The condensed unaudited interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the July 31, 2008 audited consolidated financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.
These condensed unaudited consolidated financial statements reflect all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the operations and cash flows for the period presented. Results of operations for the nine months ended April 30, 2009 should not necessarily be taken as indicative of the results of operations that may be expected for the fiscal year ending July 31, 2009.
On March 12, 2007 a private placement of an aggregate of $2,825,000 of Convertible Debentures was placed with eight investors. The Convertible Debentures, subject to stockholder approval as required by any applicable Nasdaq rules, 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 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. The Company’s shareholders approved the issuance of the common stock issuable upon conversion of the Debentures. 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.
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 at this $1.05 conversion price.
On June 12, 2008, the Company’s Board of Directors voted unanimously to adjust the original conversion price of their outstanding debenture from $4.20 (post reversal) to $1.20 resulting in the reduction in Notes payable of $627,071.
On September 8, 2008, the Company 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 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.
On March 9, 2009 the Maturity Date of the Notes was extended from March 11, 2009 to August 31,2009. In addition, from the date of March 9, 2009 until immediately after the Maturity Date, the holders may convert at a conversion rate of 75% of the average closing bid prices for the five trading days preceding the date of the Conversion Notice.
As a result of the above reductions in exercise and conversion prices, for the nine months ended April 30, 2009 investors have converted $633,326 of debt for 932,628 common stock shares. The Company has recognized an Induced Conversion cost related to these conversions of $347,982 for the nine months ended April 30, 2009 compared to a $944,362 Induced Conversion cost for the same nine month period last year.
Note 3 - Nasdaq Notification
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 March 16, 2009 the Company received a NASDAQ Staff Notification that its common stock had maintained a minimum bid price of $1.00 per share or greater for at least 10 consecutive business day and accordingly had regained compliance with Marketplace Rule 4301 ( c) (4).
As of April 30, 2009, the Company does not meet the minimum listing requirement of NASDAQ with regard to maintaining a minimum Net Worth (Equity) of $2.5 million. Refer to subsequent Events Note 5.The Company has not received any NASDAQ Staff Letter regarding this non-compliance issue.
Note 4 – Major Customers
The Company’s revenues from three customers accounted for $759,854 or 61% of total revenues in the nine months ended April 30, 2009. Total amounts due from these customers at April 30, 2009 were $124,368 or 51% of total accounts receivable. These three customers accounted for 10% or more of total revenues, which is the definition of a major customer.
Note 5 – Reclassification
Certain reclassifications have been made to the July 31, 2008 condensed consolidated financial statements to conform to the 2009 presentation. These changes had no effect on net loss or cash flow for the three and nine month period ended April 30, 2009.
Note 6 – Subsequent Events
As of the filing date over $299,000 of existing debt was converted to Equity. Also as of June 15, 2009, the Company was in negotiations to sell unregistered common stock securities to a private investor in an amount up to $200,000. The effect of these transactions is to increase Equity, bringing the Equity balance, as of the filing date, into compliance with NASDAQ’s minimum requirement of $2.5 million.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED April 30, 2009
Product revenues for the nine months ended April 30, 2009 totaled $1,239,560 representing an increase of 40% from the $884,035 reported for the same nine month period last year. The Company attributes this nine month increased to more timely order releases from utilities.
Product revenues for the three months ended April 30, 2009 totaled $293,920, representing a decrease of 19% from $361,308 for the same three month period last year.
Product Cost (Material and Direct Labor) for the three months ended April 30, 2009 and 2008 totaled $78,159 and $55,263 respectively. Product Cost (Material and Direct Labor) for the nine months ended April 30, 2009 and 2008 totaled $312,522 (25% of Product revenues) and $251,865 (28% of Product revenues [excluding $100,000 inventory write down])
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respectively. This three month increase reflects an adjustment to inventory for the entire nine month period. The overall Product Cost continues to be contained by the standardizing of costs to build our new PDR-2000 systems; the outsourcing of assemblies and continued use of assembly standards under ISO-9000.
Gross Profit for the nine months ended April 30, 2009 and 2008 amounted to $927,038 or 75% and $532,170 or 40% respectively, the increase is a direct result of the increase in sales deliveries as of April 30, 2009.
Selling, general and administrative expenses for the nine months ended April 30, 2009 amounted to $2,285,610, a reduction of $810,095 from the same period last year. Selling, general and administrative expenses for the three months ended April 30, 2009 amounted to $1,152,063, an increase of $245,349 for the same period last year. The Company attributes this increase to legal fees and development costs for new products.
Non-cash non-operating expenses for the nine-month period totaled $721,685 and included expenses related to the induced conversion cost of $347,982; $112,399 for amortization of deferred debenture discount and $261,304 for amortization of deferred debenture costs.
As a result of the foregoing, the Company reported a net loss from operations of ($1,786,985) or ($2.46) per share compared to a loss of ($5,018,894) or ($4.81)* per share for the nine months ended April 30, 2009 and 2008, respectively.
*Represents retroactive application of 1:5 reverse stock split
LIQUIDITY AND FINANCIAL CONDITION
Inventories from the Company’s product segment increased from $850,507 at July 31, 2008 to $1,191,706 for the nine months ended April 30, 2009, an increase of $341,199. This additional inventory is required to satisfy the Company’s current backlog of over $300,000 in purchase orders and expected orders of $500,000 for the remainder of calendar year 2009. There can be no assurance that the Company will receive the orders that it expects to receive.
Accounts Receivable-trade decreased to $241,653 for the nine months ended April 30, 2009 from $360,846 as of July 31, 2008.
The Company expects to meet its cash requirements for the next 12 months through existing cash balances.
STATEMENT REGARDING PRESENT OPERATIONS
There were no material changes in the nature of the operations of the Registrant during the nine months ended April 30, 2009. Detailed information is contained in the Registrant’s annual report on Form 10-K for the fiscal year ended July 31, 2008.
FORWARD LOOKING STATEMENTS
This quarterly report contains certain “forward-looking statements” within the meaning of Section 27A of The Securities Act of 1933, as amended and section 21E of The Securities Act of 1934, as amended. Such Statements are subject to certain risks and uncertainties, including, among other things, significant variations in recognizing revenue due to customer-caused delays, and intense competition from more well known companies, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above, among other factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically declines any obligations, to publicly release the results of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 4T – CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rule 13a-15 (e) under the Securities Exchange Act of 1934) as of the end of the period
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covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose under the Securities and Exchange Act of 1934.
(b) Changes in internal controls
There have been no significant changes in the Company’s internal controls or, to its knowledge, in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. 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.
On May 7, 2009 the Supreme Court of New York issued a Stipulation of Dismissal, dismissing with prejudice all of Meyers’ claims for breach of contract and quantum merit.
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. On February 25, 2009 the United States District Court for the Southern District of New York dismissed Wolfson’s claim.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: During the quarter ended April 30, 2009, three Note Holders exercised conversion rights to convert $282,435 principal and $6,289 of interest to 253,869 unregistered shares of common stock. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the SEC under the Securities Act of 1933, as amended (the “Securities Act”) an/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
On March 23, 2009, in accordance with the 2008 Stock Grant Program, approved by the shareholders at the 2008 Annual Meeting, 745,000 shares of restricted common stock of the Company was issued to Officers, Directors, employees and independent consultants.
Item 3. Defaults upon Senior Securities – None
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the stockholders at our 2009 annual meeting of stockholders held on February 25, 2009: (1) a proposal to elect the five nominees for director named below for terms of one year each; (2) a proposal to ratify the selection of Bagell Josephs Levine & Company, L.L.C. as our independent auditors for the current fiscal year. (3) to consider and act upon a proposal to approve an amendment to the Certificate of Incorporation of the Company to effect a reverse stock split of the Company’s common stock at a ratio not less than two-for–one and not greater than six-for-one ,with the exact ratio to be set in the discretion of the Board of Directors. The number of shares of common stock outstanding and eligible to vote as of the record date of January 6, 2009 was 2,868,714. Set forth below is the number of votes cast for or withheld with respect to each nominee for director and the number of votes cast for or against or abstaining, and if applicable the number of broker non-votes, for the other matters submitted to a vote of the stockholders at the meeting.
Proposal # 1 —To elect the following nominees as our directors for terms of one year each:
| | | For | | Withheld |
| |
| Robert S. Benou | | 1,961,323 | | 176,031 |
| Marc R. Benou | | 1,965,656 | | 171,698 |
| Louis S. Massad | | 2,013,460 | | 123,894 |
| Edward J. Rielly | | 2,016,879 | | 120,475 |
| David M. Peison | | 2,016,879 | | 120,475 |
Proposal #2 — To ratify the selection of Bagell, Josephs, Levine & Company, L.L.C. as our independent auditors for the fiscal year ending July 31, 2009.
| For | Against | Abstaining |
| | | |
| 2,021,434 | 115,767 | 153 |
Proposal # 3 – Proposal to effect a reverse split of the common stock of the Company, at a ratio not less than two-for-one and not greater than six-for-one, with the exact ration to be set within such range in the discretion of the Board of Directors, provided that the Board of Directors determines to effect the reverse stock split no later than July 1, 2009.
| For | Against | Abstaining |
| | | |
| 1,752,056 | 354,630 | 30,668 |
Proposal #4 —To act on such other matters as may properly come before the meeting or any adjourmments.
| For | Against | Abstaining |
| | | |
| 1,779,684 | 326,959 | 30,711 |
ITEM 5. Other Information – None
ITEM 6. Exhibits
| Exhibit Number | | Description |
| | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act |
| | | |
| 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act |
| | | |
| 32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act. |
| | | |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant’s caused this report to be signed on its behalf by the undersigned, thereunto and duly authorized
CONOLOG CORPORATION
| Date: June 19, 2009 | By /s/ Robert S. Benou |
| | Robert S. Benou |
| | Chairman, Chief Executive Officer, |
| | (Principal Executive Officer) |
| | Chief Financial Officer and Treasurer, |
| | (Chief Accounting Officer) |
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