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| | 2009 | | 2008 | |
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CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net loss | | $ | (4,998,014 | ) | $ | (559,852 | ) |
Adjustments to reconcile net loss to net cash used in operations: | | | | | | | |
Depreciation | | | 4,002 | | | 4,000 | |
Stock based compensation | | | 672,733 | | | — | |
Induced conversion cost | | | 31,208 | | | 180,505 | |
Amortization and interest discount on convertible debt and warrants | | | 3,117,301 | | | 168,774 | |
Changes in fair market value of derivatives | | | 825,487 | | | — | |
Stock issued for interest | | | 6,433 | | | — | |
Changes in assets and liabilities | | | | | | | |
Decrease (increase) in accounts receivable | | | 12,346 | | | (11,593 | ) |
(Increase) in accounts receivable - other | | | (7,115 | ) | | (10,429 | ) |
Decrease (Increase) in prepaid expenses | | | 38,533 | | | (238,650 | ) |
Decrease (Increase) in inventories | | | 3,346 | | | (126,641 | ) |
(Decrease) in accounts payable | | | (77,950 | ) | | (13,361 | ) |
(Decrease) in accrued expenses and other liabilities | | | (19,468 | ) | | (9,365 | ) |
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Net cash used in operations | | | (391,158 | ) | | (616,612 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Purchase of property and equipment | | | (32,062 | ) | | — | |
Redemption of certificates of deposit | | | — | | | 600,182 | |
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Net cash provided by (used in) investing activities | | | (32,062 | ) | | 600,182 | |
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CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Proceeds from issuance of stock | | | 1,000,000 | | | — | |
Payment of financing fees related to convertible debentures | | | (140,000 | ) | | — | |
Proceeds from note receivable | | | 1,607 | | | 4,950 | |
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Net cash provided by financing activities | | | 861,607 | | | 4,950 | |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 438,387 | | | (11,480 | ) |
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | | | 27,358 | | | 680,647 | |
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CASH AND CASH EQUIVALENTS - END OF PERIOD | | $ | 465,745 | | $ | 669,167 | |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | |
CASH PAID DURING THE PERIOD FOR: | | | | | | | |
Interest expense | | $ | — | | $ | 2,582 | |
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Income Taxes | | $ | — | | $ | — | |
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SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: | | | | | | | |
Debt converted to equity | | $ | 259,206 | | $ | 300,042 | |
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Common stock for services to be provided | | $ | 384,000 | | $ | — | |
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Common stock issued for accrued interest | | $ | 6,433 | | $ | 52,552 | |
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CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2009
(Unaudited)
Note 1 – Unaudited Financial Statements
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, 2009 audited consolidated financial statements and the accompanying notes thereto.
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 three months ended October 31, 2009 should not necessarily be taken as indicative of the results of operations that may be expected for the fiscal year ending July 31, 2010.
Note 2 – Conversion of Debt
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 Convertible debt 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 three months ended October 31, 2009 investors have converted $37,950 of debt for 46,592 common stock shares. The Company has recognized an Induced Conversion cost related to these conversions of $31,208 for the three months ended October 31, 2009.
The Company entered into a Subscription Agreement (the“ Subscription Agreement”), dated as of August 3, 2009 ( the “Closing Date”), with three investors, pursuant to which it sold an aggregate of One Million Dollars of its principal amount of secured promissory notes (the “Notes”). On the Closing Date the Company received gross proceeds of $500,000 and $500,000 (the “Escrowed Funds”) was placed in escrow pursuant to an Escrow Agreement between the Company, the Subscribers and the escrow agent. Pursuant to the Subscription Agreement, the Company was required to file a preliminary proxy statement with the Securities and Exchange Commission by September 2, 2009 seeking approval for the transactions contemplated by the Subscription Agreement and the Company was obtained approval of its shareholders on September 24, 2009.
The Company did receive the Escrowed Funds. Shareholder Approval was obtained and the amount of the Note was decrease to $500,000 and the Escrowed Funds were not returned to the Subscribers
The initial interest rate of the Notes is 4% per annum and upon the shareholder Approval the interest rate became 8% per annum. Interest accrues from the date of the Closing Date and is be payable quarterly, in arrears, commencing six months after the Closing Date and on the maturity date of the Note. The Conversion Price of the Notes is $.78 (the “Fixed Conversion Price”) as may be adjusted (the “Initial Conversion Price”). Commencing six months after the Closing Date, the Conversion Price shall be the Fixed Conversion Price or 75% of the lowest three closing bid prices for the Company’s common stock for the ten days prior to when the Note is converted.
The Company also issued the Subscribers Class A Warrants to purchase 1,282,051 shares of the Company’s Common Stock at $1.12 per share. The Class A warrants are exercisable for a period beginning on August 3, 2009 and terminate on August
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3, 2014. Pursuant to the Subscription Agreement, the Company also issued the Subscribers a total of 40,000 class B Warrants.
The Class B Warrants entitle the Subscribers after September 24, 2009 until July 3, 2012, to purchase up to $4,000,000 of principal amount of the Company’s 8% notes on the same terms as the original Notes and 40,000 warrants (exercisable in 1,000 blocks) to purchase 128,205 shares of the Company’s Common Stock, per 1,000 Warrants, at a per share purchase price equal to 105 % of the closing bid price of the Company’s common stock or the exercise price of the Class A Warrants. For each $100,000 of principal of notes purchased pursuant to the Class B Warrants, the Subscribers will surrender 1,000 Class B Warrants.
The Notes cannot be converted to the extent such conversion would cause the Subscriber, together with such holder’s affiliates, to beneficially own in excess of 4.99% of the of the Company’s outstanding common stock immediately following such conversion.
The Company paid the selling agent for this transaction, a cash fee of $100,000 (10% of the aggregate gross proceeds received by the Company) and issued warrants to purchase 256,410 shares of the Company’s common stock ( 20% of the shares issuable to the subscribers upon conversion of the Notes). Fees paid to the selling agent will be amortized over the term of the subscription agreement.
The Notes cannot be converted to the extent such conversion would cause the Subscriber, together with such holder’s affiliates, to beneficially own in excess of 4.99% of the of the Company’s outstanding common stock immediately following such conversion.
The Company also entered into a Security Agreement pursuant to which it granted the Subscribers a security interest in its assets.
The security interest granted pursuant to the Security Agreement will terminate when the Approval is obtained or the Notes, including outstanding interest due thereon) are repaid.
The Company paid the selling agent for this transaction, a cash fee of $100,000 (10% of the aggregate gross proceeds received by the Company) and issued warrants to purchase 256,410 shares of the Company’s common stock ( 20% of the shares issuable to the subscribers upon conversion of the Notes).
At a Special Meeting of Shareholders held on September 24, 2009, the Shareholder Approval was obtained. As a result, the Escrowed Funds were released and after the payment of fees in the amount of $50,000 to the placement agent for the transaction. The Company received net proceeds of $450,000 (prior to the deduction of other fees and expenses related to the Offering).
At the Special Meeting of Shareholders held on September 24, 2009, Shareholder approval was obtained for the Company’s 2009 Restrictive Stock Incentive Plan.
On September 28, 2009, the Company entered into an Advisory Service Agreement with Garden State Securities Inc. (GSS) to perform certain Advisory and Business services. The Board of Directors has approved the Company to issue 200,000 restricted common shares to GSS.
On October 21, 2009, Two holders of the Company’s outstanding Convertible Notes dated August 3, 2009 converted principal amounts of $221,256 and interest amounts of $3,855 and issued a total of 288,605restricted common shares.
After the above transactions, 3,180,846 shares of the Company’s common stock will be issued and outstanding.
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Note 3 – Major Customers
The Company’s revenues from three customers accounted for $339,769 or 72% of total revenues in the three months ended October 31, 2009. Each of these three customers accounted for 10% or more of total revenues, which is the definition of a major customer. Accounts receivable from these same three customers at October 31, 2009 amounted to $156,664 of 66.7% of total accounts receivable.
Note 4 – Warrant and Conversion liabilities
Secured promissory notes in the amount of $1,000,000 were issued on August 3, 2009 and the 2,564,102 Class A common stock purchase warrant issued with these notes contain a provisions where the conversion and exercise price may reset. This provision creates a derivative and is separately accounted for as a liability at fair value.
Note 5 –Deferred compensation
Shares of Restricted Common Stock are issued to Officers, Directors and employees.
These shares are for future services to be preformed and they are fully vested and non-cancellable. Management has historically recorded the actual issuance of stock in the Equity section and recognizes the cost over the period during which an employee is required to provide services in exchange for the grant – the requisite service period. As of the quarterly period ended October 31, 2009, the balance of the deferred compensation has been fully amortized.
Note 6 - 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 effect of assuming the exchange of Series A Preferred Stock and Series B Preferred Stock in 2009 and 2008 would be anti-dilutive.
On February 25, 2009, the Company’s shareholders approved the amendment to the company’s certificate of incorporation to effect a one-for-five reverse split of the Company’s common stock. The weighted average number of common shares outstanding at October 31, 2008 has been restated to reflect this on a retro active basis.
Note 7 – Subsequent Events
On November 30, 2009, the Company filed a Preliminary Prospectus, Form S-1, subject to completion. This prospectus relates to the public offering of up to 635,070 shares of common stock, par value $0.01 per share, of Conolog Corporation, by the selling stockholder, which is issuable upon exercise of warrants with an exercise price of $1.12. The number of shares being registered is 33% of the shares held by non-affiliates of the company. The Form S-1 went effective as of December 11, 2009.
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED October 31, 2009
Product revenues for the three months ended October 31, 2009 totaled $468,096, representing an increase of 3% from $456,681 for the same period last year. The Company attributes this increase to more timely order releases from utilities.
Cost of goods sold (Material and Labor) for the three months ended October 31, 2009 and 2008 totaled $196,883 and $104,305 respectively. The Company attributes this increase to an increase in labor costs and the delivery of newer upgraded systems which carry a higher production cost.
Gross Profit for the three months ended October 31, 2009 and 2008 amounted to $271,213 or 58% and $352,376 or 77% respectively. This decrease in Gross Profit Percentage is directly related to the increase in Cost of goods sold.
Total Selling, general and administrative expenses for the three months ended October 31, 2009 amounted to $1,289,657, an increase of $770,513 from the same period last year. The Company attributes this increase primarily to the amortization of the annual employee stock incentive plan of $672,733 and increases of $62,334 for professional fees and services.
Total Other expenses for the three months ended October 31, 2009 amounted to $$3,979,570 compared to $393,084 for the same period last year. This increase is attributed primarily to non-cash non-operating expenses for interest related to equity derivative of $2,783,227; Changes in fair market value of derivatives of $825,487; amortization of debt of $340,508 and induced conversion costs of $31,208. As a result of the foregoing, the Company reported a net loss applicable to common shares of ($4,998,014) or ($2.32) per share compared to a net loss applicable to common shares of ($559,852) or ($0.90), as restated, per share for the three months ended October 31, 2009 and 2008, respectively.
LIQUIDITY AND FINANCIAL CONDITION
Inventories from the Company’s product segment decreased from $1,395,452 at July 31, 2009 to $1,392,106 for the three months ended October 31, 2009, a decrease of $3,346.
Accounts Receivable-trade decreased to $233,634 for the three months ended October 31, 2009 from $245,980 as of July 31, 2009.
The Company expects to meet its cash requirements for the next twelve months through existing cash balances and cash generated from operations. The Company will receive additional funds from the sale of State NOLs within the current calendar year of $323,000. The Company also anticipates additional financing during the next 12 months of up to $4,000,000 from current investors.
STATEMENT REGARDING PRESENT OPERATIONS
There were no material changes in the nature of the operations of the Registrant during the three months ended October 31, 2009. Detailed information is contained in the Registrant’s annual report on Form 10-K for the fiscal year ended July 31, 2009.
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
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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
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 the filing date of 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 Management, that during their review of audit procedures for fiscal 2009 Management identified a material weakness 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 Quarterly Report on Form 10Q that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
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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 31,2009. 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. This annual report does not include an attestation report of the Company’s registered accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: During the quarter ended October 31, 2009, two Note Holders exercised conversion rights to convert $259,206 principal and $6,433 of interest to 338,363 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.
Item 3. Defaults upon Senior Securities – None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Shareholders held on September 24, 2009, the Shareholder Approval was obtained. As a result, the Escrowed Funds related to the August 3rd Subscription Agreement were released and after the payment of fees in the amount of $50,000 to Garden State Securities, Inc., the placement agent for the transaction, the Company received net proceeds of $450,000 (prior to the deduction of other fees and expenses related to the Offering).
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At the Special Meeting of Shareholders held on September 24, 2009, Shareholder approval was obtained for the Company’s 2010 Restrictive Stock Incentive Plan.
ITEM 5. Other Information – None
ITEM 6. Exhibits
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Exhibit Number | | Description | |
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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. |
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
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| CONOLOG CORPORATION |
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Date: April 16, 2010 | | By /s/ Robert S. Benou | |
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| Robert S. Benou |
| Chairman, Chief Executive Officer, |
| (Principal Executive Officer) |
| Chief Financial Officer and Treasurer, |
| (Chief Accounting Officer) |
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