certificates of deposit totaling $600,182 and $2,037,330, respectively with interest at a rate of 4.3% and 5.3% and maturing September 2008 and September 2007, respectively. |
| |
| | | Inventories |
| | | Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. |
| |
| | | Property, Plant and Equipment |
| | | Property, plant and equipment are carried at cost, less allowances for depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Depreciation was $24,000 and $20,831 for the years ended July 31, 2008 and 2007, respectively. Repairs and maintenance expenditures which do not extend the useful lives of the related assets are expensed as incurred. |
F-7
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
| NOTE 2- | | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| | | (CONTINUED) |
| |
| | | Research and Development |
| | | Research and Development costs are expensed as incurred. Research and Development costs were $150,173 and $372,723 for the years ended July 31, 2008 and 2007 respectively. |
| |
| | | Revenue Recognition |
| | | Revenue is recorded in accordance with the guidance of the SEC’s Staff Accounting Bulletin (SAB) No. 104, which supersedes SAB No. 101. Revenue from product sales are 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. |
| |
| | | Receivables and Allowance for Doubtful Accounts |
| | | 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. The Company has a concentration risk in trade accounts receivable with significant sales to the government and local agencies. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations. |
| | | |
| | | Other Current Assets |
| | | 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 fiscal year ended July 31, 2008, the Company entered into an agreement under which it will sell $861,408 of its NOL carryover. The total net proceeds of this transaction will amount to $758,039 and a portion ($568,529) is recorded in current Other Assets in the accompanying financial statements. |
| | | |
| | | Advertising / Public Relations Costs |
| | | Advertising/Public Relations costs are charged to operations when incurred. These expenses were $41,795 and $42,978 for the years ended July 31, 2008 and 2007, respectively. |
| |
| | | Shipping and Handling Costs |
| | | Shipping and handling costs are expensed as incurred and amounted to $17,491 and $14,891 for the years ended July 31, 2008 and 2007, respectively. |
| |
| | | Securities Issued for Services |
| | | The Company accounts for common stock issued for compensation services of Officers, Directors and employees by reference to the fair market value of the Company’s stock on the date of stock issuance. |
| |
| | | Fair Value of Financial Instruments |
| | | The carrying amounts of cash, accounts receivable, other current assets, accounts payable and accrued expenses approximates fair value because of the short maturity of these instruments. |
| |
| | | Income Taxes |
| | | Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future federal and state income taxes. |
| |
| | | Loss Per Share of Common Stock |
| | | Loss per share of common stock is computed by dividing net loss (after dividends on preferred shares) by the weighted average number of shares of Common Stock outstanding during the year. The preferred dividends are not reflected in arriving at the net loss as they are not material and would have no effect on earnings per share available to common shareholders. The number of weighted average shares used in the computations were 1,483,380 and 653,511 (adjusted for the 1:4 reverse stock split) for 2008 and 2007 respectively. The effect of assuming the exchange of Series A Preferred Stock and Series B Preferred Stock in 2007 and 2006 would be anti-dilutive. |
| | | |
| | | Anti-dilutive shares are not included in the calculation of Earnings Per Share. |
F-8
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
| NOTE 2- | | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| | | (CONTINUED) |
| |
| | | Loss Per Share of Common Stock (Continued) |
| | | The effect of assuming the exercise of outstanding warrants at July 31, 2008 would be anti-dilutive. |
| |
| | | The following is a reconciliation of the computation for basic and diluted EPS: |
| | | | | July 31, | | | | July 31, | |
| | | | | 2008 | | | | 2007 | |
| | Net Loss | | $ | (6,967,606 | ) | | $ | (8,121,067 | ) |
| |
| | Weighted-average common shares | | | | | | | | |
| | outstanding (Basic) | | | 1,483,380 | | | | 653,511 | |
| | Weighted-average common stock | | | | | | | | |
| | equivalents: | | | | | | | | |
| | Stock options | | | - | | | | - | |
| | Warrants | | | - | | | | - | |
| |
| | Weighted-average common shares | | | | | | | | |
| | outstanding (Diluted) | | | 1,483,380 | | | | 653,511 | |
| | Use of Estimates |
| | The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
F-9
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
| NOTE 2- | | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| | | (CONTINUED) |
| |
| | | Recent Accounting Pronouncements |
| | | In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 157 to have a material impact on its results or financial statements |
| | | |
| | | In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “;Quantifying Misstatements”. SAB 108 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect SAB 108 to have a material impact on its results or financial statements |
| | | |
| | | The FASB also issued in September 2006 Statement of Financial Accounting Standards No. 158, employers’ Accounting for Defined Benefit Pension and other Postretirement Plans effective for financial statements issued for fiscal years beginning after December 15, 2006. This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Company does not expect FAS 158 to have a material impact on its results or financial statements |
| | | |
| | | In June 2006, the FASB issued Interpretation No.48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” effective for financial statements issued for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material impact on the Company’s consolidated financial position and results of operations. |
| | | |
| | | In February 2007 the FASB issued Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 effective for financial statements issued for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The Company does not expect FAS 159 to have a material impact on its results or financial statements. |
| |
| | | Also in February 2007 the FASB issued Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements- an amendment of ARB No. 51 effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect FAS 160 to have a material impact on its results or financial statements. |
| |
| | | In March 2008 the FASB issued Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB No. 133 effective for financial statements issued for fiscal years beginning after November 15, 2007. This Statement requires enhanced disclosures about an entity’s derivatives and hedging activities and thereby improves the transparence of financial reporting. The Company does not expect FAS 161 to have a material impact on its results or financial statements. |
| |
| NOTE 3- | | INVENTORY |
| |
| | | Inventory consisted of the following as of July 31, |
| | | | | 2007 | | | | 2006 |
| | Finished Goods | | $ | 560,903 | | | $ | 205,638 |
| | Work-in-process | | | 32,033 | | | | 22,350 |
| | Raw materials | | | 257,571 | | | | 310,866 |
| | | | $ | 850,507 | | | $ | 538,854 |
| NOTE 4- | | RENTAL COMMITMENTS |
| | | Total rental expense for all operating leases of the Company amounted to approximately $55,680 and $55,680 during the years ended July 31, 2008 and 2007, respectively. The Company currently leases its facilities on a month-to-month basis. |
| |
| NOTE 5- | | DEFERRED FINANCING FEES |
| | | The Company has deferred financing fees of $295,030 and $799,770 for July 31, 2008 and 2007, respectively. These deferred financing fees will be amortized over the life of the loans. Amortization expense for these fees for the years ended July 31, 2008 and 2007 were $504,740 and $363,676 respectively. |
| | | |
| NOTE 6- | | DEFERRED COMPENSATION |
| | | Pursuant to the Corporation 2008 Stock Incentive Plan, 774,500 common shares of Company stock were issued to current Officers, Directors and Employees. These shares were recorded at a value of $604,110 and will be expensed during the July 31, 2009 fiscal year. |
F-10
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
| NOTE 7- | | NOTE RECEIVABLE |
| |
| | | The Company entered into an Agreement to Rescind Asset Purchase Agreement, dated October 22, 2002. This Agreement requires the repayment of $148,640, consisting of principal and interest accrued to July 31, 2004. Payments of $1,607 (principal of $1,239 and interest at 5% of $368) begin December 30, 2004 and will continue monthly until the full balance is repaid. |
| |
| NOTE 8- | | INCOME TAXES |
| | | The income tax (benefit) is comprised of the following: |
| | | | | July 31, | |
| | | | | 2008 | | | | 2007 | |
| | Current Income Taxes | | $ | - | | | $ | - | |
| | Federal | | | - | | | | - | |
| | State | | | (112,485 | ) | | | (291,596 | ) |
| | | | $ | (112,485 | ) | | $ | (291,596 | ) |
| | 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 fiscal year ended July 31, 2008, the Company entered into an agreement under which it will sell $861,408 of its NOL carryover. The total net proceeds of this transaction will amount to $758,039 and a portion is recorded as a benefit and in current Other Assets in the accompanying financial statements. |
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. The Company has established a valuation allowance at the full value of the deferred tax asset.
At July 31, 2008 and 2007, the Company has net operating loss carryforwards for federal and state income tax (Book) purposes of approximately $46,800,000 and $39,900,000 respectively, which is available to offset future Federal and State taxable income through 2028.
There was no provision for income taxes for the year ended July 31, 2008 and July 31, 2007.
| | | | | | | | | |
| | | 2007 | | | 2008 | |
| |
| |
| Deferred tax asset | | $ | 16,380,000 | | | $ | 13,965,000 | |
| |
Less: Valuation
allowance | | $ | (16,380,000 | ) | | $ | (13,965,000 | ) |
F-11
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
NOTE 9- PROFIT SHARING PLAN
The Company sponsors a qualified profit sharing plan that covers substantially all full time employees. Contributions to the plan are discretionary and determined annually by management. No contributions to the plan were made during the years ended July 31, 2008 and 2007.
The Plan also provides an employee savings provision (401(k) plan whereby eligible participating employees may elect to contribute up to the maximum allowed under the IRS code to an investment trust. For tax year 2008 this maximum allowable deferred contribution was $15,500 ($20,500 for employee over age 59 ½). The Company made matching contributions to the plan of $180,619 and $183,549 for the fiscal years ended July 31, 2008 and 2007 respectively.
F-12
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
NOTE 10- STOCKHOLDERS’ EQUITY
The Series A Preferred Stock provides 4% cumulative dividends, which were $120,783 ($0.78 per share) in arrears at July 31, 2008. In addition, each share of Series A Preferred Stock may be exchanged for one share of Common Stock upon surrender of the Preferred Stock and payment of $48,000 per share. The Company may redeem the Series A Preferred Stock at $.50 per share plus accrued and unpaid dividends.
The Series B Preferred Stock provides cumulative dividends of $0.90 per share, which were $39,936 ($33.36 per share) in arrears at July 31, 2008. In addition, each share of Series B Preferred Stock is convertible into .005 of one share of Common Stock.
On January 19, 2006, pursuant to a Subscription Agreement, the Company sold and issued to three Subscribers Convertible Notes having an aggregate principal balance of $1,250,000 which are convertible into 1,000,000 shares of common stock at a conversion price of $1.25 per share, and warrants to purchase 1,000,000 shares of common stock at a price of $0.9579 per share. The Warrants are exercisable as of April 19, 2006 and terminate on the fifth year anniversary date. Interest payable on these notes accrues at a rate of 5% per annum. The convertible notes and warrants have been recorded in compliance with APB-14.
The $1,250,000 of proceeds attributed to the Convertible Debenture are recorded based upon their relative fair value. The value assigned to the warrants of $401,363 has been recorded as a discount to the convertible debenture. Additionally, the warrants valued at $0.9579 per share represents a Beneficial Conversion feature calculated at their intrinsic value and amounted to $46,157. This beneficial conversion feature has been recorded as a discount to the convertible debenture. This aggregate discount to the debt of $447,520 will be amortized over the life of the debt using the effective interest method.
At a Special Meeting of the shareholders held on August 2, 2006 a proposal to amend the Certificate of Incorporation to give effect to a one-for-six reverse stock split of the common stock of the Company was approved by the stockholders. The reverse split was effected on August 4, 2006.
Pursuant to a Subscription Agreement dated January 19, 2006, the Company sold and issued to three Subscribers Convertible Notes having an aggregate principal balance of $ 1,250,000 which as a result of the reverse split are convertible into 166,667 (the “Note Shares”) post split shares of (post 1-for-6 stock reverse split) common stock at a post split conversion price of $7.50, and warrants to purchase 166,668 shares of (post 1-for-6 stock reverse split) common stock at a post split exercise price of $5.7474 per share (the “Conversion Price”). Pursuant to an agreement dated as of September 28, 2006, between the Company and the selling shareholders who were parties to the January 19, 2006 Subscription Agreement (the “Subscribers”), the Company reduced the warrant exercise price of warrants held by the Subscribers to $1.25 so long as such warrants were exercised by October 31, 2006, after which time the warrant exercise price would revert to $5.7474, subject to adjustment as provided in the warrants. Pursuant to an agreement between the Company and First Montauk Securities Corp. (the placement agent in the private placement with the selling shareholders who were parties to the January 19, 2006 Subscription Agreement) the Company reduced the exercise price of warrants issued to First Montauk Securities Corp. and/or its transferees to $1.25. As of January 31, 2007 all of the Subscribers and some of the First Montauk Securities Corp. warrants, amounting to 191,667 warrants were exercised at a conversion price of $1.25 per share. The Company received a Gross amount of $239,584 for these warrants.
As permitted by the January 19, 2006 Subscription Agreement, on November 30th, the Company reduced the Conversion Price to $1.10 per share. Any shares in excess of the Notes Shares will not be registered under the Securities Act of 1933, as amended, and, therefore, may not be offered for sale, pledged or hypothecated in the absence of an effective registration statement or an opinion of counsel reasonably satisfactory to the Company that such registration is not required.
In January 2007, the Company reduced the original conversion prices of their outstanding debentures from $7.50 to $1.10. Subsequent to the reduction in the conversion price the debt holders exercised their rights to convert. The
F-13
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
incremental consideration of the shares issued in the conversion was valued at $2,705,457 and recorded as induced conversion costs in the accompanying statement of operations.
In connection with this conversion, the amortization of deferred loan costs of $174,147 and the amortization of deferred loan discount of $363,610 were fully written off.
On March 12, 2007 we completed a private placement of an aggregate of $2,825,000, principal amount, of Convertible Debentures with eight investors. The Convertible Debentures are convertible into an aggregate of 1,412,500 shares of the common stock of the Company.
The Conversion Price of the Convertible Debentures is $2.00 per share. The investors have also received warrants to purchase an aggregate of 1,412,500 shares of the Company’s common stock at an exercise price of $2.88 per share, exercisable beginning at any time on the sooner of September 8, 2007 or the date the Company’s stockholders approves the issuance of the Company’s common stock issuable on conversion of the Convertible Debentures (if such approval is required by the applicable rules of the Nasdaq) through the fifth anniversary of the issuance. In addition, the selling agent (including certain of its employees and affiliates) was granted a warrant to acquire 282,500 shares of the Company’s common stock. The Company received net proceeds of $2,487,500. The private placement was approved by the Company’s shareholders, as required by applicable Nasdaq rules, on May 15, 2007.
On September 7, 2007, the Company’s Board of Directors voted unanimously to adjust the original conversion price of their outstanding debentures from $2.00 to $1.40 resulting in the reduction in Notes payable of $1,246,171.
On December 26, 2007, the Company’s Board of Directors voted unanimously to further adjust the original conversion price of their outstanding debentures from $1.40 to $1.05. There has been no reduction in Notes payable as of this filing.
On June 12, 2008, the Company’s Board of Directors voted unanimously to adjust the original conversion price of their outstanding debentures from $4.20 (post reversal) to $1.20 resulting in the reduction in Notes payable of $627,071.
On November 2, 2007, the Company issued and sold in a private placement (the “Private Placement”), an aggregate of 953,000 shares of common stock (the “Common Shares”) at a purchase price of $1.40 per share, and warrants to purchase 476,500 shares of the Company’s common stock, which are exercisable for a period commencing six months from November 2, 2007 for five years to November 2, 2012, at an exercise price of $1.66 per share (the “Subscriber Warrants”). From the sale of the Common Shares, the Company received net proceeds of $1,163,268 after deducting attorneys' fees, printing fees and other miscellaneous fees related to the Private Placement.
On March 20, 2008 Conolog received a Nasdaq Staff Deficiency Letter stating that, as the bid price of the Company’s common stock has closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market set forth in Marketplace Rule 4310(c)(4), in accordance with Marketplace Rule 4310(c) (8)(D), the Company will be provided 180 calendar days , or until September 16, 2008, to regain compliance. If at any time before September 16, 2008, the bid price of the Company’s stock closes at $1.00 per share or more for a minimum of 10 consecutive business days Nasdaq will provide written notification that the Company complies with the rule.
On June 25, 2008 Conolog received a Nasdaq Notification Letter stating that the bid price of the Company’s common stock has closed above the minimum $1.00 per share requirement for at least 10 consecutive trading days and accordingly has regained compliance with Marketplace Rule 4310 (c) (4).
On August 26, 2008 Conolog received a Nasdaq Staff Deficiency Letter stating that, as the bid price of the Company’s common stock has closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market set forth in Marketplace Rule 4310(c)(4), in accordance with Marketplace Rule 4310(c) (8)(D), the Company will be provided 180 calendar days , or until February 23, 2009, to regain compliance. If at any time before February 23, 2009, the
F-14
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
bid price of the Company’s stock closes at $1.00 per share or more for a minimum of 10 consecutive business days Nasdaq will provide written notification that the Company complies with the rule.
A summary of the Company’s warrant activity is as follows:
| | | Year End July 31, 2008 | | | | | | Weighted | |
| | | Number of | | | Post Reverse Split | | | | | | average | |
| | | Warrants | | | 1 X 6 | | 1 X 4 | | | | Exercise Price | |
| Balance st July 31, 2004 | | 470,000 | | | | | | | | $ | 1.69 | |
| Exercised September 2004 | | (270,000 | ) | | | | | | | $ | 1.59 | |
| | | 200,000 | | | 33,333 | | 8,333 | | | $ | 40.56 | |
| |
| Issued February 2005 | | 958,549 | | | | | | | | $ | 1.25 | |
| Exercised February 2005 | | (200,000 | ) | | | | | | | $ | 1.84 | |
| | | 758,549 | | | 126,425 | | 31,606 | | | $ | 30.00 | |
| Issued July 2005 | | 1,440,000 | | | 240,000 | | 60,000 | | | $ | 40.56 | |
| |
| Issued January 2006 | | 1,200,000 | | | | | | | | $ | 0.96 | |
| Exercised February 2007 | | (1,191,667 | ) | | | | | | | | | |
| | | 8,333 | | | 8,333 | | 2,083 | | | $ | 5.00 | |
| Issued March 2007 | | | | | 1,695,000 | | 423,750 | | | $ | 11.52 | |
| Issued November 2007 | | | | | 476,500 | | 119,125 | | | $ | 6.64 | |
| |
| Balance July 31, 2008 | | | | | 2,579,591 | | 644,897 | | | $ | 14.58 | |
NOTE -11 CONVERTIBLE DEBENTURES
On March 12, 2007 a private placement of an aggregate of $2,825,000, principal amount, of Convertible Debentures was placed with eight investors. The Convertible Debentures are convertible into an aggregate of 1,412,500 shares of the common stock of the Company. The balance of any un-converted Note with simple and unpaid interest (6%) will mature on March 12, 2009.
The Conversion Price of the Convertible Debentures is $2.00 per share. The investors have also received warrants to purchase an aggregate of 1,412,500 shares of the Company’s common stock at an exercise price of $2.88 per share, exercisable beginning at any time on the sooner of September 8, 2007 or the date the Company’s stockholders approves the issuance of the Company’s common stock issuable on conversion of the Convertible Debentures (if such approval is required by the applicable rules of the Nasdaq) through the fifth anniversary of the issuance. In addition, the selling agent (including certain of its employees and affiliates) was granted a warrant to acquire 282,500 shares of the Company’s common stock.
The Company received net proceeds of $2,487,500.
On September 7, 2007, the Company’s Board of Directors voted unanimously to adjust the original conversion price of their outstanding debentures from $2.00 to $1.40 resulting in the reduction in Notes payable of $1,246,171.
On December 26, 2007, the Company’s Board of Directors voted unanimously to further adjust the original conversion price of their outstanding debentures from $1.40 to $1.05. There has been no reduction in Notes payable as of this filing.
On June 12, 2008, the Company’s Board of Directors voted unanimously to adjust the original conversion price of their outstanding debentures from $4.20 (post reversal) to $1.20 resulting in the reduction in Notes payable of $627,071.
F-15
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
| NOTE 12- | | MAJOR CUSTOMERS |
| |
| | | The following summarizes sales to major customers (each 10% or more of net sales) by the Company: |
| | | | | Total | | Sales to Major | | Number of | | Percentage of |
| | Year Ended | | | Revenue | | | Customers | | Customers | | Total |
| | 2008 | | $ | 1,220,993 | | $ | 756,137 | | 4 | | 61.9% |
| | 2007 | | $ | 517,705 | | $ | 266,253 | | 3 | | 51.4% |
| NOTE 13- | | STOCK OPTION PLAN |
| |
| | | 2002 Stock Option Plan |
| |
| | | On April 23, 2002, the Board of Directors of the Company adopted the 2002 Stock Option Plan (“the 2002 Plan”). Under the 2002 Plan, the Company may grant up to 190,000 shares of common stock as either incentive stock options under Section 422A of the Internal Revenue Code or nonqualified stock options. Subject to the terms of the 2002 Plan, options may be granted to eligible persons at any time and under such terms and conditions as determined by the 2002 Stock Option Committee (‘the Committee”). Unless otherwise determined by the Committee, each stock option shall terminate no later than ten years (or such shorter time as may be fixed by the Committee) after the date in which it was granted. The exercise price for incentive stock options must be at least one hundred percent (100%) of the fair market value of common stock as determined on the date of the grant. 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. |
| |
| |
| | | As of July 31, 2008 and 2007, there had been no shares granted under the 2002 Plan. |
| |
| |
| |
| NOTE 14- | | SECURITIES ISSUED FOR SERVICES |
| |
| | | During fiscal year July 31, 2008, the Company issued 25,000 shares of common stock to a consultant for services. These shares were for services that extend into the future and are amortized against invoices billed by the consultants for actual services rendered in fiscal year 2009. |
| | | |
| | | During fiscal year July 31, 2007, the Company issued 29,563 shares of common stock to various consultants for services. Of these, 16,563 shares issued were for services that extend into the future |
F-16
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
and were amortized against invoices billed by the consultants for actual services rendered in fiscal year 2008. The remaining were expensed at the fair value of consideration received during fiscal year 2007.
These services were performed in fiscal year 2007 and expensed at their fair value of consideration received at the date of the agreement in accordance with EITF 00-18 “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees”.
NOTE 15– CONTINGENCIES
Meyers Associates, L.P. v. Conolog Corporation, Supreme Court of the State of New York, County of New York Index No. 600824/07.
On March 13, 2007, Meyers Associates, L.P. commenced an action against Conolog Corporation, asserting that: (1) Conolog breached a purported contract it had with Meyers pursuant to which it claims Meyers was to act as lead underwriter in connection with a Regulation D securities offering for Conolog, and (2) Conolog misappropriated a purported confidential list of potential investors. Conolog denies the allegations in the complaint and intends to vigorously defend against Meyers’s claims.On January 10, 2008 the Court heard arguments on Conolog’s motion to dismiss, or, in the Alternative, for Summary Judgment. On March 5, 2008 the Court granted Conolog’s motion for summary judgment and on April 1, 2008 a Court conference was held to determine the remaining portion of the complaint in the amount of under $5,000. The complainant did not appear for this conference.
Allen Wolfson v. Conolog Corporation, United States District Court for the Southern District of New York, Case Number 08-cv-3790.
On April 22, 2008, Allen Wolfson filed an action against Conolog Corporation, asserting that there was a breach of contract in connection with four consulting contracts allegedly entered into with ”plaintiff and entities controlled by plaintiff.” On June 10, 2008, the company filed a motion to dismiss Plaintiff’s complaint on the grounds that the Court lacks personal jurisdiction over the Company or, in the alternative, for Plaintiff’s failure to state a claim upon which relief can be granted. The motion to dismiss was fully briefed and submitted to the Court on June 26, 2008 and we await the Court’s decision on the motion to dismiss.
| NOTE 16- | | SUBSEQUENT EVENTS |
| |
| | | On September 8, 2008, The Company has reduced the exercise price of the warrants issued in connection with the Subscription Agreement, dated March 12, 2007 (the “Subscription Agreement”), from $1.20 per share to $0.50 per share. As a result of the reduction of the warrant exercise price, pursuant to Section 12 (b) of the Subscription Agreement, the conversion price of the Convertible Notes issued in connection with the Subscription Agreement is now $0.50 per share. Any shares in |
F-17
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2008 AND 2007
excess of the shares that already have been registered for sale on conversion of the Notes will not be registered under the Securities Act of 1933, as amended, and, therefore, may not be offered for sale, pledged or hypothecated in the absence of an effective registration statement or an opinion of counsel reasonably satisfactory to the Company that such registration is not required.
As a result of the above reductions in exercise and conversion prices, as of October 15, 2008 investors have converted $285,042 of debt for 570,084 common stock shares. The Company will also recognize an Induced Conversion cost related to these conversions of approximately $180,500.
On August 26, 2008 Conolog received a Nasdaq Staff Deficiency Letter stating that, as the bid price of the Company’s common stock has closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market set forth in Marketplace Rule 4310(c)(4), in accordance with Marketplace Rule 4310(c) (8)(D), the Company will be provided 180 calendar days, or until February 23, 2009, to regain compliance. If at any time before February 23, 2009, the bid price of the Company’s stock closes at $1.00 per share or more for a minimum of 10 consecutive business days Nasdaq will provide written notification that the Company complies with the rule.
On October 16, 2008, NASDAQ implemented a temporary suspension of the Marketplace Rule 4310(c) (4) regarding the minimum closing bid price of $1.00. This temporary suspension will allow Conolog until April 24, 2009 to regain compliance.
F-18
