The decline in our gross profit percentage of 41.1% for the fiscal year ended July 31, 2010, from 46.9% for the fiscal year 2009 can be attributed to (a) lower sales dollars as a result of lower sales price for our largest selling item the PRD-2000, (b) increases in direct labor costs associated with manufacturing and (c) lower sales margins associated with Military sales.
Total Other Income and Expenses: For the fiscal year ended July 31, 2010 total other income/expense was an expense of $21, 515,442, an increase of $20, 472,965 versus the fiscal year ended July 31, 2009 restated amount of $1,042,477. This large increase in other income (expense) is primarily a result of recording a derivative liability associated with a subscription agreement entered into in fiscal year 2010. The subscription agreement entered into on August 3, 2009, had a conversion feature embedded in the Company’s convertible debt and certain warrants that required the recording of a derivative liability. Under this derivative liability the Company recorded a non-cash loss on derivative financial instruments of $18,958,801. Amortization expenses associated with debt discount and deferred financing fees increased $1,548,587 and induced conversion cost decreased $471,679 for fiscal year ended July 31, 2010. Additionally, fiscal year ended July 31, 2010, the Company recorded a beneficial conversion feature of $457,692 and an incremental consideration for a warrant modification of $107,863.
Income Tax Benefit: 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 years ended July 31, 2010 and 2009, the Company entered into agreements to sell up to $5,594,000 and $4,757,000 of its unused tax losses. The Company received net proceeds of $284,703 and $376,819 during the fiscal years ended July 31, 2010 and 2009 respectively, related to the sale and accordingly recorded them as a tax benefit in the year received. The net tax benefit recorded in the Statement of Operations for 2010 of $137,131 consists of the proceeds received from the sale of the Company’s NJ NOL’s offset by the unrecorded tax provision due to uncertain tax positions of $135,000.
Net Loss: The Company recorded a net loss of $24,910,756 for the fiscal year ended July 31, 2010, as compared to a net loss of $2,289,415 for fiscal year ended July 31, 2009. The increase in net loss of $22, 621,341 can mainly be attributed to noncash transactions related to the subscription agreement entered into in 2009. A decline in sales of approximately $307,000, along with a decline in gross profit margin of approximately $213,000 also contributed to the increase in the net loss. The Company reported a net loss applicable to common shares of ($5.36) per share for fiscal 2010, compared to a net loss applicable to common shares of ($2.36) per share, as restated for fiscal 2009.
Status of Certain Press Releases Issued:On October 19, 2009, the Company announced that it had received orders for switches and other equipment valued at over $300,000 for immediate deliver. A customer ordered 400 switches for $105,600 on August 10, 2009 for immediate delivery. Delivery occurred during the periods September 25, 2009 through December 18, 2009. At the time we also had other orders for additional communication equipment for approximately $190,000. These other orders were filled and shipped prior to April 30, 2010.
On January 27, 2010, the Company announced that it started production of its “GlowWorm” Fiber Optic Detector. We initially produced 100 units of the “Glow Worm”. Those units along with additional modified units are being marketed to the electrical utility industry and broadband communication companies. Since this is a new type of product customers are requesting to field test the “Glow Worm” before ordering.
On February 1, 2010, the Company issued a press release announcing that it had received advanced orders for its PDR Systems valued at over $1,900,000. At the time of this press release we had advanced orders for $1,900,000. Approximately, two weeks subsequent to the press release we received an actual purchase order in the amount of $638,000. The advance order on this $638,000 actual purchase was $936,000 resulting in a decrease of $298,000 from the advanced orders to the actual purchases by the customer. Other advanced orders related to the $1,900,000 in the amount of $964,000 have been subsequently received and shipped through October 31, 2010.
On February 17, 2010, the Company issued a press release announcing that it had received releases for its PDR 2000 systems valued at $638,000. One of our customers placed one purchase order with the Company for two separate deliveries of the PDR systems totaling $638,000 in revenue. The first shipment was for immediate delivery which commenced February 25, 1010 and completed April 8, 2010. The balance of the shipment is expected to occur in March of 2011. The original estimate from the customer for this order was for $936,000 (which was part of the $1,900,000 advance order – as discussed above). The difference between the original estimate of $936,000 and the final order shipped of $638,000 was due to less expensive options and 33 fewer units ordered than estimated.
LIQUIDITY AND CAPITAL RESOURCES
We have had recurring losses from operations and used cash from operations in the amounts of $1,636,745 and $1,264,120 for the years ended July 31, 2010 and 2009, respectively. At July 31, 2010, the Company had cash and equivalents of $713,005. On August 13, 2010, an event of default occurred on our outstanding convertible debentures. Although, the Company received a waiver from the note holders there can be no assurance that we will not suffer further events of default and that if we do a waiver will be obtained from our note holders.
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At July 31, 2010, the Company had total current assets of $1,859,984 and total current liabilities of $351,880, resulting in working capital of $1, 508,104 compared to working capital of $598,825 at year ended July 31, 2009, as restated. The Company’s current assets consists of $713,005 in cash and cash equivalent, $826,079 in inventory, $248,297 in prepaid expenses and $67,603 in accounts receivable. Accounts receivable decreased from $245,980 at July 31, 2009 to $67,603 at July 31, 2010. This decline in our accounts receivable is the of result of lower sales in the last three months of our fiscal year due to a few customers delaying their sales orders until fiscal year 2011. Prepaid expenses increased from $47,000 at July 31, 2009 to $248,297 at July 31, 2010. This increase is attributable to retainers paid to consultants and professional service providers for services to be provided.
Cash expenditures have exceeded revenues for the prior year and Management expects this consumption of cash to continue into next year. Our operations have been and will continue to be funded from existing cash balances and private placements of equity funding. During our fiscal year ended July 31, 2010, we have raised $2,000,000 from the sale of convertible debentures and $635,070 from the exercise of warrants (See “FINANCING ACTIVITIES”, below). We are dependent on improved operating results and raising additional funds over the next twelve month period. There are no assurances that we will be able to raise additional funding. In the event that we are unable to generate sufficient cash flow or receive proceeds from offerings of debt or equity securities, the Company may be forced to curtail or cease it activities and/or operations.
OPERATING ACTIVITIES
Net cash used in operating activities was $1,636,745 for fiscal year ended July 31, 2010, as compared to net cash used in operating activities in the amount of $1,264,121 for fiscal year 2009, an increase of $372,624, this increase can be attributed to an increase in cash used in paying down our accounts payable liabilities ($66,600), increased spending for inventory ($313,900) and an increased spending on cash prepaid expenses ($121,300) for an aggregate of approximately $365,400. Additionally, accounts receivable collections increased by approximately $178,000.
The increase in inventory of approximately $313,900 was due to an increase in our finished goods of $262,000, an increase in our work-in-process of $59,700 and a decrease in our raw materials (net of obsolete inventory write downs and the change in our reserve) of $21,800. This increase in finished goods was attributable to an increase of 103 units of our PDR-2000 units over the July 31, 2009 year-end quantity of PDR-2000 units. The buildup of inventory for the PDR-2000 units and our increase in work-in-process were required to meet purchase order commitments for our quarter ended October 31, 2010.
INVESTING ACTIVITIES
Net cash used in investing activities for the fiscal year ended July 31, 2010 was $22,781 for the purchase of manufacturing equipment. For fiscal year ended July 31, 2009 investing activities funded $600,182 from the redemption of a certificate of deposit.
FINANCING ACTIVITIES
Net cash provided by financing activities was $2,345,173 for the fiscal year ended July 31, 2010, as compared to $10, 650 provided in fiscal year 2009. In fiscal year 2010 the Company received proceeds of $2,000,000 related to issuance of convertible debentures and $635,070 related to the exercise of warrants. The Company paid deferred loan costs of $291,507.
On August 3, 2009, the Company entered into a Subscription Agreement pursuant to which it sold a $500,000 convertible debenture on August 3, 2009 and a $500,000 Debenture on September 24, 2009. (Collectively, the “August 2009 Debentures”). The initial interest rate of the August 2009 Debentures is 4% per annum and upon the shareholder Approval the interest rate will be 8% per annum. The August 2009 Debentures have maturity dates of 15 months from their closing dates. Interest shall accrue from the closing date and shall be payable quarterly, in arrears, commencing six months after the closing date. The August 2009 debentures are convertible into shares of the Company’s common stock at a conversion price of $0.78 per share. Commencing six months after the closing date, the Conversion Price shall be adjusted to the lesser of the $0.78 or 75% of the lowest three closing bid prices for the Company’s common stock for the ten days prior to when the August 2009 Debenture is converted.
In connection with the August 2009 Debentures, the Company issued Class A and Class B warrants. The Class A warrants provide the holder with the option to purchase 2,564,102 shares of the Company’s common stock at an exercise price $1.12 per share. The Class A warrants are exercisable for a period beginning on August 3, 2009 and terminate on August 3, 2014. Additionally, the 40,000 Class B Warrants issued entitles the holder 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 August 2009 Debentures. Upon the exercise of the Class B Warrants, the holder of the Class B Warrant will be issued two Class C Warrants for each share of the Company’s common stock that would be issued on the exercise date of the Class B Warrant assuming the full conversion of the notes issued on such date. The Class C warrants entitle the warrant holder to purchase 10,256,408 shares of the Company’s Common Stock with and exercise price equal to the lesser of 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 principal of notes purchased pursuant to the Class B Warrants, the holder will surrender 1,000 Class B Warrants.
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The August 2009 Debentures cannot be converted to the extent such conversion would cause the Debenture holder, 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 Agreement will terminate when the August 2009 Debentures, including outstanding interest due thereon are repaid.
In connection with the August 2009 Debenture agreement entered into on August 3, 2009, the Company paid Garden State Securities, Inc., the selling agent, a cash fee of $100,000 and issued warrants to purchase 256,410 shares of the Company’s common stock. The Company calculated the fair value of the warrants on August 3, 2009 at $231,025 using the Black-Scholes option pricing model.
At various times during the year ended July 31, 2010, an aggregate $1,000,000 of the August 2009 Debentures and $36,968 of accrued interest were converted into 1,329,447 shares of the Company’s common stock. As of July 31, 2010 the remaining balance of the August 2009 Debentures were $0.
On February 24, 2010, holders of the Class B warrants exercised 10,000 Class B Warrants to purchase $1,000,000 in convertible notes (“February 2010 Debentures”). The February 2010 Debentures were issued under the same terms as the August 2009 Debentures. With the exercise of the 10,000 Class B warrants, the Company also issued Class C Warrants to purchase 2,564,104 shares of the Company’s common stock at an exercise price of $1.12.
In connection with the exercise of the Class B warrants and pursuant to Selling Agent Agreement the Company paid Garden State Securities, Inc., a cash fee of $100,000 and issued Garden State additional warrants to purchase 256,410 shares of the Company’s common stock. The Company calculated the fair value of the warrants on March 3, 2010 to be $380,256 using the Black-Scholes option pricing model.
The August 2009 Debentures, February 2010 Debentures, Class A warrants, Class B warrants, Class C warrants and the warrants granted to the selling agent contain provisions whereby if the Company shall offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which shall be less than the conversion price of the August 2009 Debentures and February 2010 Debentures or less than the exercise price of the Class A warrants, Class B warrants, Class C warrants or the warrants granted to the selling agent, then the conversion price and the warrant exercise price shall automatically be reduced to such other lower issue price. Due to this provision, the embedded conversion features of the Debentures and the warrants are not considered indexed to the Company’s stock. Accordingly, these financial instruments have been recorded as a derivative liability.
On June 18, 2010, Conolog Corporation (the “Company”) entered into an amendment with the holders of its outstanding convertible debentures and warrants. Pursuant to the amendments, the parties agreed to the following: (i) remove the above provision which allowed for an adjustment to the conversion price of the debentures or exercise price of the debentures, (ii) the conversion feature of the February 2010 Debentures were adjusted to a fixed conversion price $0.60, (iii) all future Class C Common Stock Purchase Warrants issued upon exercise of the Class B Common warrants shall have an exercise price of $0.50 per share, (iv) the exercise price of the outstanding Class C warrants shall be adjusted to $0.50 per share, (v) the exercise price of the outstanding selling agent warrants shall be adjusted to $0.60 per share.
As a result of the June 18, 2010 amendments the embedded conversion features of the debentures and the warrants were considered indexed to the Company’s stock. Accordingly, the outstanding derivative liabilities were reclassified to additional paid in capital at their fair value on June 18, 2010 with the change in fair value being recorded in the statement of operation.
After the accounting for the embedded derivatives, induced conversion costs, interest expense, amortization of debt discounts and amortization of deferred financing fees the above financing transactions increased our net loss by $21,514,072. The $21,514,072 had no effect on the Company’s cash flow. Through the accounting for induced conversion costs, exercise of warrants, conversions of convertible debt and the reclassification of derivative liabilities the above financing transactions increased our additional paid in capital by $23,998,405.
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.
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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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions made by management as based upon available current information, historical experience and other factors that are believed to be reasonable under the circumstances. The estimates and assumptions made by management involve risks and uncertainties which could cause reported amounts to differ materially from actual future results. If management’s estimates and assumptions are inaccurate, the Company’s reported amounts and disclosures of contingent assets and liabilities could be materially and adversely affected. Management considers its reserve for inventory and accounting for derivative liabilities to be significant estimates.
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 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 collectability 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 lower of cost or market using the first-in, first-out (“FIFO”) method. Finished goods costs included raw materials, labor and manufacturing overhead costs. Excess and obsolete inventory costs are expensed and a reserve for slow-moving inventory is made on management’s estimates.
Finished goods are products that have been completed in connection with specific orders and are awaiting shipment. Work-in-Process represents raw material components that have been requisitioned from the warehouse and are being assembled in the manufacturing area. Raw Materials consist of components parts purchased from various suppliers and are used to build our finished products. Various raw material parts are also maintained to support warranty claims for commercial and military products. Typical raw material products include PC boards, digital screen assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates.
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.
The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our reserve review. The Company estimated a usage rate for its raw material component parts for what it expects to use over a 36 month period. Any excess inventory based on this projected usage rate is written off as excess and obsolete. The Company then reserves 100% of the estimated usage that is over 12 months and less than 36 months. Certain raw material parts which have been written down to a zero value, may still be maintained in inventory to satisfy possible requirements under the warranty programs but are valued at zero. Ongoing the Company evaluates the inventory parts based on their age and usage over a 36 month period to determine inventory and obsolescence and reserve adjustments.
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WARRANTY
The Company provides a twelve-year warranty on its commercial products and 25 years on its military 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. Our warranty costs have historically been insignificant and therefore a provision was not warranted. Management continues to monitor the costs and will provide a warranty provision if circumstances change.
INCOME TAXES
The Company follows the authoritative guidance for accounting for income taxes. Deferred income taxes are determined using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when the expected recognition of a deferred tax asset is considered to be unlikely. The guidance also requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement. Based on the Company’s evaluation, management has concluded that there are significant uncertain tax positions requiring recognition in the consolidated financial statements with respect to the sale of the Company’s New Jersey Net Operating Loss Carryovers. In the event the Company receives an assessment for interest and/or penalties by major tax jurisdiction it would be classified in the financial statements as general and administrative expense. See note 6, Income Taxes.
DERIVATIVE LIABILITY
Derivative liabilities consist of certain common stock warrants, and conversion features embedded in our convertible Debenture notes. These financial instruments are recorded in the balance sheet at fair value, determined using the Black- Scholes option pricing model, as liabilities. Changes in fair value are recognized in the statement of operations in the period of change.
STOCK BASED COMPENSATION
The Company follows the authoritative guidance for accounting for stock-based compensation. This guidance requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based upon their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company also follows the guidance for equity instruments issued to consultants.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and short term convertible Debentures approximates fair value because of the short maturity of these instruments. The recorded value of long-term debt approximates its fair value as the terms and rates approximate market rates.
FAIR VALUE MEASUREMENTS
The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
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Level 1 – | Quoted prices in active markets for identical assets or liabilities. |
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Level 2 – | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities. |
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Level 3 – | Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities. |
DEBT DISCOUNT
The Company follows the authoritative guidance for accounting for debt discount and valuation of detachable warrants the Company recognized the value of detachable warrants issued in conjunction with issuance of the secured convertible Debenture notes. The Company valued the warrants using the Black-Scholes pricing model. The Company recorded the warrant relative fair value as an increase to additional paid-in capital and discount against the related debt. The discount attributed to the value of the warrants is amortized over the term of the underlying debt using the effective interest method.
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EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In May 2008, the FASB issued guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlements). This guidance requires a portion of this type of convertible debt to be recorded as equity and to record interest expense on the debt portion at a rate that would have been charged on nonconvertible debt with the same terms. This guidance is effective for the Company’s fiscal year beginning August 1, 2009. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued guidance related to determining whether instruments granted in share-based payment transactions are participating securities. Securities participating in dividends with common stock according to a formula are participating securities. This guidance determined that unvested shares of restricted stock and stock units with nonforfeitable rights to dividends are participating securities. Participating securities require the “two-class” method to be used to calculate basic earnings per share. This method lowers basic earnings per common share. This guidance is effective for the Company’s fiscal year beginning August 1, 2009. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
In June 2008, the FASB reached a consensus regarding the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which is the first part of the scope exception related to accounting for derivative instruments and hedging activities. This guidance is effective for the Company’s fiscal year beginning August 1, 2009. The Company determined that the conversion features embedded in its convertible Debentures and certain of its warrants with price protection provisions are not considered to be indexed to the Company’s own stock, therefore, they do not meet the scope exception and thus should be accounted for as a liability. During the fiscal year ended July 31, 2010, the adoption of this guidance resulted in a loss on derivative financial instruments in the amount of $18,958,801.
In June 2009, the FASB issued guidance which stipulates the FASB Accounting Standards Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. This guidance is effective for the Company’s fiscal year beginning August 1, 2009. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In October 2009, the FASB issued guidance on multiple deliverable revenue arrangements which eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence including, vendor specific objective evidence, third party evidence of selling price, or estimated selling price. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional. Early adoption of these standards may be elected. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
In January 2010, the FASB issued additional guidance on fair value measurements and disclosures which requires reporting entities to provide information about movements of assets among Level 1 and 2 of the three-tier fair value hierarchy established by the existing guidance. The guidance is effective for any fiscal year that begins after December 15, 2010, and it should be used for quarterly and annual filings. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on its financial statements.
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.
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Bagell, Josephs, Levine & Company LLC was retained by the Company on September 21, 2004 to serve as its independent registered public accountants. Conolog Corporation (the “Company”) was notified that the audit practice of Bagell, Josephs, Levine & Company, LLC, the Company’s independent registered public accounting firm (“BJL”), was combined with Friedman LLP (“Friedman”) on January 1, 2010. As of the same date, BJL resigned as the independent registered public accounting firm of the Company and, with the approval of the Audit Committee of the Company’s Board of Directors, Friedman was engaged as the Company’s independent registered public accounting firm. Prior to that date, Friedman LLP did not perform any services nor receive any fees from the Company.
On July 8, 2010, Conolog Corporation (the “Company”) dismissed Friedman LLP (“Friedman”) as the Company’s independent registered public accounting firm. The decision to dismiss Friedman was approved by the audit committee of the Company’s board of directors on July 8, 2010.
On July 23, 2010 the Company engaged WithumSmith+Brown, PC (“Withum”) to serve as the Company’s independent registered public accounting firm. During the recent fiscal years ending July 31, 2009 and July 31, 2008, and the subsequent interim period prior to the engagement of Withum, neither the Company nor anyone on its behalf consulted Withum regarding the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company nor oral advice was provided that Withum concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K and the related instructions to this item) or a reportable event (as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K).
ITEM 9A. CONTROLS AND PROCEDURES
This item is not applicable.
ITEM 9A (T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of the Company’s Annual Report on Form 10-K, an evaluation was carried out by our management, with participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed and submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, included the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During evaluation of disclosure controls and procedures as of the end of the period covered by this report, conducted as part of the Company’s annual audit and preparation of our annual financial statements, several material weaknesses were identified. As a result of the material weaknesses, described more fully below, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 31, 2010, the Company’s disclosure controls and procedures were ineffective.
The Company instituted and is continuing to implement corrective actions with respect to the deficiencies in our disclosure controls and procedures.
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ITEM 9A (T). CONTROLS AND PROCEDURES (continued)
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted, with the participation of the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company’s internal control over financial reporting as of the end of the period covered by this report. Management’s assessment of internal control over financial reporting was conducted using the criteria set forth inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on management’s assessment of internal control over financial reporting, management believes as of July 31, 2010, the Company’s internal control over financial reporting was not effective due to the following material weaknesses:
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• | The Company lacks sufficient personnel with an appropriate level of experience and knowledge of generally accepted accounting principles and SEC reporting requirements. |
• | The Company lacks adequate accounting resources to address non routine and complex transactions and financial reporting matters on a timely basis. Consequently various accounts were materially misstated in the previously issued financial statements which have caused a restatement of previously reported amounts. |
• | The Company lacks adequate segregation of duties control concerning Information Technology (“IT”). IT personnel perform accounting transactions, programming function and controls security function with the Company for IT. |
• | The Company lacks appropriate environmental controls needed to ensure the security and reliability of IT equipment. |
• | The Company lacks adequate journal entry approval and disclosure controls needed to identify and prevent misstatements in the consolidated financial statements and accompanying footnotes. |
• | The Company’s control environment does not have adequate segregation of duties; the Company only had one person performing all accounting-related on-site duties. |
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
The Company has commenced efforts to address the material weaknesses in its internal control over financial reporting and its control environment through the following actions:
| | |
| • | Supplementing existing resources with technically qualified third party consultants. |
| • | Institute a more stringent approval process for financial transactions |
| • | Perform additional procedures and analysis for significant transactions as a mitigating control in the control environment due to segregation of duties issues. |
The Company believes that the consolidated financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of July 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended July 31, 2010 and 2009, in conformity with generally accepted accounting principles, notwithstanding the material weaknesses we identified.
Changes in Internal Control over Financial Reporting
Other than described above, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal year ended July 31, 2010, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
19
ITEM 9A (T). CONTROLS AND PROCEDURES (continued)
Inherent Limitations on Effectiveness of Controls
Our Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect that there are resources constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
ITEM 9B - OTHER INFORMATION
On September 29, 2010 the Company received a subpoena from the Securities and Exchange Commission (the “Commission”) in connection with an investigation of possible securities law violations by the Company that is a non-public, fact finding inquiry, which as noted by the Commission should not be construed as an indication by the Commission or its staff that any violation of the law has occurred or as an adverse reflection upon any person, entity or security. The Company has responded to the subpoena and has not received further correspondence from the Commission with respect to the subpoena as of the date of this filing. At this time it is not possible to predict the outcome of the investigation or its impact on Company.
On June 23, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that the Company no longer complied with the NASDAQ Listing Rules (the “Listing Rules”) for continued listing on The NASDAQ Stock Market (“NASDAQ”) because the Company had not maintained a minimum of $2,500,000 in stockholders’ equity as required by Listing Rule 5550(b)(1), and because the Company’s Form 10-Q for the period ended April 30, 2010, had not yet been reviewed in accordance with Statement of Auditing Standards No. 100, as required by Rule 8-03 of Regulation S-X, pursuant to Listing Rule 5250(c)(1). Thereafter, on June 23, 2010, the Company received a NASDAQ Staff Determination Letter indicating that the Staff had concluded that the Company had not solicited proxies or held its annual meeting within the timeframe required by Listing Rules 5620(a) and 5620(b) and accordingly, determined to initiate procedures to delist the Company’s securities from NASDAQ. Finally, on August 13, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that, as the bid price of the Company’s common stock had closed below the minimum $1.00 per share requirement set forth in by NASDAQ Listing Rule 5550(a)(2), and in accordance with Listing Rule 5810(c)(3)(A), the Company had been provided 180 calendar days, or until February 9, 2011, to regain compliance with that requirement.
As a result of the Company’s receipt from NASDAQ of the June 23, 2010 Staff Deficiency Letter, an event of default occurred with respect to the Company’s outstanding Secured Convertible Notes. As a result of the event of default the interest rate on the outstanding Notes increased to 15% per annum. Pursuant to a waiver dated November 27, 2010, the holders of the Outstanding Notes waived the event of default which may have occurred with respect to the receipt of the June 23, 2010 Staff Deficiency Letter.
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 November 15, 2010.
| | | | |
Name | | Age | | Position |
|
|
|
|
|
Robert S. Benou | | 75 | | Chairman, Chief Executive Officer, Chief Financial Officer and Director |
Marc R. Benou | | 41 | | President, Chief Operating Officer, Secretary and Director |
Louis S. Massad | | 73 | | Director |
Edward J. Rielly | | 41 | | Director |
David M. Peison | | 41 | | Director |
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/turnkey 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. Mr. Benou’s experience as the Company’s chief executive officer led to the conclusion that Mr. Benou should serve on the Board of Directors, given the Company’s business and structure.
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. Mr. Benou’s experience as the Company’s president and chief operating officer led to the conclusion that Mr. Benou should serve on the Board of Directors, given the Company’s business and structure.
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. Mr. Massad’s business management and financial experience and knowledge led to the conclusion that Mr. Massad should serve on the Board of Directors, given the Company’s business and structure.
20
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE(continued)
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 with the United States Golf Association. Mr. Rielly is a graduate of Lehigh University and holds a BS in Computer Science. Mr. Rielly’s technical experience and knowledge led to the conclusion that Mr. Rielly should serve on the Board of Directors, given the Company’s business and structure.
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. Mr. Peison’s business management and financial experience and knowledge led to the conclusion that Mr. Peison should serve on the Board of Directors, given the Company’s business and structure
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” as 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, 2010, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with except that Form 4’s for David Peison, Edward Rielly, Robert Benou and Marc Benou were not timely filed. These Forms have since been filed.
Code of Ethics
The Corporation has adopted a Code of Ethics. This Code is publicly available on the Company’s internet websitewww.conolog.com.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles. Mr. Robert Benou has served as our Chairman since May 2001. Due to the small size of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.
21
ITEM 11- EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to and accrued by each executive officer during the prior three fiscal years.
| | | | | | | | | | | | | | | | | | | | | |
Name
and
Title | | Fiscal
Year
End
July 31, | | Salary | | Bonus | | Restricted
Stock
Awards (3) | | Closing Price of
of Common
Stock on
Date of the
Restricted Stock
Award | | Securities
Underlying
Option/
SARS | | Other* | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Benou | | 2010 | | $ | 259,749 | | | — | | $ | 403,200 | | $ | 1.92 | | | | | $ | 28,000 | |
Chief Executive | | 2009 | | $ | 110,833 | | | — | | $ | — | | $ | — | | | | | $ | 16,000 | |
Officer, CFO & Director | | 2008 | | $ | 348,333 | | $ | 70,000 | | $ | 424,880 | | $ | 1.88 | | | — | | $ | 21,500 | |
| | | | | | | | | | | | | | | | | | | | | |
Marc Benou | | 2010 | | $ | 238,200 | | $ | — | | $ | 403,200 | | $ | 1.92 | | | — | | | — | |
President, COO | | 2009 | | $ | 208,516 | | $ | — | | $ | — | | $ | — | | | — | | | — | |
Secretary & Director | | 2008 | | $ | 173,949 | | $ | 40,000 | | $ | 432,400 | | $ | 1.88 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Thomas Fogg | | 2010 | | $ | 39,453 | | $ | — | | $ | 57,600 | | $ | 1.92 | | | — | | | — | |
Vice-President | | 2009 | | $ | 43,040 | | $ | — | | $ | — | | $ | — | | | — | | | — | |
Engineering | | 2008 | | $ | 43,040 | | $ | — | | $ | 47,000 | | $ | 1.88 | | | — | | | — | |
* 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. | Under the Employee Stock Grant Plans for 2008 and 2009, stockholders approved the granting of 800,000 shares of our common stock, under each plan, to our directors, officers and employees. |
4. | During fiscal year 2009, Robert Benou forgave $286,467 of salary and during fiscal 2010, Robert Benou forgave $157,551 of his salary. |
Outstanding equity awards at fiscal year end.
| | | | | | | | | | | | | | | | | | | |
Name | | Option Awards | | Stock Awards | |
| |
| |
| |
| | Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable | | Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable | | Equity
Incentive
Plan Awards:
Number of
Securities
Underlying of
Unexercised
Unearned
Options (#) | | Option
Exercise
Price ($) | | Option
Expiration
Date | | Number of
Shares or
Units of
Stock That
Have Not
Vested (#) | | Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($) | | Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested (#) | | Equity
Incentive
Plan Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested ($) | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
|
Robert Benou | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Benou | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
On July 9, 2002 our stockholders approved our 2002 Stock Option Plan under which up to 158 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.
22
ITEM 11- EXECUTIVE COMPENSATION (continued)
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, 2010 was $417,300 (actual 2010 salary drawn was $259,749, the difference of $157,551 has been forgiven by Mr. Benou and he does not hold the Company liable for this amount) and increases by $20,000 annually on January 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, 2010 was $238,200 and he receives annual increases of $12,000 on January 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 the employment agreement, employment is terminated upon death or disability of the employee and employee may be terminated by the Company for cause.
COMPENSATION OF DIRECTORS
No director of the Company receives any cash compensation for their services as such, but directors may receive stock options pursuant to the Company’s stock option plan and grants of the Company’s common stock. Currently, the Company has three directors who are not employees, Messrs. Louis Massad, David Peison and Edward Rielly. No cash or stock compensation has been granted to any director during the years ended July 31, 2010 and 2009.
RISK MANAGEMENT
The Company does not believe risks arising from its compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the Company.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 31, 2010, 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 at July 31, 2010 is based on 6,967,881 shares issued and outstanding.
23
ITEM 12 - - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (continued)
| | | | | | | |
Name and Title | | Amount and Nature
of Beneficial Ownership | | Percent of
Class | |
| |
| |
| |
Robert S. Benou, Chairman, Chief Executive Officer | | | 426,666 | | | 6.12 | % |
Chief Financial Officer and Director Marc R. Benou, President, Chief Operating Officer, | | | 517,923 | | | 7.43 | % |
Secretary and Director Louis Massad, Director | | | 37,500 | | | 0.54 | % |
Edward J. Rielly, Director | | | — | | | 0.00 | % |
David M. Peison, Director | | | 74,667 | | | 1.07 | % |
Thomas Fogg, Vice President -Engineering Deceased 6/18/10 | | | — | | | 0.00 | % |
| |
|
| |
|
| |
All Officers and Directors as a Group (6 persons) | | | 1,056,756 | | | 15.16 | % |
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORS INDEPENENCE
Certain relationships and Related Transactions
Marc Benou, President, Chief Operating Officer, Secretary and Director is the son of Robert Benou, Chairman, Chief Executive Officer, Chief Financial Officer and Director.
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 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fee
Bagell Josephs Levine & Company LLC billed the Company in the aggregate amount of $45,000 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Forms 10-Q for the year ended July 31, 2009. With the engagement of WithumSmith+Brown, PC for the re-audit of fiscal 2009, including the opening balances of fiscal 2008 and the current fiscal 2010, the Company expects audit fees of approximately $200,000. Withum has not billed the Company for any audit services as of July 31, 2010.
Audit-Related Fees
No fees were billed during the years ended July 31, 2010 and 2009 for assurance and related services by either WithumSmith+Brown, PC or 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 during the years ended July 31, 2010 and 2009 for tax compliance, tax advice, or tax planning services by WithumSmith+Brown, PC or 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 WithumSmith+Brown, PC or Bagell, Joseph, Levine & Company LLC during the years ended July 31, 2010 and 2009 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.
24
PART IV
ITEM 15 – EXHIBITS
| |
Exhibit No. | Description of Exhibits |
| |
3.1 | Certificate of Incorporation** - |
| |
3.1.1 | Certificate of Amendment of Certificate of Incorporation - ** |
31.2 | Certificate of Amendment of Certificate of Incorporation of DSI Systems, Inc. ** |
| |
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.”** |
| |
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.** |
| |
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.** |
3.1.6 | Certificate of Ownership and Merger of Conolog Corporation (New Jersey) by DSI Systems, Inc.* |
3.1.7 | Certificate of Amendment of Certificate of Incorporation.* |
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* |
| |
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) |
25
ITEM 15 – EXHIBITS
| |
Exhibit No. | Description of Exhibits |
| |
4.6.1 | Form of Broker’s Common Stock Purchase Warrants, dated March 13, 2010 (3) |
| |
4.7 | Form of Notes as of August 3, 2009 (7) |
| |
4.8 | Form of Class A Warrants (7) |
| |
4.9 | Form of Class B Warrants (7) |
| |
4.10 | Form of Class C Warrants (7) |
| |
10.1 | Employment Agreement dated June 1, 1997 between Robert Benou and Conolog Corporation* |
| |
10.1.1 | Amendment Employment Agreement dated February 18, 1999 between Robert Benou and Conolog Corporation* |
| |
10.2 | Employment Agreement dated June 1, 1997 between Marc Benou and Conolog Corporation (4) |
| |
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 July 29, 2009* |
| |
10.6 | Subscription Agreement dated as of March 12, 2007 (3) |
| |
10.7 | Form of Subscription Agreement between Conolog Corporation and the subscribers named therein dated as of August 3, 2009 (7) |
| |
10.8 | Security Agreement dated as of August 3, 2009 (7) |
| |
10.9 | Amendment No. 1 to Class C Common Stock Purchase Warrants, dated June 18, 2010 between Conolog Corporation and Alpha Capital Anstalt; Whalehaven Capital and Osher Partners (8) |
| |
10.10 | Amendment No 1 to Secured Convertible Note, dated June 18, 2010, between Conolog Corporation and Alpha Capital Anstalt, Whalehaven Capital and Osher Partners (8) |
| |
10.11 | Amendment No 1 to Subscription Agreement, dated June 18, 2010, between Conolog Corporation and the Holders identified on the signature pages thereto (8) |
| |
10.12 | 2009 Incentive Stock Pan (9) |
| |
10.13 | Waiver dated November 27, 2010 |
| |
14.1 | Code of Ethics(6) |
| |
21.1 | List of Subsidiaries* |
| |
23.1 | Incorporated by reference to the Registrants Registration Statements on Forms S-8 filed on May 25, 2007, July 8, 2008 and February 1, 2010. |
| | |
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)* |
26
ITEM 15 – EXHIBITS (continued)
| | |
| |
* | Filed herewith |
** | Incorporated by reference to the Registrant’s Statement on Form SB-2 filed with the Securities and Exchange on February 18, 2005. |
(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. |
(7) | Incorporated by reference to the Registrants Report on form 8-K filed on August 6, 2009 |
(8) | Incorporated by reference to the Registrants Report on form 8-K filed on July 14, 2010 |
(9) | Incorporated by reference to Schedule 14A filed on August 31, 2009. |
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Conolog Corporation
| | | | |
| | By: | /s/ Robert S. Benou | |
| | |
| |
November 30, 2010 | | Chairman, Chief Executive Officer |
| | Chief Financial Officer |
| | | |
In accordance with the Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant and in the capacities and on the dates indicated. |
| | | |
November 30, 2010 | | /s/Robert S. Benou | |
| |
| |
| | Chairman, Chief Executive Officer and |
| | Chief Financial Officer |
| | | |
November 30, 2010 | | /s/Marc R. Benou | |
| |
| |
| | President, Chief Operating Officer, Secretary and Director |
| | | |
November 30, 2010 | | /s/Louis S. Massad | |
| |
| |
| | Director |
| | | |
November 30, 2010 | | /s/Edward J. Rielly | |
| |
| |
| | Director |
| | | |
November 30, 2010 | | /s/David M. Peison | |
| |
| |
| | Director |
28
Form 10-K
Index to the Consolidated Financial Statements
Conolog Corporation and Subsidiaries
July 31, 2010 and 2009
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Conolog Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Conolog Corporation and Subsidiaries as of July 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. Conolog Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Conolog Corporation and Subsidiaries as of July 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company has restated their July 31, 2009 financial statements to correct a misstatement.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 1 to the consolidated financial statements, the Company has had recurring losses from operations of $3,532,645 and $1,620,877 and used cash from operations in the amounts of $1,636,745 and $1,264,121 for the years ended July 31, 2010 and 2009, respectively. At July 31, 2010 the Company had cash equivalents of $713,005. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ WithumSmith+Brown, PC
Somerville, New Jersey
November 30, 2010
F-1
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2010 AND 2009
| | | | | | | |
| | | | As Restated | |
| | 2010 | | 2009 | |
| |
| |
| |
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | 713,005 | | $ | 27,358 | |
Accounts receivable, net of allowance | | | 67,603 | | | 245,980 | |
Inventory, net of reserve for obsolescence | | | 826,079 | | | 587,782 | |
Prepaid expenses | | | 248,297 | | | 47,000 | |
Note receivable, net of allowance | | | — | | | 1,610 | |
Other current assets | | | 5,000 | | | 5,000 | |
| |
|
| |
|
| |
| | | | | | | |
Total Current Assets | | | 1,859,984 | | | 914,730 | |
| |
|
| |
|
| |
| | | | | | | |
Property and equipment: | | | | | | | |
Machinery and equipment | | | 1,357,053 | | | 1,357,053 | |
Furniture and fixtures | | | 430,924 | | | 429,765 | |
Automobiles | | | 34,097 | | | 34,097 | |
Computer software | | | 231,002 | | | 209,380 | |
Leasehold improvements | | | 30,265 | | | 30,265 | |
| |
|
| |
|
| |
Total property and equipment | | | 2,083,341 | | | 2,060,560 | |
Less: accumulated depreciation | | | (1,987,284 | ) | | (1,960,054 | ) |
| |
|
| |
|
| |
Net Property and Equipment | | | 96,057 | | | 100,506 | |
| |
|
| |
|
| |
| | | | | | | |
Other Assets: | | | | | | | |
Deferred financing fees, net of amortization | | | 382,132 | | | — | |
| |
|
| |
|
| |
| | | | | | | |
Total Other Assets | | | 382,132 | | | — | |
| |
|
| |
|
| |
| | | | | | | |
TOTAL ASSETS | | $ | 2,338,173 | | $ | 1,015,236 | |
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F-2
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
| | | | | | | |
| | | | | As Restated | |
| | 2010 | | 2009 | |
| |
| |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current Liabilities: | | | | | | | |
Accounts payable | | $ | 150,880 | | $ | 217,455 | |
Accrued expenses | | | 201,000 | | | 64,132 | |
Convertible debenture, net of discount, of $0 and $3,632 at July 31, 2010 and 2009, respectively | | | — | | | 34,318 | |
| |
|
| |
|
| |
Total Current Liabilities | | | 351,880 | | | 315,905 | |
| |
|
| |
|
| |
| | | | | | | |
Non-Current Liabilities: | | | | | | | |
Convertible debenture, net of discount of $720,687 and $0 at July 31, 2010 and 2009, respectively | | | 279,313 | | | — | |
| |
|
| |
|
| |
Total Liabilities | | | 631,193 | | | 315,905 | |
| |
|
| |
|
| |
Commitments and Contingencies | | | | | | | | | | | | | | | |
Stockholders’ Equity: | | | | | | | |
Preferred stock, par value $.50; Series A; 4% cumulative; 500,000 shares authorized; 155,000 shares issued and outstanding at July 31, 2010 and 2009, 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, 2010 and 2009, respectively. | | | 597 | | | 597 | |
Common stock, par value $0.01; 30,000,000 shares authorized; 6,967,881 and 1,842,485 shares issued and outstanding at July 31, 2010 and 2009 respectively including 2 shares held in treasury. | | | 69,679 | | | 18,425 | |
Contributed capital | | | 78,088,878 | | | 52,221,727 | |
Accumulated deficit | | | (76,397,940 | ) | | (51,487,184 | ) |
Less: Treasury shares at cost | | | (131,734 | ) | | (131,734 | ) |
| |
|
| |
|
| |
Total Stockholders’ Equity | | | 1,706,980 | | | 699,331 | |
| |
|
| |
|
| |
| | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 2,338,173 | | $ | 1,015,236 | |
| |
|
| |
|
| |
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, 2010 AND 2009
| | | | | | | |
| | | | | As Restated | |
| | 2010 | | 2009 |
| |
| |
| |
OPERATING REVENUES | | | | | | | |
Product revenue | | $ | 1,178,673 | | $ | 1,485,298 | |
| |
|
| |
|
| |
Cost of product revenue | | | | | | | |
Materials and labor used in production | | | 618,990 | | | 618,325 | |
Inventory obsolesence | | | 75,564 | | | 169,712 | |
| |
|
| |
|
| |
Total Cost of product revenue | | | 694,554 | | | 788,037 | |
| |
|
| |
|
| |
Gross Profit | | | 484,119 | | | 697,261 | |
| |
|
| |
|
| |
Selling, general and administrative expenses | | | | | | | |
General and administrative | | | 3,759,490 | | | 1,779,243 | |
Research and development | | | 139,951 | | | 368,331 | |
Selling expenses | | | 117,323 | | | 170,564 | |
| |
|
| |
|
| |
Total selling, general and administrative expenses | | | 4,016,764 | | | 2,318,138 | |
| |
|
| |
|
| |
Loss from Operations | | | (3,532,645 | ) | | (1,620,877 | ) |
| |
|
| |
|
| |
OTHER INCOME (EXPENSES) | | | | | | | |
Loss on derivative financial instruments | | | (18,958,801 | ) | | — | |
Beneficial conversion feature | | | (457,692 | ) | | — | |
Incremental consideration for modification of debt warrants | | | (107,863 | ) | | — | |
Interest expense | | | (44,546 | ) | | (102,379 | ) |
Interest income | | | 3,630 | | | 16,265 | |
Induced conversion cost | | | (150,201 | ) | | (621,880 | ) |
Bad debt for note receivable | | | — | | | (83,101 | ) |
Amortization of debt discount | | | (1,279,313 | ) | | (123,274 | ) |
Amortization of deferred financing fees | | | (520,656 | ) | | (128,108 | ) |
| |
|
| |
|
| |
Total Other Income (Expense) | | | (21,515,442 | ) | | (1,042,477 | ) |
| |
|
| |
|
| |
Net Loss before income tax benefit | | | (25,048,087 | ) | | (2,663,354 | ) |
Income tax benefit | | | 137,331 | | | 373,939 | |
| |
|
|
|
|
| |
NET LOSS APPLICABLE TO COMMON SHARES | | | (24,910,756 | ) | | (2,289,415 | ) |
| |
|
| |
|
| |
NET LOSS PER BASIC AND DILUTED COMMON SHARE | | $ | (5.36 | ) | $ | (2.36 | ) |
| |
|
| |
|
| |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | | 4,650,113 | | | 968,723 | * |
| |
|
| |
|
| |
*Represents retroactive application of 1:5 reverse stock split.
The accompanying notes are an integral part of the consolidated financial statements.
F-4
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A
Preferred Stock | | Series B
Preferred Stock | | | | Contributed
Capital | | Accumulated
Deficit | | Treasury Stock | | Total
Stockholders’
Equity | |
| | | | Common Stock | | | | | |
| | Shares | | Amount | | Shares | | Amount | | Shares* | | Amount | | | | Shares* | | Amount | | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2008, as restated | | 155,000 | | $ | 77,500 | | 1,197 | | $ | 597 | | 557,494 | | $ | 5,574 | | $ | 50,604,831 | | $ | (49,197,769 | ) | 2 | | $ | (131,734 | ) | $ | 1,358,999 | |
| |
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion of convertible debenture | | — | | | — | | — | | | — | | 636,570 | | | 6,366 | | | 907,443 | | | — | | — | | | — | | | 913,809 | |
Interest paid with issuance of common stock | | — | | | — | | — | | | — | | 51,526 | | | 515 | | | 93,543 | | | — | | — | | | — | | | 94,058 | |
Induced conversion costs associated with convertible debt | | — | | | — | | — | | | — | | — | | | — | | | 621,880 | | | — | | — | | | — | | | 621,880 | |
Reversal of previously issued shares issued for services to be provided | | — | | | — | | — | | | — | | (5,000 | ) | | (50 | ) | | (19,450 | ) | | — | | — | | | — | | | (19,500 | ) |
Reversal of previously issued common shares issued to, officers, directors and employees for fiscal 2008 | | — | | | — | | — | | | — | | (144,000 | ) | | (1,440 | ) | | (1,372,210 | ) | | — | | — | | | — | | | (1,373,650 | ) |
Shares issued for services to be provided | | — | | | — | | — | | | — | | 25,500 | | | 255 | | | 47,430 | | | — | | — | | | — | | | 47,685 | |
Common shares issued to officers, directors and employees for fiscal 2009 | | — | | | — | | — | | | — | | 720,395 | | | 7,205 | | | 1,338,260 | | | — | | — | | | — | | | 1,345,465 | |
Net loss for the year | | — | | | — | | — | | | — | | — | | | — | | | — | | | (2,289,415 | ) | — | | | — | | | (2,289,415 | ) |
| |
|
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|
Balance at July 31, 2009, as restated | | 155,000 | | $ | 77,500 | | 1,197 | | $ | 597 | | 1,842,485 | | $ | 18,425 | | $ | 52,221,727 | | $ | (51,487,184 | ) | 2 | | $ | (131,734 | ) | $ | 699,331 | |
| |
|
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|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion of convertible debentures | | — | | | — | | — | | | — | | 1,328,645 | | | 13,287 | | | 1,024,662 | | | — | | — | | | — | | | 1,037,949 | |
Exercise of warrants | | — | | | — | | — | | | — | | 2,746,192 | | | 27,462 | | | 607,608 | | | — | | — | | | — | | | 635,070 | |
Shares issued for services to be provided | | — | | | — | | — | | | — | | 265,000 | | | 2,650 | | | 506,150 | | | — | | — | | | — | | | 508,800 | |
Induced conversion costs associated with convertible debt | | — | | | — | | — | | | — | | — | | | — | | | 150,201 | | | — | | — | | | — | | | 150,201 | |
Interest paid with issuance of common stock | | — | | | — | | — | | | — | | 50,559 | | | 505 | | | 39,041 | | | — | | — | | | — | | | 39,546 | |
Reclassification of derivative liability | | — | | | — | | — | | | — | | — | | | — | | | 21,570,084 | | | — | | — | | | — | | | 21,570,084 | |
Incremental consideration for reduction of exercise price of Series C warrants | | — | | | — | | — | | | — | | — | | | — | | | 107,863 | | | — | | — | | | — | | | 107,863 | |
Beneficial converion feature on February 2010 debentures in consideration of modifying terms | | — | | | — | | — | | | — | | — | | | — | | | 457,692 | | | — | | — | | | — | | | 457,692 | |
Common shares issued to officers, directors and employees | | — | | | — | | — | | | — | | 735,000 | | | 7,350 | | | 1,403,850 | | | — | | — | | | — | | | 1,411,200 | |
Net loss for the year | | — | | | — | | — | | | — | | — | | | — | | | — | | | (24,910,756 | ) | — | | | — | | | (24,910,756 | ) |
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|
Balance at July 31, 2010 | | 155,000 | | $ | 77,500 | | 1,197 | | $ | 597 | | 6,967,881 | | $ | 69,679 | | $ | 78,088,878 | | $ | (76,397,940 | ) | 2 | | $ | (131,734 | ) | $ | 1,706,980 | |
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*Represents retroactive application of 1:5 reverse stock split.
The accompanying notes are an integral part of the consolidated financial statements.
F-5
CONOLOG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
| | | | | | | |
| | 2010 | | As Restated
2009 | |
| |
| |
| |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net loss | | $ | (24,910,756 | ) | $ | (2,289,415 | ) |
Adjustments to reconcile net loss to net cash used in operations: | | | | | | | |
Depreciation | | | 27,230 | | | 23,374 | |
Provision for uncollectible note receivable | | | — | | | 83,101 | |
Reserve of obsolete inventory parts | | | (14,000 | ) | | (4,000 | ) |
Write down of obsolete inventory parts | | | 89,564 | | | 173,712 | |
Amortization of deferred financing fees | | | 520,656 | | | 128,108 | |
Common stock issued to officers, directors and employees | | | 1,411,200 | | | — | |
Amortization of common stock issued for services | | | 428,800 | | | 47,685 | |
Induced conversion costs associated with convertible debt and warrants | | | 150,201 | | | 621,880 | |
Amortization of discount of convertible debentures | | | 1,279,313 | | | 123,274 | |
Beneficial conversion feature | | | 457,692 | | | — | |
Incremental consideration for modification of warrants | | | 107,863 | | | — | |
Loss on derivative financial instruments | | | 18,958,801 | | | — | |
Changes in assets and liabilities | | | | | | | |
(Increase) decrease in accounts receivable | | | 178,377 | | | 114,866 | |
(Increase) in prepaid expenses | | | (117,666 | ) | | (63,364 | ) |
(Increase) in inventories | | | (313,861 | ) | | (366,429 | ) |
(Increase) in other current assets | | | — | | | (5,000 | ) |
Increase (decrease) in accounts payable | | | (66,575 | ) | | 51,854 | |
Increase in accrued expenses | | | 176,416 | | | 96,233 | |
| |
|
| |
|
| |
Net cash used in operations | | | (1,636,745 | ) | | (1,264,121 | ) |
| |
|
| |
|
| |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Purchase of property and equipment | | | (22,781 | ) | | — | |
Redemption of certificates of deposit | | | — | | | 600,182 | |
| |
|
| |
|
| |
Net cash (used in) provided by investing activities | | | (22,781 | ) | | 600,182 | |
| |
|
| |
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Proceeds from issuance of convertible debentures | | | 2,000,000 | | | — | |
Proceeds from exercise of warrants | | | 635,070 | | | — | |
Payments for deferred loan costs | | | (291,507 | ) | | — | |
Proceeds from note receivable | | | 1,610 | | | 10,650 | |
| |
|
| |
|
| |
Net cash provided by financing activities | | | 2,345,173 | | | 10,650 | |
| |
|
| |
|
| |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 685,647 | | | (653,289 | ) |
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | | | 27,358 | | | 680,647 | |
| |
|
| |
|
| |
CASH AND CASH EQUIVALENTS - END OF YEAR | | | 713,005 | | | 27,358 | |
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| |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | |
CASH PAID DURING THE YEAR FOR: | | | | | | | |
Interest expense | | $ | — | | $ | 8,321 | |
| |
|
| |
|
| |
Income Taxes | | | 11,099 | | | 520 | |
| |
|
| |
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| |
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: | | | | | | | |
Debt converted to equity | | $ | 1,037,949 | | $ | 913,809 | |
| |
|
| |
|
| |
Common stock issued for serices to be provided | | $ | 508,800 | | $ | 47,685 | |
| |
|
| |
|
| |
Common stock issued for accrued interest | | $ | 39,546 | | $ | 94,058 | |
| |
|
| |
|
| |
Warrants granted to broker for deferred financing fees | | $ | 611,281 | | $ | — | |
| |
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| |
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| |
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, 2010 AND 2009 |
|
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 located primarily throughout the United States, 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. |
|
Going Concern |
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has had recurring losses from operations of ($3,532,645) and ($1,620,877) and used cash from operations in the amounts of ($1,636,745) and ($1,264,121) for the years ended July 31, 2010 and 2009, respectively. At July 31, 2010, the Company had cash and cash equivalents of $713,005. On June 23, 2010, an event of default occurred on our outstanding convertible Debentures (See Notes 9 and 15). Although, the Company received a waiver from the note holders on November 29, 2010 there can be no assurance that we will not suffer further events of default. These factors raise substantial doubt as to the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from this uncertainty. |
|
The Company plans to raise additional capital through debt and equity placements and increase revenue through new product development. There can be no assurance that the Company will be successful in achieving its goals. |
|
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 three 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. Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. At July 31, 2010 the Company did not have any cash equivalents. |
|
Receivables and Allowance for Doubtful Accounts |
Trade Receivables are non-interest bearing, uncollateralized customer obligations and are stated at the amounts billed to customers. 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 allowance for doubtful accounts at July 31, 2010 and 2009 was $1,000 and $1,000, respectively. |
|
The Company has a concentration risk in trade accounts receivable with significant sales to the government and local agencies. Three customers accounted for approximately 48%, 30% and 14% of accounts receivable as of July 31, 2010. Two customers accounted for approximately 71% and 12% of accounts receivable as of July 31, 2009. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations. |
F-7
|
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
|
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
Inventories |
Inventories are valued at lower of cost or market using the first-in, first-out (“FIFO”) method. Finished goods costs included raw materials, labor and manufacturing overhead costs. Excess and obsolete inventory costs are expensed and a reserve for slow-moving inventory is made on management’s estimates. |
|
Finished goods are products that have been completed in connection with specific orders and are awaiting shipment. Work-in-Process represents raw material components that have been requisitioned from the warehouse and are being assembled in the manufacturing area. Raw Materials consist of components parts purchased from various suppliers and are used to build our finished products. Various raw material parts are also maintained to support warranty claims for commercial and military products. Typical raw material products include PC boards, digital screen assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates. |
|
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.
The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our reserve review. The Company estimated a usage rate for its raw material component parts for what it expects to use over a 36 month period. Any excess inventory based on this projected usage rate is written off as excess and obsolete. The Company then reserves 100% of the estimated usage that is over 12 months and less than 36 months. Certain raw material parts which have been written down to a zero value, may still be maintained in inventory to satisfy possible requirements under the warranty programs but are valued a zero. Ongoing the Company evaluates the inventory parts based on their age and usage over a 36 month period to determine inventory obsolescence and reserve adjustments. |
|
Property and Equipment |
Property 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 which range between three and seven years. Depreciation was $27,230 and $23,374 for the years ended July 31, 2010 and 2009, respectively. Repairs and maintenance expenditures which do not extend the useful lives of the related assets are expensed as incurred. Gains and losses on depreciable assets retired or sold are recognized in the consolidated statement of operations in the year of disposal. |
|
Deferred Financing Costs |
The Company follows authoritative guidance for accounting for financing costs as it relates to convertible debt issuance cost. These costs are deferred and amortized over the term of the debt period or until redemption of the convertible Debentures. As of July 31, 2010 and 2009, $382,132 and $0, respectively of deferred financing costs remained to be amortized. Amortization of deferred financing costs amounted to $520,656 and $128,108 for years ended July 31, 2010 and 2009, respectively. |
|
Derivative Liability |
Derivative liabilities consist of certain common stock warrants, and conversion features embedded in our convertible Debenture notes. These financial instruments are recorded in the balance sheet at fair value, determined using the Black Scholes option pricing model, as liabilities. Changes in fair value are recognized in the statement of operations in the period of change. |
|
Effective August 1, 2009, the Company adopted the provisions of the Financial Accounting Standards Board Accounting Codification Topic 815-40-15-5, “Evaluating Whether an Instrument Involving a Contingency is Considered Indexed to an Entity’s Own Stock” (“FASB ASC 815-40-15-5”). FASB ASC 815-40-15-5 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock for purposes of determining whether the equity-linked instrument (or embedded feature) qualifies as a derivative instrument. We have determined that our convertible Debentures and certain of our warrants issued after the adoption of FASB ASC 815-40-15-5 contain features that are not indexed to our own stock and therefore, were classified as derivative instruments. Upon adoption of FASB ASC 815-40-15-5 we did not record a cumulative effect of a change in accounting principle as it did not apply to any outstanding convertible Debentures or warrants at that time. |
|
On June 18, 2010, the Company’s common stock warrants and convertible notes were amended. As a result of these amendments we determined that the equity-linked instruments (or embedded features) are indexed to our Company’s stock within the meaning of FASB ASC 815-40-15-5 and no longer qualify as a derivative instrument. |
F-8
|
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
|
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
Debt Discount |
The Company follows the authoritative guidance for accounting for debt discount and valuation of detachable warrants the Company recognized the value of detachable warrants issued in conjunction with issuance of the secured convertible Debenture notes. The Company valued the warrants using the Black-Scholes pricing model. The Company recorded the warrant relative fair value as an increase to additional paid-in capital and discount against the related debt. The discount attributed to the value of the warrants is amortized over the term of the underlying debt using the effective interest method. |
|
Impairment of Long-Lived Assets |
We review our long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows. |
|
Research and Development |
Research and Development costs are expensed as incurred. Research and Development costs were $139,951 and $368,331 for the years ended July 31, 2010 and 2009, 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. |
|
Warranty |
The Company provides a twelve-year warranty on its commercial products and 25 years on its military 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. Our warranty costs have historically been insignificant and therefore a provision was not warranted. Management continues to monitor the costs and will provide a warranty provision if circumstances change. |
|
Advertising / Public Relations Costs |
Advertising/Public Relations costs are charged to operations when incurred. These expenses were $72,329 and $37,521 for the years ended July 31, 2010 and 2009, respectively. |
|
Shipping and Handling Costs |
Shipping and handling costs are expensed as incurred and amounted to $37,416 and $30,583 for the years ended July 31, 2010 and 2009, respectively. |
|
Stock Based Compensation |
The Company follows the authoritative guidance for accounting for stock-based compensation. This guidance requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and stock, be recognized in the financial statements based upon their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company also follows the guidance for equity instruments issued to consultants. |
F-9
| |
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
| |
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
| |
Fair Value Measurements |
The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: |
| |
Level 1 – | Quoted prices in active markets for identical assets or liabilities. |
Level 2 – | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities. |
Level 3 – | Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities. |
| |
The Company’s financial instruments include cash and equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, convertible Debentures as well as derivative liabilities. All these items, except the derivative liabilities were determined to be Level 1 fair value measurements. |
| |
The carrying amounts of cash and equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and short term convertible Debentures approximates fair value because of the short maturity of these instruments. The recorded value of long-term debt approximates its fair value as the terms and rates approximate market rates. |
| |
The Company has determined its financial instruments accounted for as derivative liabilities to be a Level 2 fair value measurement and has used the Black-Scholes pricing model to calculate the fair value. See Note 10, Derivative Liabilities. |
| |
Income Taxes |
The Company follows the authoritative guidance for accounting for income taxes. Deferred income taxes are determined using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when the expected recognition of a deferred tax asset is considered to be unlikely. The guidance also requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion, the guidance requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement. Based on the Company’s evaluation, management has concluded that there are significant uncertain tax positions requiring recognition in the consolidated financial statements with respect to the sale of the Company’s New Jersey Net Operating Loss Carryovers. In the event the Company receives an assessment for interest and/or penalties by major tax jurisdiction it would be classified in the financial statements as general and administrative expense. See note 6, Income Taxes. |
| |
Other State Tax Benefits |
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 years ended July 31, 2010 and 2009, the Company entered into agreements to sell its unused NOLs. Recognition of this asset and income have been in accordance with the guidance of SAB Topic 13 and are recorded upon the State of New Jersey’s approval of the technology tax benefit transfer certificate and receipt of a contract to purchase a fixed amount of these NOLs. |
| |
Loss Per Share of Common Stock |
Basic loss per share of common stock is computed by dividing the Company’s net loss 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 computation were 4,650,113 and 968,723 (adjusted for a 1:5 reverse stock split) for 2010 and 2009 respectively. The effect of assuming the exchange of Series A Preferred Stock and Series B Preferred Stock in 2010 and 2009 would be anti-dilutive. Anti-dilutive shares are not included in the calculation of Earnings per Share. As the Company had a loss, the impact of the assumed exercise of outstanding warrants and convertible debt at July 31, 2010 and 2009 would be anti-dilutive. Potentially dilutive securities at July 31, 2010 consist of 2,939,036 common shares from outstanding warrants, 1,666,667 common shares from convertible debt and 155,006 common shares from preferred stock. |
F-10
|
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
|
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
The following is a reconciliation of the computation for basic and diluted EPS: |
| | | | | | | |
| | | | As Restated | |
| | | |
| |
| | July 31,
2010 | | July 31,
2009* | |
| |
| |
| |
Net Loss | | $ | (24,910,756 | ) | $ | (2,289,415 | ) |
| |
|
| |
|
| |
Weighted-average common shares outstanding (Basic) | | | 4,650,113 | | | 968,723 | |
Weighted-average common stock equivalents: | | | | | | | |
Warrants | | | — | | | — | |
Series A Preferred Shares | | | — | | | — | |
Series B Preferred Shares | | | — | | | — | |
| |
|
| |
|
| |
| | | | | | | |
Weighted-average common shares outstanding (Diluted) | | | 4,650,113 | | | 968,723 | |
| |
|
| |
|
| |
| | | | | | | |
*Represents retroactive application of 1:5 reverse stock split. |
|
Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions made by management ae based upon available current information, historical experience and other factors that are believed to be reasonable under the circumstances. The estimates and assumptions made by management involve risks and uncertainties which could cause reported amounts to differ materially from actual future results. If management’s estimates and assumptions are inaccurate, the Company’s reported amounts and disclosures of contingent assets and liabilities could be materially and adversely affected. Management considers its reserve for inventory and accounting for derivative liabilities to be significant estimates. |
|
Effects of Recent Accounting Pronouncements |
|
Recently Adopted Accounting Pronouncements |
In May 2008, the FASB issued guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlements). This guidance requires a portion of this type of convertible debt to be recorded as equity and to record interest expense on the debt portion at a rate that would have been charged on nonconvertible debt with the same terms. This guidance is effective for the Company’s fiscal year beginning August 1, 2009. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements. |
|
In June 2008, the FASB issued guidance related to determining whether instruments granted in share-based payment transactions are participating securities. Securities participating in dividends with common stock according to a formula are participating securities. This guidance determined that unvested shares of restricted stock and stock units with nonforfeitable rights to dividends are participating securities. Participating securities require the “two-class” method to be used to calculate basic earnings per share. This method lowers basic earnings per common share. This guidance is effective for the Company’s fiscal year beginning August 1, 2009. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements. |
F-11
| |
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
| |
Recently Adopted Accounting Pronouncements (continued) |
| |
In June 2008, the FASB reached a consensus regarding the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which is the first part of the scope exception related to accounting for derivative instruments and hedging activities. This guidance is effective for the Company’s fiscal year beginning August 1, 2009. The Company determined that the conversion features embedded in its convertible Debentures and certain of its warrants with price protection provisions are not considered to be indexed to the Company’s own stock, therefore, they do not meet the scope exception and thus should be accounted for as a liability. During the fiscal year ended July 31, 2010, the adoption of this guidance resulted in a loss on derivative financial instruments in the amount of $18,958,801. |
| |
In June 2009, the FASB issued guidance which stipulates the FASB Accounting Standards Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. This guidance is effective for the Company’s fiscal year beginning August 1, 2009. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements. |
| |
Recently Issued Accounting Pronouncements |
In October 2009, the FASB issued guidance on multiple deliverable revenue arrangements which eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence including, vendor specific objective evidence, third party evidence of selling price, or estimated selling price. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional. Early adoption of these standards may be elected. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements. |
| |
In January 2010, the FASB issued additional guidance on fair value measurements and disclosures which requires reporting entities to provide information about movements of assets among Level 1 and 2 of the three-tier fair value hierarchy established by the existing guidance. The guidance is effective for any fiscal year that begins after December 15, 2010, and it should be used for quarterly and annual filings. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements. |
| |
Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements. |
| |
NOTE 3 – RESTATEMENT TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS |
| |
In a Form 8-K dated June 10, 2010, Conolog Corporation concluded that our consolidated financial statements for the year ended July 31, 2009 and the quarters ended April 30, 2010, January 31, 2010 and October 31, 2009 would be restated and should no longer be relied upon. |
| |
The following is a summary of the adjustments to our previously issued consolidated balance sheet as of July 31, 2009 and consolidated statement of operations for the year then ended: |
| |
1. | The July 31, 2009 ending inventory balance was reduced in the amount of $348,229, as a result of inventory not being valued using appropriate GAAP. This reduction was expensed to cost of goods sold. In addition, the Company established a reserve for inventory in the amount of $88,000, in accordance with GAAP. |
2. | Computer software previously capitalized as an asset in the amount of $311,243 was appropriately expensed to research and development expense. The accumulated depreciation associated with the inappropriate capitalization was also corrected in the amount of $15,045. |
3. | A reserve was established for a note receivable in the amount of $83,101 whose collectability was not reasonably assured. The amount of $83,101 was expensed to the bad debt for note receivable on the consolidated statements of operations. |
F-12
| |
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
| |
NOTE 3 – RESTATEMENT TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued) |
| |
4. | Prepaid expenses were overstated. Consulting fees in the amount of $23,843 were expensed and are included in selling, general and administrative expense line item on the consolidated statements of operations. |
5. | The Company recorded a payroll tax accrual in the amount of $38,000. This adjustment has increased general, selling and administrative expenses in the amount of $38,000 with a corresponding increase in the accrual expenses on the consolidated balance sheet. |
6. | The previously reported induced conversion costs were inaccurately calculated. An additional expense of $69,510 was recorded in the induced conversion cost line item of the consolidated statement of operations with a corresponding increase to additional paid in capital. |
7. | The Company reduced amortization of deferred financing fees in the amount of $158,476 with a corresponding increase to deferred financing fees on the consolidated balance sheet. |
8. | The Company inappropriately accounted for stock based compensation expense. Stock based compensation of $751,242 and consulting fees of $28,185 were both reduced and are included in general, selling and administrative expense of the consolidated statement of operations. Additional paid in capital was reduced by $68,623 both of which are on the consolidated balance sheet. |
9. | Adjusted the net loss per basic and diluted common shares from ($2.43) loss per share to ($2.36) loss per share based upon the restated net loss. |
| |
The following is a summary of the adjustments that have affected the opening accumulated deficit as of July 31, 2008: |
| |
1. | Deferred compensation (contra-equity) was reclassified to accumulated deficit in the amount of $604,110 to comply with ASC No. 718Compensation – Stock Compensation. |
2. | The inventory balance was restated because it was determined that the inventory was not appropriately valued using general accepted accounting principles (“GAAP”). The July 31, 2008 ending inventory balance was reduced by $459,442, and the accumulated deficit was increased by the same amount. In addition, the Company established a reserve for obsolete inventory in the amount $92,000 in accordance with GAAP. |
3. | A reduction to other receivable was recorded due to an error in recognizing a receivable for the sale of the Company’s N.J. State Tax Net Operating Losses. The other receivable was reduced by $568,529 and accumulated deficit was also appropriately adjusted. A receivable should not have been recognized until cash was received as per SAB Topic 13. |
4. | An incremental increase in compensation expense was recorded to adjust the fair value of the stock granted to the appropriate measurement date. The amount of $1,112,000 was recognized as in increase in accumulated deficit with a corresponding increase to additional paid in capital. |
5. | The previously reported induced conversion costs were inaccurately calculated. Additional paid in capital was reduced by $533,165 with the corresponding reduction in accumulated deficit. |
6. | The Company recorded additional amortization of deferred financing fees. Accumulated deficit was increased by $166,922 with a corresponding reduction to deferred financing fees on the consolidated balance sheet. |
| |
Presented on the following two pages are the previously reported and restated July 31, 2009 consolidated balance sheet and statements of operations and consolidated statement of cash flows. |
F-13
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
| | | | | | | |
NOTE 3 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued) | | | | |
| | | | |
Consolidated Balance Sheet - July 31, 2009 | | | | |
| | | | | | | |
| | Previously
Reported
2009 | | As
Restated
2009 | |
| |
| |
| |
ASSETS | | | | | | | |
| | | | | | | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | 27,358 | | $ | 27,358 | |
Accounts receivable, net of allowance | | | 245,980 | | | 245,980 | |
Inventory, net of reserve for obsolescence | | | 1,395,452 | | | 587,782 | |
Prepaid expenses | | | 70,843 | | | 47,000 | |
Current portion of note receivable | | | 14,864 | | | 1,610 | |
Other current assets | | | 551,937 | | | 5,000 | |
| |
|
| |
|
| |
Total Current Assets | | | 2,306,434 | | | 914,730 | |
| |
|
| |
|
| |
| | | | | | | |
Net Property and Equipment | | | 396,704 | | | 100,506 | |
| |
|
| |
|
| |
Other Assets: | | | | | | | |
Deferred financing fees, net of amortization | | | 8,445 | | | — | |
Note receivable, net of current portion | | | 69,846 | | | — | |
| |
|
| |
|
| |
Total Other Assets | | | 78,291 | | | — | |
| |
|
| |
|
| |
| | | | | | | |
TOTAL ASSETS | | $ | 2,781,429 | | $ | 1,015,236 | |
| |
|
| |
|
| |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current Liabilities: | | | | | | | |
Accounts payable | | $ | 217,456 | | $ | 217,455 | |
Accrued expenses | | | 26,132 | | | 64,132 | |
Convertible debenture, net of discount | | | 34,318 | | | 34,318 | |
| |
|
| |
|
| |
Total Current Liabilities | | | 277,906 | | | 315,905 | |
| |
|
| |
|
| |
Total Liabilities | | | 277,906 | | | 315,905 | |
| |
|
| |
|
| |
Commitments and Contingencies | | | | | | | |
Stockholders’ Equity: | | | | | | | |
Preferred stock, par value $.50; Series A; 4% cumulative; 500,000 shares authorized; 155,000 shares issued and outstanding at July 31, 2009 | | | 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, 2009 | | | 597 | | | 597 | |
Common stock, par value $0.01; 30,000,000 shares authorized; 1,842,485 shares issued and outstanding at July 31, 2009 including 2 shares held in treasury | | | 18,425 | | | 18,425 | |
Contributed capital | | | 52,385,432 | | | 52,221,727 | |
Accumulated deficit | | | (49,173,964 | ) | | (51,487,184 | ) |
Treasury shares at cost | | | (131,734 | ) | | (131,734 | ) |
Deferred compensation | | | (672,733 | ) | | — | |
| |
|
| |
|
| |
Total Stockholders’ Equity | | | 2,503,523 | | | 699,331 | |
| |
|
| |
|
| |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 2,781,429 | | $ | 1,015,236 | |
| |
|
| |
|
| |
F-14
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
| | | | | | | |
NOTE 3 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued) | | | | |
| | | | |
| | | | |
Consolidated Statement of Operations
For the Year Ended July 31, 2009 | | | | |
| | | | | | | |
| | Previously
Reported
2009 | | As Restated
2009 | |
| |
| |
| |
OPERATING REVENUES | | | | | | | |
Product revenue | | $ | 1,485,298 | | $ | 1,485,298 | |
| |
|
| |
|
| |
| | | | | | | |
Cost of product revenue | | | | | | | |
Materials and labor used in production | | | 388,254 | | | 618,325 | |
Inventory obsolesence | | | 82,138 | | | 169,712 | |
| |
|
| |
|
| |
Total Cost of product revenue | | | 470,392 | | | 788,037 | |
| |
|
| |
|
| |
| | | | | | | |
Gross Profit | | | 1,014,906 | | | 697,261 | |
| |
|
| |
|
| |
| | | | | | | |
Selling, general and administrative expenses | | | | | | | |
General and administrative | | | 2,445,290 | | | 1,779,243 | |
Research and development | | | 57,089 | | | 368,331 | |
Selling expenses | | | 170,564 | | | 170,564 | |
| |
|
| |
|
| |
Total selling, general and administrative expenses | | | 2,672,943 | | | 2,318,138 | |
| |
|
| |
|
| |
Loss from Operations | | | (1,658,037 | ) | | (1,620,877 | ) |
| |
|
| |
|
| |
| | | | | | | |
OTHER INCOME (EXPENSES) | | | | | | | |
Interest expense | | | (102,379 | ) | | (102,379 | ) |
Interest income | | | 16,265 | | | 16,265 | |
Other income | | | 352,347 | | | — | |
Induced conversion cost | | | (552,370 | ) | | (621,880 | ) |
Bad debt for note receivable | | | — | | | (83,101 | ) |
Amortization of debt discount | | | (123,274 | ) | | (123,274 | ) |
Amortization of deferred financing fees | | | (286,584 | ) | | (128,108 | ) |
| |
|
| |
|
| |
Total Other Income (Expense) | | | (695,995 | ) | | (1,042,477 | ) |
| |
|
| |
|
| |
Loss before provision for income taxes | | | (2,354,032 | ) | | (2,663,354 | ) |
Income tax benefit | | | — | | | 373,939 | |
| |
|
|
|
|
| |
NET LOSS | | $ | (2,354,032 | ) | $ | (2,289,415 | ) |
| |
|
| |
|
| |
| | | | | | | |
NET LOSS PER BASIC AND DILUTED COMMON SHARE | | $ | (2.43 | ) | $ | (2.36 | ) |
| |
|
| |
|
| |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | | 968,723 | * | | 968,723 | * |
| |
|
| |
|
| |
F-15
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
| | | | | | | |
NOTE 3 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued) |
|
| | | | | | | |
Consolidated Statement of Cash Flows
July 31, 2009 | | | | | | | |
| | | | | | | |
| | Previously
Reported
2009 | | As Restated
2009 | |
| |
| |
| |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net loss | | $ | (2,354,032 | ) | $ | (2,289,415 | ) |
Adjustments to reconcile net loss to net cash used in operations: | | | | | | | |
Depreciation | | | 23,373 | | | 23,374 | |
Provision for uncollectible note receivable | | | — | | | 83,101 | |
Reserve for obsolete inventory parts | | | — | | | (4,000 | ) |
Write down of obsolete inventory parts | | | 82,138 | | | 173,712 | |
Amortization of deferred financing fees | | | 123,274 | | | 128,108 | |
Amortization of deferred compensation | | | 715,242 | | | — | |
Amortization of prepaid consulting expense | | | 43,732 | | | 47,685 | |
Amortization of discount on converible debt | | | 77,500 | | | — | |
Induced conversion costs associated with convertible debt and warrants | | | 552,370 | | | 621,880 | |
Amortization of deferred loan discount | | | 286,584 | | | 123,274 | |
Changes in assets and liabilities | | | | | | | |
Decrease in accounts receivable | | | 114,866 | | | 114,866 | |
(Increase) in prepaid expenses | | | (24,476 | ) | | (63,364 | ) |
(Increase) in inventories | | | (627,083 | ) | | (366,429 | ) |
(Increase) decrease in other current assets | | | 16,592 | | | (5,000 | ) |
Increase (decrease) in accounts payable | | | — | | | 51,854 | |
Increase (decrease) in accrued expenses | | | 17,042 | | | 96,233 | |
| |
|
| |
|
| |
Net cash used in operations | | | (952,878 | ) | | (1,264,121 | ) |
| |
|
| |
|
| |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Purchase of property and equipment | | | (311,242 | ) | | — | |
Redemption of certificates of deposit | | | 600,182 | | | 600,182 | |
| |
|
| |
|
| |
Net cash provided by investing activities | | | 288,940 | | | 600,182 | |
| |
|
| |
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Proceeds from note receivable | | | 10,649 | | | 10,650 | |
| |
|
| |
|
| |
Net cash provided by financing activities | | | 10,649 | | | 10,650 | |
| |
|
| |
|
| |
NET (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (653,289 | ) | | (653,289 | ) |
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | | | 680,647 | | | 680,647 | |
| |
|
| |
|
| |
CASH AND CASH EQUIVALENTS - END OF YEAR | | | 27,358 | | | 27,358 | |
| |
|
| |
|
| |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | |
CASH PAID DURING THE YEAR FOR: | | | | | | | |
Interest expense | | $ | 7,931 | | $ | 8,321 | |
| |
|
| |
|
| |
Income Taxes | | $ | — | | $ | 520 | |
| |
|
| |
|
| |
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: | | | | | | | |
Debt converted to equity | | $ | 913,809 | | $ | 913,809 | |
| |
|
| |
|
| |
Common stock issued for services to be provided | | $ | 47,685 | | $ | 47,685 | |
| |
|
| |
|
| |
Common stock issued for deferred compensation | | $ | 1,345,465 | | $ | — | |
| |
|
| |
|
| |
Common stock issued for accrued interest | | $ | 94,448 | | $ | 94,058 | |
| |
|
| |
|
| |
Common stock resinded from Emplyee Stock Grant Plan | | $ | 581,490 | | $ | — | |
| |
|
| |
|
| |
F-16
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 4 - INVENTORY
Inventory consisted of the following as of July 31,
| | | | | | | |
| | 2010 | | As Restated
2009 | |
| |
| |
| |
| | | | | | | |
Finished Goods | | $ | 587,835 | | $ | 325,943 | |
Work-in-process | | | 83,441 | | | 23,711 | |
Raw materials | | | 228,803 | | | 326,128 | |
| |
|
| |
|
| |
| | | 900,079 | | | 675,782 | |
Less: Inventory reserve | | | 74,000 | | | 88,000 | |
| |
|
| |
|
| |
Inventory, net | | $ | 826,079 | | $ | 587,782 | |
| |
|
| |
|
| |
The Company, on an annual basis, reviews finished goods and raw material inventory on-hand and provides a reserve for obsolete product based on the results of the review.
As of July 31, 2010 and 2009, inventory reserves amounted to $74,000 and $88,000, respectively. For the years ended July 31, 2010 and 2009, inventory written off as obsolete, amounted to $89,565 and $173,712, respectively, and was charged to cost of sales.
NOTE 5 - NOTE RECEIVABLE
The Company entered into an Agreement to Rescind an 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 were to have continued monthly until the full balance was repaid. During fiscal 2009, the maker of the note stopped making payments and the Company reserved $83,100 at July 31, 2009. During fiscal 2010 the principal made only one payment of $1,610. The Company filed legal action and a Judgment was granted in favor of the Company. Any future collections from the principal will be recorded as income.
NOTE 6 - INCOME TAXES
The income tax expense (benefit) is comprised of the following:
| | | | | | | | | | | |
| | | | 2010 | | 2009 | | | |
| | | |
| |
| | | |
| | Current: | | | | | | | | | |
| | Federal | | $ | — | | $ | — | | | |
| | State | | | (137,331 | ) | | (373,939 | ) | | |
| | Deferred: | | | | | | | | | |
| | Federal | | | — | | | — | | | |
| | State | | | — | | | — | | | |
| | | |
|
| |
|
| | | |
| | | | | | | | | | | |
| | Total tax benefit | | $ | (137,331 | ) | $ | (373,939 | ) | | |
| | | |
|
| |
|
| | | |
| | | | | | | | | | | |
The U.S. federal statutory income tax rate is reconciled to the effective rate at July 31, 2010 and 2009, as follows: |
| | | | | | | | | | | |
| | | | 2010 | | 2009 | | | |
| | | |
| |
| | | |
| | | | | | | | | | | |
| Income tax expense at U.S. federal statutory rate | | | (34.0 | %) | | (34.0 | %) | |
| New Jersey state statutory rate | | | (5.8 | %) | | (5.8 | %) | |
| Change in valuation allowance | | | 2.3 | % | | 12.7 | % | |
| Loss on derivative financial instruments | | | 30.1 | % | | 0.0 | % | |
| Common stock issue for services | | | 2.9 | % | | 0.0 | % | |
| Amortization of debt discount and deferred financing fees | | | 2.9 | % | | 3.8 | % | |
| Benefits and modification of debt | | | .9 | % | | 0.0 | % | |
| Induced conversion cost | | | .2 | % | | 9.3 | % | |
| | | |
|
| |
|
| | | |
| | | | | | | | | | | |
| Effective tax benefit | | | (0.5 | %) | | (14.0 | %) | |
| | | |
|
| |
|
| | | |
F-17
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 6 – INCOME TAXES (continued)
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 years ended July 31, 2010 and 2009, the Company entered into agreements to sell up to $5,594,000 and $4,757,000 of its unused tax losses. The Company received net proceeds of $284,703 and $376,819 during the fiscal years ended July 31, 2010 and 2009 respectively, related to the sale and accordingly recorded them as a tax benefit in the year received. The net tax benefit recorded in the Statement of Operations consists of the proceeds received from the sale of the Company’s NJ NOLs offset by the unrecorded tax benefit due to uncertain tax positions of $135,000 in 2010.
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, 2010 and 2009, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $26,890,000 and $25,430,000 respectively, which is available to offset future Federal taxable income through 2030. At July 31, 2010 and 2009, the Company has net operating loss carryforwards forward state income tax purposes of approximately $6,900,000 and $5,302,000 respectively, to offset future state taxable income through 2030.
There was no provision for income taxes for the year ended July 31, 2010 and July 31, 2009. The Company has no open tax years prior to 2005 for the State of New Jersey and 2003 for the Federal Income purposes which are subject to examination.
The components of the net deferred tax assets (liabilities) at July 31, 2010 and 2009 are as follows:
| | | | | | | |
| | 2010 | | 2009 | |
| |
| |
| |
| | | | | | | |
Deferred tax asset | | | | | | | |
Net operating loss | | $ | 9,708,000 | | $ | 9,080,000 | |
Reserves | | | 63,000 | | | 65,000 | |
| |
|
| |
|
| |
Total deferred tax assets | | | 9,771,000 | | | 9,145,000 | |
| | | | | | | |
Deferred tax liability | | | | | | | |
Property and equipment (depreciation) | | | — | | | — | |
| |
|
| |
|
| |
| | | | | | | |
Net deferred tax asset | | | 9,771,000 | | | 9,145,000 | |
| |
|
| |
|
| |
Less: Valuation allowance | | | (9,771,000 | ) | | (9,145,000 | ) |
| |
|
| |
|
| |
Net deferred tax asset | | $ | — | | $ | — | |
| |
|
| |
|
| |
The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets and determines if a valuation allowance is necessary. As a result of this analysis the Company concluded that it is more likely than not that its deferred tax assets will not be recovered and, accordingly, recorded a 100% of the deferred tax asset to a valuation allowance as of July 31, 2010 and 2009.
The Company accounts for the recognition, measurement, presentation and disclosure of uncertain tax positions in accordance with the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. The Company evaluates these unrecognized tax benefits each reporting period. As of July 31, 2010, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $135,000. The unrecognized tax benefit is the result of the Company’s position to deduct the write off of the obsolete inventory for income tax purposes. The Company maintains some of its obsolete inventory for utilization in repairing its products previously sold in accordance with the Company’s warranty program. The Company over the years has discarded obsolete inventory, however the Company did not keep a detailed log of the inventory that was discarded. These inventory items were written down to zero in the Company’s inventory system as they were deemed to have no value and therefore the Company deducted the amounts on its income tax returns.
F-18
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 6 – INCOME TAXES (continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | |
| | July 31, 2010 | |
Balance at beginning of year | | $ | — | |
Additions based on tax positions related to current year | | | 135,000 | |
| |
|
| |
Balance at end of year | | $ | 135,000 | |
| |
|
| |
The Company and its subsidiaries are subject to United States federal income tax as well as income tax of multiple state jurisdictions. These uncertain tax positions are related to the Sale of the Company’s NJ NOL’s and are within the tax years that remain subject to examination by the relevant taxing authorities.
It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months. These changes may be the result of new state audits. It is also expected that the statute of limitations for certain unrecognized tax benefits will expire in the next 12 months resulting in a reduction of the liability for unrecognized tax benefits of approximately $22,000. The balance of the unrecognized tax benefits is primarily related to uncertain tax positions for which there are no current ongoing federal or state audits and therefore, an estimate of the range of the reasonably possible outcomes cannot be made.
The Company has recorded accrued interest of $5,000 as of July 31, 2010 which has been included in interest expense in the Statement of Operations.
NOTE 7– PROFIT SHARING PLAN
The Company sponsors a contributing thrift and savings plan which qualifies under Section 401(k) of the Internal Revenue Code that covers eligible employees meeting age and service requirements. Eligible participating employees may elect to contribute up to the maximum allowed under the IRS code to an investment trust. For tax year 2010 and 2009 this maximum allowable deferred contribution was $16,500 ($22,500 for employee over age 50). Employer contributions to the plan are discretionary and determined annually by management. The Company made matching contributions to the plan of $0 and $98,893 for the fiscal years ended July 31, 2010 and 2009, respectively.
F-19
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 8 – STOCKHOLDERS’ EQUITY
The Series A Preferred Stock provides 4% cumulative dividends, which were $126,983 ($0.82 per share) and $123,883 ($0.80 per shares) in arrears at July 31, 2010 and 2009, respectively. 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 $5,760,000 (due to reverse stock splits) per share. The Company may redeem the Series A Preferred Stock at $.50 per share plus accrued and unpaid dividends. The liquidation preference of the Series A Preferred Stock was $204,483 and $201,383 at July 31, 2010 and 2009, respectively.
The Series B Preferred Stock provides cumulative dividends of $0.90 per share, which were $42,096 ($35.17 per share) and $42,096 ($35.17 per share) in arrears at July 31, 2010 and 2009, respectively. In addition, each share of Series B Preferred Stock is convertible into .005 of one share of Common Stock. The liquidation preference of the Series B Preferred Stock is the dividend in arrears plus $15 per share. The liquidation preference was $60,051 and $58,971 at July 31, 2010 and 2009, respectively.
On May 21, 2008, a Special Meeting of the Company’s shareholders approved a proposed amendment to the Company’s certificate of incorporation to effect a one-for-four reverse split of the Company’s common stock which was subsequently approved by the Company’s board of directors.
On February 25, 2009, at the Annual Meeting the Company’s shareholders then approved a proposed amendment to the Company’s certificate of incorporation to effect a one-for-five reverse split of the Company’s common stock which was subsequently approved by the Company’s board of directors.
On June 23, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that the Company no longer complied with the NASDAQ Listing Rules (the “Listing Rules”) for continued listing on The NASDAQ Stock Market (“NASDAQ”) because the Company had not maintained a minimum of $2,500,000 in stockholders’ equity as required by Listing Rule 5550(b)(1), and because the Company’s Form 10-Q for the period ended April 30, 2010, had not yet been reviewed in accordance with Statement of Auditing Standards No. 100, as required by Rule 8-03 of Regulation S-X, pursuant to Listing Rule 5250(c)(1). Thereafter, on June 23, 2010, the Company received a NASDAQ Staff Determination Letter indicating that the Staff had concluded that the Company had not solicited proxies or held its annual meeting within the timeframe required by Listing Rules 5620(a) and 5620(b) and accordingly, determined to initiate procedures to delist the Company’s securities from NASDAQ. Finally, on August 13, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that, as the bid price of the Company’s common stock had closed below the minimum $1.00 per share requirement set forth in by NASDAQ Listing Rule 5550(a)(2), and in accordance with Listing Rule 5810(c)(3)(A), the Company had been provided 180 calendar days, or until February 9, 2011, to regain compliance with that requirement.
On September 15, 2010, the Company attended a hearing before the NASDAQ Listing Qualifications Panel (the “Panel”) to present its plan to evidence compliance with all applicable Listing Rules and to request an extension of time within which to do so. By decisions dated October 19, 2010, November 3, 2010, and November 23, 2010, the Panel determined to continue the Company’s listing on NASDAQ, subject to certain conditions. The Company’s continued listing on NASDAQ is conditioned upon the Company becoming current in its SEC reporting obligations by November 30, 2010, evidencing compliance with the minimum $2,500,000 million stockholders’ equity requirement, as well as its ability to sustain compliance with that requirement, by December 31, 2010, and soliciting proxy statements and holding the 2010 annual meeting of stockholders by January 14, 2011, among other things. The Company is continuing to work toward regaining compliance with all of the applicable Listing Rules as required by the Panel decision; however, if it is unable to do so, the Company’s securities may be delisted from NASDAQ.
During the years ended July 31, 2010 and 2009, $1,037,949 and $913,809 of convertible Debentures, respectively, were converted into 1,328,645 and 636,570 shares of common stock, respectively.
During the years ended July 31, 2010 and 2009, $39,546 and $94,058 of interest expense, respectively, were converted into 50,559 and 51,526 shares of common stock, respectively.
F-20
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 8 – STOCKHOLDERS’ EQUITY (continued)
During the years ended July 31, 2010 and 2009, the Company issued 265,000 and 20,500 common shares, respectively, to consultants for services to be provided. The common shares were valued at $508,800 and $28,185 for the years ended July 31, 2010 and 2009, respectively.
During the years ended July 31, 2010 and 2009, the Company issued 735,000 and 0 common shares, respectively, to officers, directors and employees as compensation. The common shares were valued at $1,411,200 and $0 for the years ended July 31, 2010 and 2009.
During the years ended July 31, 2010 and 2009, investors were issued 2,746,192 and 0 common shares, respectively, for the exercise of warrants. The Company received proceeds of $635,070 and $0 from the exercise of these warrants during the years ended July 31, 2010 and 2009, respectively.
During the year ended July 31, 2009, the Company re-issued 745,895 common shares to officers, directors, employees and consultants that were initially issued in the year ended July 31, 2008. The initial shares issued in fiscal year ended July 31, 2008 were cancelled. There was no additional incremental value upon re-issuance and no compensation expense was recorded in the year ended July 31, 2009.
A summary of the Company’s warrant activity is as follows:
| | | | | | | | | | |
| | Number of
Warrants | | Strike Price | | Expiration
Date | |
| |
| |
| |
| |
|
2/18/2005 Warrants | | | 6,321 | | $ | 150.00 | | | 2/18/10 | |
7/16/2005 Warrants | | | 12,000 | | $ | 202.70 | | | 7/16/10 | |
1/19/2006 Warrants | | | 417 | | $ | 25.00 | | | 1/19/11 | |
3/12/2007 Warrants | | | 84,750 | | $ | 21.00 | | | 3/12/12 | |
11/2/2007 Warrants | | | 33,355 | | $ | 33.20 | | | 11/2/12 | |
| |
|
| | | | | | | |
Outstanding Balance at August 1, 2008 | | | 136,843 | | | | | | | |
|
Issued | | | — | | $ | — | | | | |
Exercised | | | — | | $ | — | | | | |
Cancelled | | | — | | $ | — | | | | |
| |
|
| | | | | | | |
|
Outstanding Balance at July 31, 2009 | | | 136,843 | | | | | | | |
| |
|
| | | | | | | |
|
Issued: | | | | | | | | | | |
Class A Warrants | | | 2,564,102 | | $ | 1.12 | | | 8/3/14 | |
Class C Warrants | | | 2,564,104 | | $ | 1.12 | | | 2/26/15 | |
Selling Agent Warrants | | | 256,410 | | $ | 1.12 | | | 8/3/14 | |
Selling Agent Warrants | | | 256,410 | | $ | 1.12 | | | 2/26/15 | |
| | | | | | | | | | |
Exercised: | | | | | | | | | | |
Class A Warrants | | | (1,929,032 | ) | $ | 0.01 | | | 8/3/14 | |
Class A Warrants | | | (635,070 | ) | $ | 1.00 | | | 8/3/14 | |
Class C Warrants | | | — | | $ | — | | | | |
Selling Agent Warrants | | | (256,410 | ) | $ | 1.12 | | | 8/3/14 | |
| | | | | | | | | | |
Cancelled: | | | | | | | | | | |
Class A Warrants | | | — | | $ | — | | | | |
Class C Warrants | | | — | | $ | — | | | | |
Selling Agent Warrants | | | — | | $ | — | | | | |
2/18/2005 Warrants | | | (6,321 | ) | $ | 150.00 | | | 2/18/10 | |
7/16/2005 Warrants | | | (12,000 | ) | $ | 202.70 | | | 7/16/10 | |
| |
|
| | | | | | | |
|
Outstanding Balance at July 31, 2010 | | | 2,939,036 | | | | | | | |
| |
|
| | | | | | | |
F-21
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 8 – STOCKHOLDERS’ EQUITY (continued)
As of July 31, 2010, the Company has the following warrants outstanding:
| | | | |
1/19/2006 Warrants | | | 417 | |
3/12/2001 Warrants | | | 84,750 | |
11/2/2007 Warrants | | | 33,355 | |
Class C Warrants | | | 2,564,104 | |
Selling Agent Warrants | | | 256,410 | |
| |
|
| |
Total | | | 2,939,036 | |
| |
|
| |
F-22
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 8 – STOCKHOLDERS’ EQUITY (continued)
The above table excludes our Class B warrants for which 40,000 were issued and 10,000 were exercised during the year ended July 31, 2010. During the fiscal year ended July 31, 2010, the Company issued Class B Warrants to purchase up to $4,000,000 of principal amount of the Company’s 8% convertible notes on the same terms as the August 2009 Debentures, upon the exercise of the Class B Warrants, the holder of the Class B Warrant will be issued two Class C Warrants for each share of the Company’s common stock that would be issued on the exercise date of the Class B Warrant assuming the full conversion of the notes issued on such date, and Class C warrants which entitle the warrant holder to purchase 10,256,416 shares of the Company’s Common Stock with and exercise price equal to the lesser of 105 % of the closing bid price of the Company’s common stock or the exercise price of the Class A Warrants.
All of our outstanding warrants (with the exception of the Class B warrants) contain a cashless exercise provisions whereby, the holder is entitled to receive a number of shares of common stock equal to (x) the excess of the market price of our common stock as of the trading day immediately prior to the exercise date over the total cash exercise price of the portion of the warrant then being exercised, divided by (y) the market price of our common stock as of the trading day immediately prior to the date of exercise.
For further information regarding the Company’s warrants please see Notes 9 and 10.
NOTE 9 – CONVERTIBLE DEBENTURES
March 2007 Debentures
On March 12, 2007, the Company issued an aggregate $2,825,000 convertible Debentures (“March 2007 Debentures”) pursuant to a subscription agreement. The March 2007 Debentures accrue interest at the rate of 6% per annum and mature on March 12, 2009. They are convertible into the Company’s common stock at a conversion price of $2.00 per share. The Company also issued warrants to purchase 1,412,500 shares of the Company’s common stock at an exercise price of $2.88 per share. After deducting fees paid to the selling agent and other professional fees, the Company received net proceeds of $2,487,500. The Company recorded a discount to the March 2007 Debentures in the amount of $2,018,962. This amount consists of a beneficial conversion feature in the amount of $483,623 determined on the intrinsic value between the fair market value of the Company’s stock and the conversion price and $1,535,339 debt discount related to the relative fair value of the warrants.
On September 7, 2007, the Company’s Board of Directors voted unanimously to adjust the original conversion price of the March 2007 Debentures from $2.00 to $1.40 resulting in the conversion of the March 2007 Debentures in the amount of $1,246,171. The Company also recognized an induced conversion cost related to this conversion of $550,339.
On December 26, 2007, the Company’s Board of Directors voted unanimously to further adjust the original conversion price of March 2007 Debentures from $1.40 to $1.05. There were no conversions of the March 2007 Debentures as a result of this reduction in the conversion price.
On June 12, 2008, the Company’s Board of Directors voted unanimously to adjust the original conversion price of the outstanding March 2007 Debentures from $4.20 (post reversal) to $1.20 resulting in the conversion of the Debentures in the amount of $627,071. The Company also recognized an induced conversion cost related to this conversion of $303,583.
On September 8, 2008, the Company reduced the exercise price of the warrants issued in connection with the March 2007 Debentures, from $1.20 per share to $0.50 per share. Pursuant to Section 12 (b) of the Subscription Agreement, as a result of the reduction of the exercise price of the warrants, the conversion price of the March 2007 Debentures issued in connection with the Subscription Agreement was also reduced to $0.50 per share. As a result of the above reductions in exercise and conversion prices, as of February 9, 2009 the investors have converted and additional $387,592 of the March 2007 Debentures plus accrued interest of $69,888 into 182,992 common stock shares. The Company also recognized an induced conversion cost related to these conversions of $420,817.
F-23
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 9 – CONVERTIBLE DEBENTURES (continued)
March 2007 Debentures (continued)
On March 9, 2009, the Company and holders of its outstanding March 2007 Debentures agreed that the maturity date of the Debentures to be August 31, 2009; the holders of the March 2007 Debentures may convert any principal amount or interest remaining at an applied conversion rate equal to the lesser of (A) the fixed conversion price or (B) seventy-five percent of the average closing bid price of the common stock for the five trading days preceding the date of the notice of conversion.
As a result of the above amendment to the maturity date and the amendment to the conversion price, the Debenture holders converted $526,217 of the March 2007 Debentures into 505,104 shares of common stock. The Company also recognized an induced conversion cost related to this conversion of approximately $201,063.
The remaining balance of the March 2007 Debentures in the amount of $37,949 and $2,578 of accrued interest was converted on August 18, 2009 into 49,758 shares of common stock. The Company also recognized an induced conversion cost related to this conversion of approximately $31,208.
As of July 31, 2010 the remaining balance on the March 2007 Debenture was $0. As of July 31, 2009 the remaining balance on March 2007 Debenture was $34,318, net of an unamortized discount of $3,631.
The following is a roll forward schedule of our March 2007 Debenture:
| | | | | | | | | | |
| | Principal
Balance | | Debt Discount | | Net Debt | |
| |
| |
| |
| |
| | | | | | | | | | |
Balance, July 31, 2008 | | $ | 951,758 | | $ | (126,905 | ) | $ | 824,853 | |
Conversions | | | (913,809 | ) | | — | | | (913,809 | ) |
Amortization of debt discount | | | — | | | 123,274 | | | 123,274 | |
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|
| |
|
| |
|
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| | | | | | | | | | |
Balance, July 31, 2009 | | | 37,949 | | | (3,631 | ) | | 34,318 | |
August 2009 Conversion | | | (37,949 | ) | | — | | | (37,949 | ) |
Amortization of debt discount | | | — | | | 3,631 | | | 3,631 | |
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|
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|
| |
| | | | | | | | | | |
Balance July 31, 2010 | | $ | — | | $ | — | | $ | — | |
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|
| |
|
August 2009 Debentures |
On August 3, 2009, the Company entered into a Subscription Agreement pursuant to which it sold a $500,000 convertible Debenture on August 3, 2009 and a $500,000 Debenture on September 24, 2009. (collectively, the “August 2009 Debentures”). The initial interest rate of the August 2009 Debentures is 4% per annum and upon the shareholder Approval the interest rate will be 8% per annum. The August 2009 Debentures have maturity dates of 15 months from their closing dates. Interest shall accrue from the closing date and shall be payable quarterly, in arrears, commencing six months after the closing date. The August 2009 Debentures are convertible into shares of the Company’s common stock at a conversion price of $0.78 per share. Commencing six months after the closing date, the Conversion Price shall be adjusted to the lesser of the $0.78 or 75% of the lowest three closing bid prices for the Company’s common stock for the ten days prior to when the August 2009 Debenture is converted. Additionally, the conversion price of the Debenture is adjustable upon the occurrence of certain events. Accordingly, the conversion feature of the Debenture was accounted for as a discount to the August 2009 Debentures in the amount of $1,000,000 at their commitment dates. |
F-24
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 9 – CONVERTIBLE DEBENTURES (continued)
August 2009 Debentures (continued)
In connection with the August 2009 Debentures, the Company issued Class A and Class B warrants. The Class A warrants provide the holder with the option to purchase 2,564,102 shares of the Company’s common stock at an exercise price $1.12 per share. The Class A warrants are exercisable for a period beginning on August 3, 2009 and terminate on August 3, 2014. Additionally, the 40,000 Class B Warrants issued entitles the holder 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 August 2009 Debentures. Upon the exercise of the Class B Warrants, the holder of the Class B Warrant will be issued two Class C Warrants for each share of the Company’s common stock that would be issued on the exercise date of the Class B Warrant assuming the full conversion of the notes issued on such date. The Class C warrants entitle the warrant holder to purchase 10,256,416 shares of the Company’s Common Stock with and exercise price equal to the lesser of 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 principal of notes purchased pursuant to the Class B Warrants, the holder will surrender 1,000 Class B Warrants. The Class A and Class B Warrants were accounted for as derivative liabilities resulting in a charge to derivative liability with a corresponding charge to the statement of operations at the commitment date of the August 2009 Debenture in the amount of $16,975,954. (See Note 10).
The August 2009 Debentures cannot be converted to the extent such conversion would cause the Debenture holder, 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 Agreement will terminate when the August 2009 Debentures, including outstanding interest due thereon are repaid.
In accordance with the terms of the August 2009 Debentures, the occurrence of any of the following events shall, at the option of the note holder, make all sums of principal and interest then remaining unpaid immediately due and payable, upon demand:
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• | Failure to pay principal or interest when due and such failure continues for a period of five (5) business days after the due date. |
• | The Company breaches any material covenant or other term or condition of the subscription agreement and convertible Debenture in any material respect and such breach, if subject to cure, continues for a period of ten (10) business days after written notice to the Company from the note holder. |
• | Breach of any material representation or warranty of the Company made in the subscription agreement or convertible Debenture or in any agreement, statement or certificate given in writing shall be false or misleading in any material respect as of the date made and the closing Date. |
• | The Company or any Subsidiary of Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for them or for a substantial part of their property or business; or such a receiver or trustee shall otherwise be appointed. |
• | Any money judgment, writ or similar final process shall be entered or filed against the Company or any subsidiary of the Company or any of their property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of forty-five (45) days. |
• | The Company shall have received a notice of default, which remains uncured for a period of more than twenty (20) business days, on the payment of any one or more debts or obligations aggregating in excess of One Hundred Thousand Dollars (US $100,000.00) beyond any applicable grace period; |
• | Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company and if instituted against them are not dismissed within sixty (60) days of initiation. |
• | Failure of the Common Stock to be quoted or listed on the NASDAQ National Market System; failure to comply with the requirements for continued listing on the Bulletin Board for a period of seven consecutive trading days; or notification from the Bulletin Board or the NASDAQ National Market System that the Company is not in compliance with the conditions for such continued listing on the NASDAQ National Market System. |
• | An SEC or judicial stop trade order or a NASDAQ National Market System trading suspension with respect to Borrower’s Common Stock that lasts for five or more consecutive trading days. |
• | The Company’s failure to timely deliver Common Stock to the note holder pursuant to and in the form required by this convertible note or subscription agreement, and, if requested by Company, a replacement convertible note, and such failure continues for a period of five (5) business days after the due date. |
• | The Company effectuates a reverse split of its Common Stock without twenty days prior written notice to the note holder. |
• | A default by the Company of a material term, covenant, warranty or undertaking of any agreement to which the Company and note holder are parties, or the occurrence of a material event of default under any such other agreement which is not cured after any required notice and/or cure period. |
F-25
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 9 – CONVERTIBLE DEBENTURES (continued)
August 2009 Debentures (continued)
In connection with the August 2009 Debentures Agreement entered into on August 3, 2009, the Company paid Garden State Securities, Inc., the selling agent, a cash fee of $100,000 and issued warrants to purchase 256,410 shares of the Company’s common stock. The Company calculated the fair value of the warrants on August 3, 2009 at $231,025 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.14, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.66%. The Company recorded the cash fee and the fair value of the warrants issued to Garden State Securities, Inc. plus $40,000 fee paid to an attorney totaling $371,025, as deferred financing costs. The deferred financing costs are being amortized over the term of the August 2009 Debenture Agreement. As of July 31, 2010, the remaining balance was $0.
At various times during the year ended July 31, 2010, an aggregate $1,000,000 of the August 2009 Debentures and $36,968 of accrued interest were converted into 1,329,447 shares of the Company’s common stock. As of July 31, 2010 the remaining balance of the August 2009 Debentures were $0.
The following is a roll forward schedule of our August 2009 Debenture:
| | | | | | | | | | |
| | Principal
Balance | | Debt Discount | | Net Debt | |
| |
| |
| |
| |
| | | | | | | | | | |
Balance, August 1, 2009 | | $ | — | | $ | — | | $ | — | |
Debt issuance | | | 1,000,000 | | | (1,000,000 | ) | | — | |
Conversions | | | (1,000,000 | ) | | — | | | (1,000,000 | ) |
Amortization of debt discount | | | — | | | 1,000,000 | | | 1,000,000 | |
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|
| |
|
| |
|
| |
| | | | | | | | | | |
Balance, July 31, 2010 | | $ | — | | $ | — | | $ | — | |
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|
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|
| |
|
| |
|
February 2010 Debentures |
On February 24, 2010, holders of the Class B warrants exercised 10,000 Class B Warrants to purchase $1,000,000 in convertible notes (“February 2010 Debentures”). The February 2010 Debentures were issued under the same terms as the August 2009 Debentures. Accordingly, the conversion feature of the Debenture was accounted for as a liability resulting in a discount to the February 2010 Debentures in the amount of $1,000,000 at their commitment dates. With the exercise of the 10,000 Class B warrants, the Company also issued Class C Warrants to purchase 2,564,104 shares of the Company’s common stock at an exercise price of $1.12. |
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In connection with the exercise of the Class B warrants and pursuant to Selling Agent Agreement the Company paid Garden State Securities, Inc., a cash fee of $100,000 and issued Garden State additional warrants to purchase 256,410 shares of the Company’s common stock. The Company calculated the fair value of the warrants on March 3, 2010 to be $380,256 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.12, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.27%. The Company recorded the cash fee and the fair value of the warrants totaling $480,256 issued to Garden State as deferred financing costs. The deferred financing costs are being amortized over the term of the February 2010 Debentures. The remaining balance at July 31, 2009 was $382,132. |
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The August 2009 Debentures, February 2010 Debentures, Class A warrants, Class B warrants, Class C warrants and the warrants granted to the selling agent contain provisions whereby if the Company shall offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which shall be less than the conversion price of the August 2009 Debentures and February 2010 Debentures or less than the exercise price of the Class A warrants, Class B warrants, Class C warrants or the warrants granted to the selling agent, then the conversion price and the warrant exercise price shall automatically be reduced to such other lower issue price. Due to this provision, the embedded conversion features of the Debentures and the warrants are not considered indexed to the Company’s stock. Accordingly, these financial instruments have been recorded as a derivative liability. |
F-26
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 9 – CONVERTIBLE DEBENTURES (continued)
February 2010 Debentures (continued)
On June 18, 2010, Conolog Corporation (the “Company”) entered into an amendment with the holders of its outstanding convertible debentures and warrants. Pursuant to the amendments, the parties agreed to the following: (i) remove the above provision which allowed for an adjustment to the conversion price of the debentures or exercise price of the debentures, (ii) the conversion feature of the February 2010 debentures were adjusted to a fixed conversion price $0.60, (iii) all future Class C Common Stock Purchase Warrants issued upon exercise of the Class B Common warrants shall have an exercise price of $0.50 per share, (iv) the exercise price of the outstanding Class C warrants shall be adjusted to $0.50 per share, (v) the exercise price of the outstanding selling agent warrants shall be adjusted to $0.60 per share.
As a result of the June 18, 2010 amendments the embedded conversion features of the debentures and the warrants were considered indexed to the Company’s stock. Accordingly, the outstanding derivative liabilities were reclassified to additional paid in capital at their fair value on June 18, 2010 with the change in fair value being recorded in the statement of operations (See Note 10).
The Company also entered into a Security Agreement pursuant to which it granted the Subscribers a security interest in its assets. The Security Agreement will terminate when the February 2010 Debentures, including outstanding interest due thereon are repaid.
In accordance with the terms of the February 2010 Debentures, the occurrence of any of the following events shall, at the option of the note holder, make all sums of principal and interest then remaining unpaid immediately due and payable, upon demand:
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• | Failure to pay principal or interest when due and such failure continues for a period of five (5) business days after the due date. |
• | The Company breaches any material covenant or other term or condition of the subscription agreement and convertible Debenture in any material respect and such breach, if subject to cure, continues for a period of ten (10) business days after written notice to the Company from the note holder. |
• | Breach of any material representation or warranty of the Company made in the subscription agreement or convertible Debenture or in any agreement, statement or certificate given in writing shall be false or misleading in any material respect as of the date made and the closing Date. |
• | The Company or any Subsidiary of Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for them or for a substantial part of their property or business; or such a receiver or trustee shall otherwise be appointed. |
• | Any money judgment, writ or similar final process shall be entered or filed against the Company or any subsidiary of the Company or any of their property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of forty-five (45) days. |
• | The Company shall have received a notice of default, which remains uncured for a period of more than twenty (20) business days, on the payment of any one or more debts or obligations aggregating in excess of One Hundred Thousand Dollars (US $100,000.00) beyond any applicable grace period; |
• | Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company and if instituted against them are not dismissed within sixty (60) days of initiation. |
• | Failure of the Common Stock to be quoted or listed on the NASDAQ National Market System; failure to comply with the requirements for continued listing on the Bulletin Board for a period of seven consecutive trading days; or notification from the Bulletin Board or the NASDAQ National Market System that the Company is not in compliance with the conditions for such continued listing on the NASDAQ National Market System. |
• | An SEC or judicial stop trade order or a NASDAQ National Market System trading suspension with respect to Borrower’s Common Stock that lasts for five or more consecutive trading days. |
• | The Company’s failure to timely deliver Common Stock to the note holder pursuant to and in the form required by this convertible note or subscription agreement, and, if requested by Company, a replacement convertible note, and such failure continues for a period of five (5) business days after the due date. |
• | The Company effectuates a reverse split of its Common Stock without twenty days prior written notice to the note holder. |
• | A default by the Company of a material term, covenant, warranty or undertaking of any agreement to which the Company and note holder are parties, or the occurrence of a material event of default under any such other agreement which is not cured after any required notice and/or cure period. |
As of July 31, 2010 the remaining balance of the February 2010 Debentures were $279,313 net of an unamortized discount of $720,687.
The following is a roll forward schedule of our February 2010 Debenture:
| | | | | | | | | | |
| | Principal
Balance | | Debt Discount | | Net Debt | |
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Balance, August 1, 2009 | | $ | — | | $ | — | | $ | — | |
Debt issuance | | | 1,000,000 | | | (1,000,000 | ) | | — | |
Conversions | | | — | | | — | | | — | |
Amortization of debt discount | | | — | | | 279,313 | | | 279,313 | |
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Balance, July 31, 2010 | | $ | 1,000,000 | | $ | (720,687 | ) | $ | 279,313 | |
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Event of Default |
On June 23, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that the Company no longer complied with the NASDAQ Listing Rules (the “Listing Rules”) for continued listing on The NASDAQ Stock Market (“NASDAQ”) because the Company had not maintained a minimum of $2,500,000 in stockholders’ equity as required by Listing Rule 5550(b)(1), and because the Company’s Form 10-Q for the period ended April 30, 2010, had not yet been reviewed in accordance with Statement of Auditing Standards No. 100, as required by Rule 8-03 of Regulation S-X, pursuant to Listing Rule 5250(c)(1). Thereafter, on August 2, 2010, the Company received a NASDAQ Staff Determination Letter indicating that the Staff had concluded that the Company had not solicited proxies or held its annual meeting within the timeframe required by Listing Rules 5620(a) and 5620(b) and accordingly, determined to initiate procedures to delist the Company’s securities from NASDAQ. Finally, on August 13, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that, as the bid price of the Company’s common stock had closed below the minimum $1.00 per share requirement set forth in by NASDAQ Listing Rule 5550(a)(2), and in accordance with Listing Rule 5810(c)(3)(A), the Company had been provided 180 calendar days, or until February 9, 2011, to regain compliance with that requirement. |
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As a result of the NASDAQ Staff Determination Letters, an event of default under the February 2010 Debenture occurred. The note holders did not exercise their rights upon an event of default and subsequent to the year ended July 31, 2010, the Company received a waiver from note holders on November 29, 2010. See Note 15, Subsequent Events. |
F-27
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
|
NOTE 10 – DERIVATIVE LIABILITIES (continued) |
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Embedded Conversion Feature of August 2009 Debentures (continued) |
The August 2009 Debentures contain a provision whereby we have the obligation to reduce the conversion price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the conversion price of the August 2009 Debentures. Accordingly the embedded conversion feature was accounted for as a derivative liability. The Company calculated the fair value of the embedded conversion feature on August 3, 2009 and September 24, 2009 (commitment dates) to be $1,466,538 using the Black-Scholes option pricing model. The weighted average assumptions used in computing the fair values are a closing stock price of $1.83, expected volatility of 117.4% over the remaining contractual life of one year and five months and a risk free rate of 2.46%. At various times throughout the fiscal year ended July 31, 2010, the holders of the August 2009 Debentures converted the full amount of the debentures into common shares of the Company’s stock. At each conversion date the Company marked to market the fair value of the derivative and reclassified it to additional paid in capital. The amounts reclassified to additional paid in capital aggregated $1,744,013 and were calculated using the Black-Scholes option pricing. The weighted average assumptions used in computing the fair value are a closing stock price of $1.99, expected volatility of 117.4% over the remaining contractual life of 1 year and a risk free rate of 2.37%. The fair value of the derivative increased by $277,475 which has been recorded in the statement of operations for the year ended July 31, 2010. |
F-28
|
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
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NOTE 10 – DERIVATIVE LIABILITIES (continued) |
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Embedded Conversion Feature of August 2009 Debentures (continued) |
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The February 2010 Debentures contain a provision whereby we have the obligation to reduce the conversion price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the conversion price of the February 2010 Debentures. Accordingly the embedded conversion feature was accounted for as a derivative liability. The Company calculated the fair value of the embedded conversion feature on February 26, 2010 and March 3, 2010 (commitment dates) to be $1,714,462 using the Black-Scholes option pricing model. The weighted average assumptions used in computing the fair values are a closing stock price of $1.86, expected volatility of 240% over the remaining contractual life of one year and six months and a risk free rate of 2.28%. On June 18, 2010, the February 2010 Debentures were amended whereby the above anti-dilution provision was eliminated. As a result the embedded conversion feature of the February 2010 Debentures were no longer accounted for as a derivative. The Company calculated the fair value of the embedded conversion feature on June 18, 2010 using the Black-Scholes option pricing model. The weighted average assumptions used in computing the fair value as of June 18, 2010 are a closing stock price of $1.19, expected volatility of 151.7% over the remaining contractual life of one year and two months and a risk free rate of 0.30%. The fair value of the derivative at June 18, 2010 was $1,032,667 which was reclassified to additional paid in capital. The fair value of the derivative decreased by $681,795 which has been recorded in the statement of operations for the year ended July 31, 2010. |
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August 2009 Selling Agent Warrants |
In connection with the August 2009 debentures, the Company issued to the selling agent, warrants to purchase 256,410 shares of common stock at an exercise price of $1.12. Under the terms of the August 2009 Selling Agent Warrants we have the obligation to reduce the exercise price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the exercise price of the August 2009 Selling Agent Warrants. Accordingly the warrants were accounted for as a derivative liability. The Company calculated the fair value of the warrants on August 3, 2009 at $231,025 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.14, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.66%. On February 3, 2010, the holder of the 2009 Selling Agent Warrants exercised their option to exercise 256,410 warrants. The Company calculated the fair value of the 256,410 exercised warrants on February 3, 2010 using the Black-Scholes option pricing model. The assumptions used in computing the fair value as of February 3, 2010 are a closing stock price of $2.98, expected volatility of 148.68% over the remaining contractual life of four years and six months and a risk free rate of 2.40%. The fair value of the derivative at February 3, 2010 was $718,230 which was reclassified to additional paid in capital. The fair value of the derivative increased by $487,205 which has been recorded in the statement of operations for the year ended July 31, 2010. |
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February 2010 Selling Agent Warrants |
In connection with the February 2010 debentures, the Company issued to the selling agent, warrants to purchase 256,410 shares of common stock at an exercise price of $1.12. Under the terms of the February 2010 Selling Agent Warrants we have the obligation to reduce the exercise price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the exercise price of the February 2010 Selling Agent Warrants. Accordingly the warrants were accounted for as a derivative liability. The Company calculated the fair value of the warrants on February 26, 2010 at $380,256 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.98, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.30%. On June 18, 2010, the February 2010 Selling Agent Warrants were amended whereby the above anti-dilution provision was eliminated. As a result the warrants were no longer accounted for as a derivative. The Company calculated the fair value of the 256,410 exercised warrants on June 18, 2010 using the Black-Scholes option pricing model. The assumptions used in computing the fair value as of June 18, 2010 are a closing stock price of $1.12, expected volatility of 143.4% over the remaining contractual life of four years and eight months and a risk free rate of 2.04%. The fair value of the derivative at June 18, 2010 was $271,538 which was reclassified to additional paid in capital. The fair value of the derivative decreased by $108,717 which has been recorded in the statement of operations for the year ended July 31, 2010. |
F-29
|
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
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NOTE 10 – DERIVATIVE LIABILITIES (continued) |
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Embedded Conversion Feature of August 2009 Debentures (continued) |
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Class A Warrants. |
In connection with the August 2009 debentures, the Company issued Class A Warrants to purchase 2,564,102 shares of common stock. The warrants were issued with an exercise price of $1.12. Under the terms of the Class A Warrants we have the obligation to reduce the exercise price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the exercise price of the Class A Warrants. Accordingly the warrants were accounted for as a derivative liability. The Company calculated the fair value of the warrants on August 3, 2009 at $2,310,256 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.14, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.66%. At various times during the fiscal year ended July 31, 2010, the holder of the Class A warrants exercised their option to purchase 635,070 shares of common stock. The Company calculated the fair value of the 635,070 exercised warrants to be $918,961 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.84, expected volatility 108% over the remaining contractual life of four years and six months and a risk free rate of 2.47%. The Company reclassified the $918,961 fair value of the 635,070 warrants to additional paid in capital. On December 29, 2009, the exercise price of the remaining 1,929,032 Class A Warrants automatically adjusted to $0.01 pursuant to the warrant agreement The reduction in the exercise price eliminated the derivative feature associated with the remaining 1,929,032 Class A Warrants. The Company calculated the fair value of the 1,929,032 Class A Warrants to be $2,723,600 using the Black-Scholes option pricing model. The assumptions used in computing the fair value are a closing stock price of $1.42, expected volatility of 108% over the remaining contractual life of four years and six months and a risk free rate of 2.62%. The fair value of the derivative at December 29, 2009 was $2,723,600 which was reclassified to additional paid in capital. Additionally, during the year ended July 31, 2010, the fair value of the derivative increased by $1,332,305 which has been recorded in the statement of operations for the year ended July 31, 2010. |
|
Class B Warrants. |
In connection with the August 2009 debentures, the Company issued Class B Warrants to purchase up to $4,000,000 of principal amount of the Company’s 8% convertible notes on the same terms as the August 2009 debentures, upon the exercise of the Class B Warrants, the holder of the Class B Warrant will be issued two Class C Warrants for each share of the Company’s common stock that would be issued on the exercise date of the Class B Warrant assuming the full conversion of the notes issued on such date, and Class C warrants which entitle the warrant holder to purchase 10,256,408 shares of the Company’s Common Stock with and exercise price equal to the lesser of 105% of the closing bid price of the Company’s common stock or the exercise price of the Class A Warrants. The financial instruments underlying the Class B Warrants contain provisions whereby we will have the obligation to reduce the exercise price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the exercise price of the Class C Warrants or conversion price of the 8% convertible notes. Accordingly the Class B Warrants were accounted for as a derivative liability. The Company calculated the fair value of the Class B Warrants on August 3, 2009 at $14,665,698 consisting of a fair value for the underlying Class C Warrants of $10,369,894 and a fair value for the underlying embedded conversion feature of the 8% convertible notes of $4,295,804. The Company used the Black-Scholes option pricing model. The assumptions used in computing the fair value of the Class C Warrants are a closing stock price of $1.14, expected volatility of 138.26% over the remaining contractual life of five years and a risk free rate of 2.66%. The assumptions used in computing the fair value of the embedded conversion feature of the 8% convertible notes are a closing stock price of $1.14, expected volatility 159.87% over the remaining contractual life of one year and six months and a risk free rate of 1.18%. On June 18, 2010, underlying of the securities of the Class B Warrants were amended whereby the above anti-dilution provisions was eliminated. As a result the Class B Warrants were no longer accounted for as a derivative. The Company calculated the fair value of the Class B Warrants on June 18, 2010 at $11,447,328 consisting of a fair value for the underlying Class C Warrants of $8,236,542 and a fair value for the underlying embedded conversion feature of the 8% convertible notes of $3,210,786. The Company used the Black-Scholes option pricing model. The assumptions used in computing the fair value of the Class C Warrants are a closing stock price of $1.19, expected volatility of 143.39% over the remaining contractual life of five years and a risk free rate of 2.04%. The assumptions used in computing the fair value of the embedded conversion feature of the 8% convertible notes are a closing stock price of $1.19, expected volatility of 151.71% over the remaining contractual life of one year and six months and a risk free rate of 0.30%. The fair value of $11,447,328 was reclassified to additional paid in capital. The fair value of the derivative decreased by 3,218,370 which has been recorded in the statement of operations for the year ended July 31, 2010. |
F-30
|
CONOLOG CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
FOR THE YEARS ENDED JULY 31, 2010 AND 2009 |
|
NOTE 10 – DERIVATIVE LIABILITIES (continued) |
|
Embedded Conversion Feature of August 2009 Debentures (continued) |
|
Class C Warrants |
In connection with the February 2010 debentures, the Company issued Class C Warrants to purchase 2,564,102 shares of common stock. The warrants were issued with an exercise price of $1.12. Under the terms of the Class C Warrants we have the obligation to reduce the exercise price if we offer, issue or agree to issue any common stock or securities into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which is less than the exercise price of the Class C Warrants. Accordingly the warrants were accounted for as a derivative liability. The Company calculated the fair value of the warrants on February 26, 2010 and March 3, 2010 (commitment dates) at $3,974,618 using the Black-Scholes option pricing model. The weighted average assumptions used in computing the fair value are a closing stock price of $1.86, expected volatility of 108% over the remaining contractual life of five years and a risk free rate of 2.28%. On June 18, 2010, the Class C Warrants were amended whereby the above anti-dilution provision was eliminated. As a result the warrants were no longer accounted for as a derivative. The Company calculated the fair value of the 2,564,102 Class C warrants on June 18, 2010 using the Black-Scholes option pricing model. The weighted average assumptions used in computing the fair value as of June 18, 2010 are a closing stock price of $1.19, expected volatility of 143.4% over the remaining contractual life of four years and eight months and a risk free rate of 2.04%. The fair value of the derivative at June 18, 2010 was $2,713,745 which was reclassified to additional paid in capital. The fair value of the derivative decreased by $1,260,873 which has been recorded in the statement of operations for the year ended July 31, 2010. |
|
The following is a roll forward schedule of the Company’s derivative liability and components of the embedded conversion features: |
| | | | | | | | | | | | | | | | | | | |
| | Number of
Class A
Warrants | | Number of
Class B
Warrants | | Number of
Class C
Warrants | | Number of
Warrants
Issued to
Selling Agent | | Face Value of
Convertible
Debt | | Total
Derivative
Liability | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
Balance 8/1/09 | | | — | | | — | | | — | | | — | | $ | — | | $ | — | |
Granted | | | 2,564,102 | | | 40,000 | | | — | | | 256,410 | | | — | | | (17,206,979 | ) |
Debt Issuance | | | — | | | — | | | — | | | — | | | 1,000,000 | | | (1,466,538 | ) |
Debt Conversion | | | — | | | — | | | — | | | — | | | (221,256 | ) | | 328,395 | |
Change in Fair Value of Derivative | | | — | | | — | | | — | | | — | | | — | | | (7,107,807 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance 10/31/09 | | | 2,564,102 | | | 40,000 | | | — | | | 256,410 | | | 778,744 | | | (25,452,929 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
Reclassification due to Change in Exercise Price To $0.01 for 1,929,032 A Warrants | | | — | | | — | | | — | | | — | | | — | | | 2,723,600 | |
Exercised | | | (635,070 | ) | | — | | | — | | | — | | | — | | | 918,961 | |
Debt Conversion | | | — | | | — | | | — | | | — | | | (489,344 | ) | | 926,993 | |
| | | | | | — | | | — | | | — | | | | | | | |
Change in Fair Value of Derivative | | | — | | | — | | | — | | | — | | | — | | | (9,178,209 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance 1/31/10 | | | 1,929,032 | | | 40,000 | | | — | | | 256,410 | | | 289,400 | | | (30,061,583 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
Exercise (no impact as these were reduced to $0.01) | | | (1,929,032 | ) | | — | | | — | | | — | | | — | | | — | |
Exercise | | | — | | | (10,000 | ) | | — | | | (256,410 | ) | | — | | | 718,230 | |
Debt Issuance | | | — | | | — | | | — | | | — | | | 1,000,000 | | | (1,714,462 | ) |
Debt Conversion | | | — | | | — | | | — | | | — | | | (289,400 | ) | | 488,625 | |
Granted | | | — | | | — | | | 2,564,104 | | | 256,410 | | | — | | | (4,354,874 | ) |
Change in Fair Value of Derivative | | | — | | | — | | | — | | | — | | | — | | | 13,743,309 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance 4/30/10 | | | — | | | 30,000 | | | 2,564,104 | | | 256,410 | | | 1,000,000 | | | (21,180,755 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
Change in Fair Value of Derivative | | | — | | | — | | | — | | | — | | | — | | | 5,715,478 | |
Reclassification to APIC | | | — | | | — | | | — | | | — | | | — | | | 15,465,277 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance 7/31/10 | | | — | | | 30,000 | | | 2,564,104 | | | 256,410 | | $ | 1,000,000 | | $ | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
F-31
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 10 – DERIVATIVE LIABILITIES (continued)
Fair Value Assumptions Used in Accounting for Derivative Warrant Liability
The Company has determined its derivative warrant liabilities to be a Level 2 fair value measurement and used the Black-Scholes pricing model to calculate the fair value at the adoption and for the first, second and third quarters of the fiscal year ended July 31, 2010. Key weighted average assumptions used in the Black-Scholes fair value calculation were as follows:
| | | | | | | | | | | | | |
| | July 31,
2010* | | April 30,
2010 | | January 31,
2010 | | October 31,
2009 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
Expected term (in years) | | | N/A | | | 3.94 | | | 3.86 | | | 3.93 | |
Volatility | | | N/A | | | 143.34 | % | | 150.82 | % | | 141.71 | % |
Risk-free interest rate | | | N/A | | | 2.10 | % | | 1.88 | % | | 1.96 | % |
Dividend yield | | | N/A | | | 0.00 | % | | 0.00 | % | | 0.00 | % |
* Inputs are not applicable as there are no derivative liabilities outstanding at July 31, 2010.
NOTE 11 - MAJOR CUSTOMERS
The following summarizes sales to major customers (each 10% or more of net sales) by the Company:
| | | | | | | | | | | | | |
Year Ended | | Total
Revenue | | Sales to Major
Customers | | Number of
Customers | | Percentage of
Total | |
| |
| |
| |
| |
| |
2010 | | $ | 1,178,673 | | $ | 509,796 | | 2 | | | 43.3 | % |
2009 | | $ | 1,485,298 | | $ | 824,097 | | 2 | | | 55.5 | % |
NOTE 12 – STOCK-BASED COMPENSATION
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 158 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, 2010 and 2009, there had been no shares granted under the 2002 Plan.
Stock Incentive Plans
The Company has Stock Incentive Plans pursuant to which the Company may grant a number of shares of the Company’s Common Stock to the Company’s officers, directors, employees and consultants. The Company’s 2008 and 2009 Stock Incentive Plan was approved by its shareholders, authorizing the Board to, from time-to-time, issue up to 800,000 shares of the Company’s Common Stock to the Company’s officers, directors, employees and consultants under each plan.
The specific number of shares of the Company’s Common Stock granted to any officer, director employee or consultant will be determined by the Board.
F-32
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 12 – STOCK-BASED COMPENSATION(continued)
Stock Inventive Plans (continued)
Pursuant to the Corporation’s 2009 Stock Incentive Plan, 800,000 common shares of Company stock were issued to current officers, directors employees and consultants. These shares were recorded at a value of $1,536,000 for the fiscal year ended July 31, 2010. The shares are fully vested and non-cancelable when granted, therefore the entire amount of stock grant compensation expense was recognized at the date the shares were authorized by the board of directors to be granted.
Securities Issued for Services
During fiscal year July 31, 2010, the Company issued a total of 265,000 shares of common stock to non-employees for services rendered during the year or to be rendered in future periods. These services were valued at $508,800. Services to be performed beyond fiscal year 2010, will be amortized and expensed to general and administrative expenses. The unamortized amount of prepaid services at July 31, 2010 is $80,000.
During fiscal year July 31, 2009, the Company issued 25,000 shares of common stock to non-employees for services rendered during the year or to be rendered in future periods. These services were valued at $47,685 and expensed during the year ended July 31, 2009.
These services were valued at their fair value of consideration received at the date of the agreement in accordance with ASC 505 “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees”.
NOTE 13 – 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 May 7, 2009, The Supreme Court of New York issued a Stipulation of Dismissal, dismissing all claims asserted by Meyers Associates, with prejudice. No appeal has been filed by Meyers Associates, L.P.
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. A Stipulation of Dismissal was issued during July 2009.
F-33
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 14 – COMMITMENTS
Total rental expense for all operating leases of the Company amounted to approximately $53,540 and $51,400 during the years ended July 31, 2010 and 2009, respectively. The Company currently leases its facilities on a month-to-month basis.
The Company’s Chief Executive Officer 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 the Chief Executive Officer. His annual base salary as of July 31, 2010 was $417,300 (actual 2010 salary drawn was $259,749 with the difference of $157,551 forgiven by the Chief Executive Officer) and increases by $20,000 annually on January 1st of each year. In addition, the Chief Executive Officer 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 Chief Executive Officer 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.
The Company’s President and Chief Operating Officer 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 employee. His annual base salary as of July 31, 2010 was $238,200 and he receives annual increases of $12,000 on January 1st of each year. The Company’s President and Chief Operating Officer 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 him 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 is terminated upon death or disability of the employee and employee may be terminated by the Company for cause.
NOTE 15 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the financial statements were issued and up to the time of filing of the financial statements with the Securities and Exchange Commission.
On June 23, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that the Company no longer complied with the NASDAQ Listing Rules (the “Listing Rules”) for continued listing on The NASDAQ Stock Market (“NASDAQ”) because the Company had not maintained a minimum of $2,500,000 in stockholders’ equity as required by Listing Rule 5550(b)(1), and because the Company’s Form 10-Q for the period ended April 30, 2010, had not yet been reviewed in accordance with Statement of Auditing Standards No. 100, as required by Rule 8-03 of Regulation S-X, pursuant to Listing Rule 5250(c)(1). Thereafter, on August 2, 2010, the Company received a NASDAQ Staff Determination Letter indicating that the Staff had concluded that the Company had not solicited proxies or held its annual meeting within the timeframe required by Listing Rules 5620(a) and 5620(b) and accordingly, determined to initiate procedures to delist the Company’s securities from NASDAQ. Finally, on August 13, 2010, the Company received a NASDAQ Staff Deficiency Letter stating that, as the bid price of the Company’s common stock had closed below the minimum $1.00 per share requirement set forth in by NASDAQ Listing Rule 5550(a)(2), and in accordance with Listing Rule 5810(c)(3)(A), the Company had been provided 180 calendar days, or until February 9, 2011, to regain compliance with that requirement.
On September 15, 2010, the Company attended a hearing before the NASDAQ Listing Qualifications Panel (the “Panel”) to present its plan to evidence compliance with all applicable Listing Rules and to request an extension of time within which to do so. By decisions dated October 19, 2010, November 3, 2010, and November 23, 2010, the Panel determined to continue the Company’s listing on NASDAQ, subject to certain conditions. The Company’s continued listing on NASDAQ is conditioned upon the Company becoming current in its SEC reporting obligations by November 30, 2010, evidencing compliance with the minimum $2.5 million stockholders’ equity requirement, as well as its ability to sustain compliance with that requirement, by December 31, 2010, and soliciting proxy statements and holding the 2010 annual meeting of stockholders by January 14, 2011, among other things. The Company is continuing to work toward regaining compliance with all of the applicable Listing Rules as required by the Panel decision; however, if it is unable to do so, the Company’s securities may be delisted from NASDAQ.
F-34
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 15 - SUBSEQUENT EVENTS(continued)
In the event the Company’s securities are delisted from NASDAQ, the Company’s securities are immediately eligible for quotation on the OTCQB, which is operated by Pink OTC Markets Inc., an electronic quotation service for securities traded over-the-counter. The Company’s securities are also eligible for quotation on the Over-the-Counter Bulletin Board, an electronic quotation service maintained by the Financial Industry Regulatory Authority (“FINRA”), provided that a market maker in the Company’s common stock files the appropriate application with, and such application is cleared by, FINRA.
As a result of the NASDAQ Staff Determination Letter, an event of default under the February 2010 Debenture occurred. The note holder did not exercise their rights upon an event of default and on November 27, 2010 the Company received a waiver from note holders. Pursuant to the waiver, the note holders waived any event of default (as defined in the Notes pursuant to Article IV Section 4.8, “Events of Default”) including any increase in the interest rate of the Notes which may have occurred and which may occur from the date of the inception of the agreement until July 31, 2011, as a result of notification from the NASDAQ that the Company is not in compliance with the conditions for such continued listing. The waiver will not be in effect if the Company is delisted from the NASDAQ stock market subsequent to November 30, 2010.
On September 29, 2010 the Company received a subpoena from the Securities and Exchange Commission (the “Commission”) in connection with an investigation of possible securities law violations by the Company that is a non-public, fact finding inquiry, which as noted by the Commission should not be construed as an indication by the Commission or its staff that any violation of the law has occurred or as an adverse reflection upon any person, entity or security. The Company has responded to the subpoena and has not received further correspondence from the Commission with respect to the subpoena as of the date of this filing. At this time it is not possible to predict the outcome of the investigation or its impact on Company.
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS
We have restated our unaudited condensed consolidated financial statements on a quarterly basis for our fiscal yeasr ended July 31, 2010 and 2009. The restatement reflects the adjustments detailed in the restated July 31, 2009 financial statements (see Note 3). Below are the adjustments to the Consolidated Balance Sheet and Consolidated Statement of Operations as previously reported and as restated.
| | | | | | | |
| | Previously | | | | |
Balance sheet at 10/31/2009 | | Reported | | As Restated | |
| |
| |
| |
Cash | | | 465,744 | | | 465,742 | |
Note receivable | | | 14,864 | | | — | |
Inventory | | | 1,392,106 | | | 525,119 | |
Other current assets | | | 328,546 | | | 12,116 | |
Current assets | | | 2,851,204 | | | 1,652,921 | |
Property and Equipment, net accumulated depreciation | | | 424,764 | | | 118,129 | |
Other non-current assets | | | 230,506 | | | — | |
Deferred financing fees, net of amortization | | | 116,667 | | | 258,295 | |
Note receivable, net of current portion | | | 68,239 | | | — | |
Total other assets | | | 415,412 | | | 258,295 | |
Total Assets | | | 3,691,380 | | | 2,029,345 | |
Accounts payable | | | 139,506 | | | 139,586 | |
Accrued expenses | | | 6,664 | | | 67,664 | |
Derivative liability | | | 4,273,886 | | | 25,452,930 | |
Current Convertible debenture, net of discount | | | — | | | 83,840 | |
Total current liabilities | | | 4,420,056 | | | 25,744,020 | |
Convertible debenture, net of discount | | | 83,840 | | | — | |
Total liabilities | | | 4,503,896 | | | 25,744,020 | |
Common stock | | | 23,808 | | | 31,808 | |
Contributed capital | | | 53,389,291 | | | 54,753,542 | |
Accumulated deficit | | | (54,171,978 | ) | | (78,446,388 | ) |
Total Equity | | | (812,516 | ) | | (23,714,675 | ) |
Total Liabilities and Stockholders’ Equity | | | 3,691,380 | | | 2,029,345 | |
F-35
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS (continued)
| | | | | | | |
| | Previously | | | | |
Balance sheet at 1/31/2010 | | reported | | As Restated | |
| |
| |
| |
Note receivable | | | 14,864 | | | — | |
Inventory | | | 1,484,351 | | | 627,454 | |
Other current assets | | | 328,546 | | | 5,000 | |
Current assets | | | 2,979,791 | | | 1,784,484 | |
| | | | | | | |
Property and Equipment, net accumulated depreciation | | | 420,765 | | | 114,128 | |
Other non-current assets | | | 223,411 | | | — | |
Deferred financing fees, net of amortization | | | 134,539 | | | 187,282 | |
Note receivable, net of current portion | | | 68,239 | | | — | |
Total other assets | | | 426,189 | | | 187,282 | |
Total Assets | | | 3,826,745 | | | 2,085,894 | |
| | | | | | | |
Accounts payable | | | 117,875 | | | 117,955 | |
Accrued expenses | | | 10,097 | | | 71,098 | |
Derivative liability | | | 557,466 | | | 30,061,584 | |
| | | | | | | |
Current Convertible debenture, net of discount | | | — | | | 45,132 | |
Total current liabilities | | | 685,438 | | | 30,295,769 | |
Convertible debenture, net of discount | | | 45,132 | | | — | |
Total liabilities | | | 730,570 | | | 30,295,769 | |
| | | | | | | |
Contributed capital | | | 60,705,267 | | | 60,573,015 | |
Accumulated deficit | | | (57,600,143 | ) | | (88,774,444 | ) |
Total Equity | | | 3,096,175 | | | (28,209,875 | ) |
Total Liabilities and Stockholders’ Equity | | | 3,826,745 | | | 2,085,894 | |
F-36
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS(continued)
| | | | | | | |
| | Previously | | | | |
Balance sheet at 4/30/2010 | | Reported | | As Restated | |
| |
| |
| |
Prepaid expenses | | | 435,651 | | | 352,318 | |
Inventory | | | 700,000 | | | 607,350 | |
Current assets | | | 2,650,075 | | | 2,474,092 | |
| | | | | | | |
Property and Equipment, net accumulated depreciation | | | 360,775 | | | 111,287 | |
Non-Current Inventory | | | 547,721 | | | — | |
Deferred financing fees, net of amortization | | | 51,507 | | | 467,868 | |
Other non current assets | | | 262,235 | | | — | |
Note receivable, net of current portion | | | 83,103 | | | — | |
Total other assets | | | 944,565 | | | 467,868 | |
Total Assets | | | 3,955,415 | | | 3,053,247 | |
Accrued expenses | | | 47,334 | | | 246,334 | |
Derivative liability | | | 20,847,678 | | | 21,180,755 | |
Total current liabilities | | | 21,076,694 | | | 21,608,771 | |
Convertible debenture, net of discount | | | 355,634 | | | 111,367 | |
Total liabilities | | | 21,432,328 | | | 21,720,138 | |
Contributed capital | | | 61,471,520 | | | 62,058,001 | |
Accumulated deficit | | | (78,964,475 | ) | | (80,740,934 | ) |
Total Equity | | | (17,476,913 | ) | | (18,666,891 | ) |
Total Liabilities and Stockholders’ Equity | | | 3,955,415 | | | 3,053,247 | |
F-37
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS (continued)
| | | | | | | |
Condensed Statement of Operations | | For the Three Month Period
Ended October 31, 2009 | |
| | Previously
reported | | Restated | |
| |
|
|
| |
| | | | | | | |
Total Cost of product revenue | | | 196,884 | | | 256,200 | |
Gross Profit (Loss) from Operations | | | 271,213 | | | 211,896 | |
General and administrative | | | 1,230,381 | | | 2,087,853 | |
Research and development | | | — | | | 30,848 | |
Selling expenses | | | 59,276 | | | 38,803 | |
Total operating expenses | | | 1,289,657 | | | 2,157,504 | |
Loss Before Other Income (Expenses) | | | (1,018,444 | ) | | (1,945,608 | ) |
Loss on derivative financial instrument | | | — | | | 24,550,300 | |
Interest expense | | | (3,088,324 | ) | | — | |
Interest income | | | 860 | | | 860 | |
Interest expense | | | — | | | 6,433 | |
Changes in fair market value of derivatives | | | (825,487 | ) | | — | |
Induced conversion cost | | | (31,208 | ) | | (31,208 | ) |
Amortization of deferred financing fees | | | (35,411 | ) | | (116,461 | ) |
Amortization of deferred loan discount | | | — | | | (305,097 | ) |
Total Other Income (Expense) | | | (3,979,570 | ) | | (25,008,639 | ) |
Loss before provision for income taxes | | | (4,998,014 | ) | | (26,954,247 | ) |
Provision for income taxes | | | — | | | (4,957 | ) |
Net loss | | | (4,998,014 | ) | | (26,959,204 | ) |
Preferred stock dividends | | | (1,045 | ) | | — | |
NET LOSS APPLICABLE TO COMMON SHARES | | | (4,999,059 | ) | | (26,959,204 | ) |
NET LOSS PER BASIC COMMON SHARE | | | (2.32 | ) | | (12.49 | ) |
NET LOSS PER DILUTED COMMON SHARE | | | — | | | — | |
| | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING – Basic and Diluted | | | 2,158,540 | | | 1,963,878 | |
F-38
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | |
Period ending January 31, 2010 | | For the Three Month Period Ended
January 31, 2010 | | For the Six Month Period Ended
January 31, 2010 | |
| | Previously
Reported | | As Restated | | Previously
Reported | | As Restated | |
| |
|
|
|
|
|
|
|
|
Total Cost of product revenue | | | 97,107 | | | 87,038 | | | 293,990 | | | 343,237 | |
Gross Profit (Loss) from Operations | | | 14,813 | | | 24,882 | | | 286,026 | | | 236,779 | |
General and administrative | | | 2,196,630 | | | 417,547 | | | 3,069,966 | | | 2,505,400 | |
Research and development | | | 30,915 | | | 30,915 | | | 51,323 | | | 61,763 | |
Selling expenses | | | 76,416 | | | 4,005 | | | 135,962 | | | 42,808 | |
Total operating expenses | | | 2,303,961 | | | 452,467 | | | 3,257,251 | | | 2,609,971 | |
Loss Before Other Income (Expenses) | | | (2,289,148 | ) | | (427,585 | ) | | (2,971,225 | ) | | (2,373,192 | ) |
Loss on derivative financial instrument | | | — | | | (9,178,209 | ) | | — | | | (33,728,508 | ) |
Interest Expense | | | (470,531 | ) | | (3,672 | ) | | (3,558,855 | ) | | (10,106 | ) |
Interest income | | | 556 | | | 556 | | | 1,416 | | | 1,416 | |
Changes in fair market value of derivatives | | | (853,134 | ) | | — | | | (1,678,621 | ) | | — | |
Induced conversion cost | | | (118,993 | ) | | (118,993 | ) | | (150,201 | ) | | (150,201 | ) |
Amortization of deferred financing fees | | | (33,634 | ) | | (148,748 | ) | | (69,045 | ) | | (265,209 | ) |
Amortization of deferred loan discount | | | — | | | (450,636 | ) | | — | | | (755,733 | ) |
Total Other Income (Expense) | | | (1,475,736 | ) | | (9,899,702 | ) | | (5,455,306 | ) | | (34,908,341 | ) |
Loss before provision for income taxes | | | (3,764,884 | ) | | (10,323,287 | ) | | (8,426,531 | ) | | (37,287,534 | ) |
Provision for income taxes | | | — | | | (770 | ) | | — | | | (5,727 | ) |
Net loss | | | (3,764,884 | ) | | (10,328,057 | ) | | (8,426,531 | ) | | (37,287,261 | ) |
Preferred stock dividends | | | (1,045 | ) | | — | | | (2,090 | ) | | — | |
NET LOSS APPLICABLE TO COMMON SHARES | | | (3,765,929 | ) | | (10,328,057 | ) | | (8,428,621 | ) | | (37,287,261 | ) |
| | | | | | | | | | | | | |
NET LOSS PER BASIC COMMON SHARE | | | (0.99 | ) | | (4.78 | ) | | (2.93 | ) | | (12.95 | ) |
NET LOSS PER DILUTED COMMON SHARE | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - | | | 3,798,852 | | | 3,091,053 | | | 2,879,293 | | | 2,527,691 | |
F-39
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | |
Period ending April 30, 2010 | | For the Three Month Period
Ended April 30, 2010 | | For the Nine Month Period
Ended April 30, 2010 | |
| | | |
| | Previously
Reported | | As Restated | | Previously
Reported | | As Restated | |
| |
|
|
|
|
|
|
|
|
Total Cost of product revenue | | | 220,403 | | | 278,412 | | | 514,394 | | | 621,649 | |
Gross Profit (Loss) from Operations | | | 295,494 | | | 237,485 | | | 581,519 | | | 474,264 | |
General and administrative | | | 849,894 | | | 812,242 | | | 3,434,412 | | | 3,317,642 | |
Research and development | | | — | | | 21,900 | | | — | | | 83,663 | |
Selling expenses | | | — | | | 6,613 | | | — | | | 49,421 | |
Total operating expenses | | | 849,894 | | | 840,755 | | | 3,434,412 | | | 3,450,726 | |
Loss Before Other Income (Expenses) | | | (554,400 | ) | | (603,270 | ) | | (2,852,893 | ) | | (2,976,462 | ) |
Loss on derivative financial instrument | | | — | | | (9,054,229 | ) | | (22,415,385 | ) | | (24,674,281 | ) |
Interest income | | | 1,244 | | | (1,416 | ) | | 2,661 | | | — | |
Interest Expense | | | (4,946,564 | ) | | (23,431 | ) | | — | | | (33,537 | ) |
Changes in fair market value of derivatives | | | 13,965,643 | | | — | | | (2,102,682 | ) | | — | |
Other income | | | — | | | — | | | 284,703 | | | — | |
Induced conversion cost | | | — | | | — | | | (150,201 | ) | | (150,201 | ) |
Amortization of deferred loan discount | | | (438,666 | ) | | (355,634 | ) | | (1,263,444 | ) | | (1,111,367 | ) |
Amortization of deferred financing fees | | | — | | | (180,048 | ) | | — | | | (445,257 | ) |
Total Other Income (Expense) | | | 8,581,657 | | | 8,493,700 | | | (25,644,348 | ) | | (26,414,643 | ) |
Income (Loss) before provision for income taxes | | | 8,027,257 | | | 7,890,430 | | | (28,497,241 | ) | | (29,391,104 | ) |
Provision for income tax benefit | | | — | | | 143,080 | | | — | | | 137,354 | |
Net income (loss) | | | 8,027,257 | | | 8,033,510 | | | (28,497,241 | ) | | (29,253,750 | ) |
Preferred stock dividends | | | 1,045 | | | — | | | (3,135 | ) | | — | |
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES | | | 8,026,212 | | | 8,033,510 | | | (28,500,376 | ) | | (29,253,750 | ) |
NET INCOME (LOSS) PER BASIC COMMON SHARE | | | 1.22 | | | 1.21 | | | (7.24 | ) | | (7.56 | ) |
NET INCOME (LOSS) PER DILUTED COMMON SHARE | | | 0.47 | | | 0.89 | | | (7.24 | ) | | (7.56 | ) |
| | | | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON | | | | | | | | | | | | | |
SHARES OUTSTANDING - BASIC | | | 6,596,113 | | | 6,642,147 | | | 3,938,957 | | | 3,869,034 | |
SHARES OUTSTANDING - ASSUMING DILUTIVE | | | 17,068,624 | | | 8,871,307 | | | — | | | — | |
F-40
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS (continued)
Restatements for 2009 unaudited quarterly condensed balance sheet and condensed statement of operations:
| | | | | | | |
| | Previously
reported | | As Restated | |
| |
|
|
|
|
Balance Sheet at October 31, 2008 | | | | | | | |
| | | | | | | |
Note receivable | | | 14,864 | | | — | |
| | | | | | | |
Inventory | | | 977,148 | | | 373,108 | |
| | | | | | | |
Other current assets | | | 578,958 | | | 10,429 | |
| | | | | | | |
Current assets | | | 2,877,703 | | | 1,710,160 | |
| | | | | | | |
Deferred financing fees, net of amortization | | | 177,018 | | | 65,200 | |
| | | | | | | |
Note receivable, net of current portion | | | 75,545 | | | 90,410 | |
| | | | | | | |
Total other assets | | | 252,563 | | | 155,610 | |
| | | | | | | |
Total Assets | | | 3,235,101 | | | 1,970,605 | |
| | | | | | | |
Current Convertible debenture, net of discount | | | 575,573 | | | 566,724 | |
| | | | | | | |
Total current liabilities | | | 727,853 | | | 719,004 | |
| | | | | | | |
Total liabilities | | | 727,853 | | | 719,004 | |
| | | | | | | |
Common stock | | | 34,927 | | | 35,104 | |
| | | | | | | |
Contributed capital | | | 50,529,742 | | | 51,184,050 | |
| | | | | | | |
Accumulated deficit | | | (47,379,784 | ) | | (49,913,916 | ) |
| | | | | | | |
Deferred compensation | | | (604,110 | ) | | — | |
| | | | | | | |
Total Equity | | | 2,507,248 | | | 1,251,601 | |
| | | | | | | |
Total Liabilities and stockholders’ equity | | | 3,235,101 | | | 1,970,605 | |
F-41
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS (continued)
| | | | | | | |
Balance Sheet at January 31, 2009 | | Previously
Reported | | As Restated | |
|
|
|
|
|
|
Note receivable | | | 14,864 | | | — | |
Inventory | | | 1,087,055 | | | 398,127 | |
Other current assets | | | 551,937 | | | 5,000 | |
Current assets | | | 3,055,620 | | | 1,804,891 | |
Deferred financing fees, net of amortization | | | 59,006 | | | 16,058 | |
Note receivable, net of current portion | | | 73,062 | | | 87,926 | |
Total other assets | | | 132,068 | | | 103,984 | |
Total Assets | | | 3,292,523 | | | 2,013,710 | |
Common Stock | | | 28,823 | | | 28,827 | |
Contributed capital | | | 50,039,403 | | | 51,280,097 | |
Accumulated deficit | | | (47,485,855 | ) | | (50,005,367 | ) |
Total Equity | | | 2,528,734 | | | 1,249,920 | |
Total Liabilities and stockholders’ equity | | | 3,292,523 | | | 2,013,710 | |
| | | | | | | |
Balance Sheet at April 30, 2009 | | Previously
Reported | | As Restated | |
|
|
|
|
|
|
Prepaid expenses | | | 223,589 | | | 28,641 | |
Inventory | | | 1,191,706 | | | 415,096 | |
Note receivable | | | 14,864 | | | — | |
Other current assets | | | 551,937 | | | 5,000 | |
Current assets | | | 2,570,858 | | | 1,037,499 | |
Deferred financing fees, net of amortization | | | 33,726 | | | — | |
Note receivable, net of current portion | | | 69,846 | | | 84,710 | |
Total other assets | | | 103,572 | | | 84,710 | |
Total Assets | | | 2,775,265 | | | 1,223,044 | |
Accrued expenses | | | — | | | 38,000 | |
Total current liabilities | | | 405,483 | | | 443,483 | |
Total liabilities | | | 405,483 | | | 443,483 | |
Common stock | | | 15,155 | | | 15,166 | |
Contributed capital | | | 51,877,016 | | | 51,724,554 | |
Accumulated deficit | | | (48,606,916 | ) | | (50,906,522 | ) |
Deferred Compensation | | | (861,836 | ) | | — | |
Total Equity | | | 2,369,782 | | | 779,561 | |
Total Liabilities and stockholders’ equity | | | 2,775,265 | | | 1,223,044 | |
F-42
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS (continued)
| | | | | | | |
Condensed Statement of Operations | | For the Three Month
Period Ended October 31,
2008 | |
Period ending October 31, 2008 | | Previously
reported | | As Restated | |
|
|
|
|
|
|
| |
|
Total Cost of product revenue | | | 104,305 | | | 248,903 | |
| | | | | | | |
Gross Profit (Loss) from Operations | | | 352,376 | | | 207,777 | |
| | | | | | | |
General and administrative | | | 519,144 | | | 499,248 | |
| | | | | | | |
Selling expenses | | | — | | | 19,894 | |
| | | | | | | |
Total operating expenses | | | 519,144 | | | 519,142 | |
| | | | | | | |
Loss Before Other Income (Expenses) | | | (166,768 | ) | | (311,365 | ) |
| | | | | | | |
Interest expense | | | (55,134 | ) | | (55,134 | ) |
| | | | | | | |
Interest income | | | 11,329 | | | 11,329 | |
| | | | | | | |
Induced conversion cost | | | (180,505 | ) | | (247,306 | ) |
| | | | | | | |
Amortization of deferred loan discount | | | (50,762 | ) | | (50,762 | ) |
| | | | | | | |
Amortization of deferred financing fees | | | (118,012 | ) | | (62,908 | ) |
| | | | | | | |
Total Other Income (Expense) | | | (393,084 | ) | | (404,781 | ) |
| | | | | | | |
Loss before provision for income taxes | | | (559,852 | ) | | (716,146 | ) |
| | | | | | | |
Provision for income taxes | | | — | | | — | |
| | | | | | | |
Net loss | | | (559,852 | ) | | (716,146 | ) |
| | | | | | | |
NET LOSS APPLICABLE TO COMMON SHARES | | | (559,852 | ) | | (716,146 | ) |
NET LOSS PER BASIC COMMON SHARE | | | (0.18 | ) | | (0.23 | ) |
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING | | | 3,111,189 | | | 3,112,536 | |
F-43
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS(continued)
| | | | | | | | | | | | | |
Period ending January 31, 2009 | | For the Three Month Period
Ended January 31, 2009 | | For the Six Month Period
Ended January 31, 2009 | |
| | | |
| | Previously
Reported | | As Restated | | Previously
Reported | | As Restated | |
| |
|
|
|
|
|
|
| |
|
Total Cost of product revenue | | $ | 130,331 | | $ | 215,074 | | $ | 234,363 | | $ | 463,977 | |
| | | | | | | | | | | | | |
Gross Profit (Loss) from Operations | | | 358,628 | | | 273,885 | | | 711,277 | | | 481,663 | |
| | | | | | | | | | | | | |
General and administrative | | | 614,129 | | | 557,101 | | | 1,133,547 | | | 1,056,350 | |
| | | | | | | | | | | | | |
Research and development | | | — | | | 27,380 | | | — | | | 27,380 | |
| | | | | | | | | | | | | |
Selling expenses | | | — | | | 14,714 | | | — | | | 34,608 | |
| | | | | | | | | | | | | |
Total operating expenses | | | 614,129 | | | 599,195 | | | 1,133,547 | | | 1,118,338 | |
| | | | | | | | | | | | | |
Loss Before Other Income (Expenses) | | | (255,501 | ) | | (325,310 | ) | | (422,270 | ) | | (636,675 | ) |
| | | | | | | | | | | | | |
Other income | | | 355,267 | | | — | | | 355,267 | | | — | |
| | | | | | | | | | | | | |
Induced conversion cost | | | (25,406 | ) | | (31,440 | ) | | (205,911 | ) | | (278,746 | ) |
| | | | | | | | | | | | | |
Amortization of deferred loan discount | | | (50,762 | ) | | (50,762 | ) | | (101,524 | ) | | (101,524 | ) |
| | | | | | | | | | | | | |
Amortization of deferred financing fees | | | (118,012 | ) | | (49,142 | ) | | (236,024 | ) | | (112,050 | ) |
| | | | | | | | | | | | | |
Total Other Income (Expense) | | | 149,430 | | | (143,001 | ) | | (243,654 | ) | | (547,782 | ) |
| | | | | | | | | | | | | |
Loss before provision for income taxes | | | (106,071 | ) | | (468,311 | ) | | (665,924 | ) | | (1,184,457 | ) |
| | | | | | | | | | | | | |
Provision for income taxes | | | — | | | 376,859 | | | — | | | 376,859 | |
| | | | | | | | | | | | | |
Net loss | | | (106,071 | ) | | (91,452 | ) | | (665,924 | ) | | (807,598 | ) |
| | | | | | | | | | | | | |
Preferred stock dividends | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
NET LOSS APPLICABLE TO COMMON SHARES | | | (106,071 | ) | | (91,452 | ) | | (665,924 | ) | | (807,598 | ) |
NET LOSS PER BASIC COMMON SHARE | | | (0.03 | ) | | (0.03 | ) | | (0.21 | ) | | (0.26 | ) |
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING | | | 3,127,079 | | | 3,127,079 | | | 3,123,736 | | | 3,123,736 | |
F-44
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2010 AND 2009
NOTE 16 – RESTATEMENT TO PREVIOUSLY ISSUED UNAUDITED QUARTERLY FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | |
Period ending April 30, 2009 | | For the Three Month Period | | For the Nine Month Period |
| | Ended April 30, 2009 | | Ended April 30, 2009 |
| | Previously
Reported | | As Restated | | Previously
Reported | | As Restated |
| |
|
|
|
|
|
|
|
| | | | | | | | | | �� | | | |
Total Cost of product revenue | | | 78,159 | | | 165,841 | | | 312,522 | | | 629,818 | |
| | | | | | | | | | | | | |
Gross Profit (Loss) from Operations | | | 215,761 | | | 128,079 | | | 927,038 | | | 609,742 | |
| | | | | | | | | | | | | |
General and administrative | | | 1,152,063 | | | 495,223 | | | 2,285,610 | | | 1,551,572 | |
| | | | | | | | | | | | | |
Research and development | | | — | | | 326,691 | | | — | | | 354,071 | |
| | | | | | | | | | | | | |
Selling expenses | | | — | | | 31,783 | | | — | | | 66,392 | |
| | | | | | | | | | | | | |
Total operating expenses | | | 1,152,063 | | | 853,698 | | | 2,285,610 | | | 1,972,035 | |
| | | | | | | | | | | | | |
Loss Before Other Income (Expenses) | | | (936,302 | ) | | (725,619 | ) | | (1,358,572 | ) | | (1,362,293 | ) |
| | | | | | | | | | | | | |
Interest expense | | | (6,289 | ) | | (6,289 | ) | | (75,563 | ) | | (75,563 | ) |
| | | | | | | | | | | | | |
Interest income | | | 76 | | | 77 | | | 13,888 | | | 13,888 | |
| | | | | | | | | | | | | |
Other income | | | (320 | ) | | | | | 354,947 | | | — | |
| | | | | | | | | | | | | |
Induced conversion cost | | | (142,071 | ) | | (142,071 | ) | | (347,982 | ) | | (420,817 | ) |
| | | | | | | | | | | | | |
Amortization of deferred loan discount | | | (10,875 | ) | | (10,875 | ) | | (112,399 | ) | | (112,399 | ) |
| | | | | | | | | | | | | |
Amortization of deferred financing fees | | | (25,280 | ) | | (16,058 | ) | | (261,304 | ) | | (128,108 | ) |
| | | | | | | | | | | | | |
Total Other Income (Expense) | | | (184,759 | ) | | (175,216 | ) | | (428,413 | ) | | (722,999 | ) |
| | | | | | | | | | | | | |
Loss before provision for income taxes | | | (1,121,061 | ) | | (900,834 | ) | | (1,786,985 | ) | | (2,085,292 | ) |
| | | | | | | | | | | | | |
Provision for income tax benefit | | | — | | | (320 | ) | | — | | | 376,539 | |
| | | | | | | | | | | | | |
Net income (loss) | | | (1,121,061 | ) | | (901,154 | ) | | (1,786,985 | ) | | (1,708,753 | ) |
| | | | | | | | | | | | | |
NET LOSS APPLICABLE TO COMMON SHARES | | | (1,121,061 | ) | | (901,154 | ) | | (1,786,985 | ) | | (1,708,753 | ) |
NET LOSS PER BASIC COMMON SHARE | | | (1.19 | ) | | (0.96 | ) | | (2.46 | ) | | (2.35 | ) |
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC | | | 939,688 | | | 939,688 | | | 727,420 | | | 727,420 | |
F-45
