Sales for the nine month period ended April 30, 2012 were significantly lower as compared to the prior year nine month period. The sales revenue decreased $685,364 or 58% to $494,344, compared to total revenue of $1,179,708. During the same nine month period in 2011, the Company was completing two significant contract orders for the delivery of the PDR-2000. Military sales was another area with a significant decline in sales, military sales declined $25,734 mainly due to cut backs in government military spending.
Sales changes by product line for the nine month periods ended April 30, 2012 and 2011.
Total product cost of goods sold for the nine months ended April 30, 2012, amounted to $232,053 compared to $638,986 for the nine months ended April 30, 2011, a decrease of $406,933 or 64%. The decrease in cost of goods sold is a result of significantly lower sales.
The gross profit percentage of 53.1% for the nine month period ended April 30, 2012, an increase from 7.3% for the nine month period ended April 30, 2011. The increase in gross profit percentage was due to a price correction on the PDR-2000 during the nine months ended April 30, 2012. The price for the same product was cut aggressively as part of a competitive contract that expired in fiscal 2011.
Selling Expenses: For the nine month period ended April 30, 2012, selling expenses were $229,630, an increase of $116,387 versus the prior year total of $113,243 mainly due to an increase of marketing expense by $161,003 related to the marketing campaigns for the company’s FIDRA and GlowWorm products. This increase was offset by a decrease in travel and entertainment of $69,366.
Total Other Income and Expenses:
For the nine month period ended April 30, 2012, other income/expense was expense of $25,377, a decrease of $1,844,549 as compared to the nine month period ended April 30, 2011. This large decrease in other income/expense is primarily a result of recording of amortization and interest expense related to a subscription agreement entered into on August 3, 2009, which had a conversion feature embedded in the Company’s convertible debt and certain warrants.
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 the nine month period ended April 30, 2012, the Company entered into agreements to sell up to $254,687 of its unused tax losses. The Company received net proceeds of $227,945, during the nine month period ended April 30, 2012, related to the sale and accordingly recorded them as a tax benefit in the period received. During the nine month period ended April 30, 2011, the Company did not enter into such agreements and did not receive such tax benefits.
Net Loss:
The Company recorded a net loss of $1,396,378 for the nine month period ended April 30, 2012, as compared to a net loss of $3,618,318 for the nine month period ended April 30, 2011. The decrease in net loss of $2,221,940 can mainly be attributed to (a) noncash transactions related to the subscription agreement entered into in August 2009, which resulted in amortization costs related to derivative financial instruments of $1,751,966, and (b) professional fees decreasing $594,634 over the prior year nine month period due to legal fees and accounting fees associated with the restatement of prior filed financial statements. For the nine month period ended April 30, 2012, gross profit decreased $278,431, general and administrative costs were $516,707 lower than the prior period, while research and development was down versus the prior period by $2,643, and selling expense was $116,387 higher. As a result of the foregoing, the Company reported a net loss applicable to common shares of ($0.08) basic and diluted loss per share compared to ($0.39) basic and diluted loss per share for the nine month period ended April 30, 2011.
LIQUIDITY AND CAPITAL RESOURCES
We have had recurring losses from operations of $1,396,378 for the nine month period ended April 30, 2012, and used cash from operations in the amount of $576,186 and $899,275 for the nine month periods ended April 30, 2012 and 2011, respectively. At April 30, 2012, the Company had cash and cash equivalents of $18,717.
At April 30, 2012, the Company had total current assets of $671,006 and total current liabilities of $2,049,423, resulting in a working capital deficit of $1,378,417 compared to a working capital deficit of $765,966 at the fiscal year ended July 31, 2011. The Company’s current assets consists of $18,717 in cash and cash equivalents, $91,404 in accounts receivable, $509,304 in inventory and $51,581 in prepaid expenses and other current assets. Accounts receivable decreased from $476,435 at July 31, 2011 to $91,404 at April 30, 2012, resulting from the timing of collections and lower sales during the nine month period ended April 30, 2012.
During the nine month period ended April 30, 2012, the Company initiated two private placement offerings.
As of June 12, 2012, the initial private placement offering resulted in subscription agreements with 30 accredited investors for the issuance and sale of an aggregate of 6,754,072 shares of the Company’s common stock (par value $.01 per share) for an aggregate purchase price of $0.10 per share. The Company received proceeds of $675,407.20.
As of June 12, 2012, the secondary private placement offering resulted in subscription agreements with 15 accredited investors for the issuance and sale of an aggregate of 676,000 shares of the Company’s common stock (par value $.01 per share) and 1,352,000 warrants for an aggregate purchase price of $0.25 per share and two warrants. Each warrant entitles the holder purchase one share of the Company’s common stock at an exercise price of $.01. The Company received proceeds of $169,000.
The Company used the proceeds of the placement for general corporate purposes, including general and administrative expenses.
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Cash expenditures have exceeded revenues for the prior quarters and Management expects this consumption of cash to continue into the next three quarters. Our operations have been, and will continue to be, funded from existing cash balances and private placements of equity funding. During the fiscal year ended July 31, 2011, we raised $316,350 from loans made to the company by Robert Benou. During the nine month period ended April 30, 2012, we raised an additional $100,000 from loans made by Mr. Benou. To date, Mr. Benou has received repayments totaling $241,350, of which, repayments totaling $181,350 were made during the nine month period ended April 30, 2012. 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 $576,747 for the nine month period ended April 30, 2012, as compared to $899,275 net cash used in operating activities for the nine month period ended April 30, 2011, a decrease of $323,089. The use of cash of $576,747 for the nine months ended April 30, 2012 can be attributed to: (a) accounts receivable balance decline due to the of collections open receivables, resulting in cash provided of $385,031 and (b) increases in inventory balances, accrued expenses, and prepaid expenses and decreases in accounts payable.
INVESTING ACTIVITIES
There was no use of cash used in investing activities for the nine month period ended April 30, 2012. For the nine month period ended April 30, 2011, net cash used investing activities was $5,899 for the purchase of equipment.
FINANCING ACTIVITIES
Net cash provided from financing activities was $587,557 for the nine month period ended April 30, 2012, as compared to $266,350 provided in the same nine month period in 2011. In the nine month period ended April 30, 2012, the Company received proceeds of $668,907 from sale of common stock through a private placement. These funds were used for repayment of $181,350 against the loans made by Robert Benou during the fiscal year ended July 31, 2011.
INFLATION
Management believes that the results of operations have not been affected by inflation and management does not expect inflation to have a significant effect on its operations in the future.
CRITICAL ACCOUNTING POLICIES
The Company’s consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external professional advice and other assumptions believed to be reasonable. The following critical accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect the Company’s consolidated financial statements.
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
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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 is 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. 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.
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.
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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.
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 cash 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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, which updated the guidance in ASC Topic 820,Fair Value Measurement.The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a material impact on the Company’s financial position or results of operations.
In December 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on the Company’s results of operations or financial condition.
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 consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Principal Executive Officer
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and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
Not applicable because we are a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of the Company’s equity securities during the quarter ended April 30, 2012, that were not otherwise disclosed on a Current Report on Form 8-K.
Item 3. Defaults upon Senior Securities.
There were no defaults upon senior securities during the quarter ended January 31, 2012.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits.
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Exhibit No. | | Description |
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4.1 | | Promissory Note in the amount of $100,000, issued by Conolog Corporation in favor of Robert Benou (incorporated by reference to exhibit 4.1 of the Registrants Current Report on Form 8-K filed with the Commission on April 10, 2012) |
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10.1 | | Form of Subscription Agreement by and among Conolog Corporation and the subscribers named therein (incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed with the Commission on October 12, 2011). |
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10.2 | | Amendment to Subscription Agreement by and among Conolog Corporation and the subscribers |
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| | named therein (incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K filed with the Commission on October 12, 2011). |
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31.1 | | Certification by the Chief Executive Officer and Chief Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).* |
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32.1 | | Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
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| 101.INS | | XBRL Instance Document (furnished herewith) |
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| 101.SCH | | XBRL Taxonomy Extension Schema (furnished herewith) |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase (furnished herewith) |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase (furnished herewith) |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase (furnished herewith) |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase (furnished herewith) |
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| CONOLOG CORPORATION |
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Date: June 14, 2012 | By: | | /s/ Robert Benou |
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| | | Name: Robert Benou |
| | | Title: Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer) |
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