months after the Closing Date
and on the maturity date of the Note. The Conversion Price of the Notes is $.78
(the Fixed Conversion Price) as may be adjusted (the Initial Conversion
Price). Commencing six months after the Closing Date, the Conversion Price
shall be the Fixed Conversion Price or 75% of the lowest three closing bid
prices for the Companys common stock for the ten days prior to when the Note
The Company also issued the
Subscribers Class A Warrants to purchase 1,282,051 shares of the Companys
Common Stock at $1.12 per share. The Class A warrants are exercisable for a
period beginning on August 3, 2009 and terminate on August 3, 2014. Pursuant to
the Subscription Agreement, the Company also issued the Subscribers a total of
40,000 class B Warrants.
The Class B Warrants entitle
the Subscribers after September 24, 2009 until July 3, 2012, to purchase up to
$4,000,000 of principal amount of the Companys 8% notes on the same terms as
the original Notes and 40,000 warrants (exercisable in 1,000 blocks) to
purchase 128,205 shares of the Companys Common Stock, per 1,000 Warrants, at a
per share purchase price equal to 105 % of the closing bid price of the
Companys common stock or the exercise price of the Class A Warrants. For each
$100,000 of principal of notes purchased pursuant to the Class B Warrants,the
Subscribers will surrender 1,000 Class B Warrants.
The Notes cannot be converted
to the extent such conversion would cause the Subscriber, together with such
holders affiliates, to beneficially own in excess of 4.99% of the of the
Companys outstanding common stock immediately following such conversion.
The Company paid the selling
agent for this transaction, a cash fee of $100,000 (10% of the aggregate gross
proceeds received by the Company) and issued warrants to purchase 256,410
shares of the Companys common stock ( 20% of the shares issuable to the
subscribers upon conversion of the Notes). Fees paid to the selling agent will
be amortized over the term of the subscription agreement.
At a Special Meeting of Shareholders
held on September 24, 2009, the Shareholder Approval was obtained. As a result,
the Escrowed Funds were released and after the payment of fees in the amount of
$50,000 to the placement agent for the transaction. The Company received net
proceeds of $450,000 (prior to the deduction of other fees and expenses related
to the Offering).
At the Special Meeting of
Shareholders held on September 24, 2009, Shareholder approval was obtained for
the Companys 2009 Restrictive Stock Incentive Plan.
On September 28, 2009, the
Company entered into an Advisory Service Agreement with Garden State Securities
Inc. (GSS) to perform certain Advisory and Business services. The Board of
Directors has approved the Company to issue 200,000 restricted common shares to
On October 21, 2009, two
holders of the Companys outstanding Convertible Notes dated August 3, 2009
converted principal amounts of $221,256 and interest amounts of $3,855 and were
issued a total of 288,605restricted common shares. On January 29, 2010, two
holders of the Companys Convertible Notes dated August 3, 2009 converted
additional principal amounts of $489,344 and interest amounts of $19,895.25 and
were issued a total of 652,872 restricted common shares. At January 31, 2010
the remaining balance on these debentures amounted to $ 289,400, net of
discount of $ 313,199.
On November 30, 2009, the
Company filed a Preliminary Prospectus, Form S-1, subject to completion. This
prospectus relates to the public offering of up to 635,070 shares of common
stock, par value $0.01 per share, of Conolog Corporation, by the selling
stockholder, which is issuable upon exercise of class A warrants with an
exercise price of $1.12. The number of shares being registered is 33% of the
shares held by non-affiliates of the company. The Form S-1 went effective as of
December 11, 2009.
On December 29, 2009 the
Company reduced the class A warrant exercise price for the 635,070 warrants
registered on Form S-1 to $1.00 per Class A Warrant. The balance of the Class A
Warrants was reduced to an exercise price of $0.01 per warrant.
During January 2010, the
635,070 class A warrants which were registered and reduced to a $1.00 exercise
price were exercised for 635,070 shares of common stock.
Note 3 Major Customers
revenues from four customers accounted for $418,860 or 73% of total revenues in
the six months ended January 31, 2010. Each of these four customers accounted
for 10% or more of total revenues, which is the definition of a major customer.
Accounts receivable from these same four customers at January 31, 2010 amounted
to $49,793 of 77.5% of total accounts receivable.
Note 4 2009 Stock Incentive Plan
with the Companys 2009 Stock Incentive Plan, 735,000 shares of common stock
were issued to officers, employees and directors of the Company at an aggregate
market value of $1,381,800. Stock compensation expense for the six months ended
January 31, 2010 and 2009 were $2,054,443 and $42,510 respectively. This non-cash
expense was recorded in General and Administrative costs on the Condensed
Consolidated Statements of Operations.
Note 5 Warrant and Conversion liabilities
promissory notes in the amount of $1,000,000 were issued on August 3, 2009 and
the 2,564,102 Class A common stock purchase warrant issued with these notes
contain a provisions where the conversion and exercise price may reset. This
provision creates a derivative and is separately accounted for as a liability
at fair value. At March 6, 2010, all outstanding notes and warrants have been
Note 6 -
Loss Per Share of Common Stock
Loss per share
of common stock is computed by dividing net loss (after dividends on preferred
shares) by the weighted average number of shares of Common Stock outstanding
during the year. The preferred dividends are not reflected in arriving at the
net loss as they are not material and would have no effect on earnings per
share available to common shareholders. The number of weighted average shares
used in the computations includes 1,929,032 common stock purchase warrants
recorded at a $0.01 value. The effect of assuming the exchange of Series A
Preferred Stock and Series B Preferred Stock in 2009 and 2008 would be
Note 6 Subsequent Events
14, 2010, one investor converted an additional principal amount of $100,000 and
interest amounting to $4,208 for 133,601 common shares. After this transaction
the remaining balance on these debentures amounted to $189,400. On March 8,
2010, one investor converted the remaining principal balance of $189,400 and
interest amounting to $6,792 for 251,528 common shares.
February 2010, 1,926,265 Class A Warrants ($0.01) were exercised on a Cashless
basis for 1,926,265 shares of common stock. After these transactions, the
remaining Class A Warrants amounted to 2,767.
25, 2010, three investors converted 10,000 Class B Warrants for $1,000,000.
Under the terms of the Class B warrants, The Company issued new interest
bearing convertible debentures totaling $1,000,000 with interest at 8%. These
new debentures can be converted into restricted common shares equal to $1.00
On February 26, 2010, the Company received a comment letter from
the Securities and Exchange Commission. The Company is addressing any comments
it believes are inapplicable.
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX
MONTHS ENDED January 31, 2010.
revenues for the three and six months ended January 31, 2010 decreased by
$377,039 and $365,624 over the same three and six month periods the prior year.
The entire decrease occurred during the three month period ended January 31,
2010. The Company attributes this decrease to the delay in receiving customer
orders until late in the quarter.
cost (Materials and Labor) increased during the six month period ended January
31, 2010 by $59,627, offset by a decrease during the three month period ended
January 31, 2010 of $33,324. Management attributes this six month increase to
an increase in fixed labor cost off-set by a sales shift to newer, upgraded
systems which bear a higher cost.
Profit for the six months ended January 31, 2010 and 2009 amounted to $286,026
and $711,277 respectively. This decrease of $425,251 was directly related to
the delay in receiving and shipping customer orders which primarily occurred
during the three months ended January 31, 2010 when the Gross Profit decreased
Selling, general and administrative expenses for the six months ended January
31, 2010 and 2009 amounted to $3,257,251 and $1,133,547 respectively. This
increase of $2,123,884 included the amortization of a non-cash expense of
$2,054,443for the 2009 annual stock incentive grant to employees, officers and
non-cash non-operating expenses for the current six month period totaled
$5,455,306 and consisted primarily of expenses related to recording of equity
derivatives on debt amounting to $5,306,521; and induced conversion cost of
$150,201. Non-cash non-operating expenses recorded for the three month period
ended January 31, 2010 amounted to $1,456,397.
a result of the foregoing, the Company reported a net loss from operations of
($8,426,531) or ($2.93) per share compared to a loss of ($665,744) or ($ .99)
per share for the six months ended January 31, 2010 and 2009, respectively.
Loss per share of common stock included the weighted average of 1,929,032
common stock purchase warrants for the six months ended January 31, 2010.
from the Companys product segment increased from $1,395,452 at July 31, 2009
to $1,484,351 for the six months ended January 31, 2010, an increase of
Receivable-trade decreased to $63,260 for the six months ended January 31, 2010
from $245,980 as of July 31, 2009.
Company expects to meet its cash requirements for the next twelve months
through existing cash balances and cash generated from operations. At January
31, 2010 new non-cancelable orders for over $822,000 had been received for
delivery during the year. On February 8, 2010 Conolog received $323,526 from
sale of New Jersey State NOLs. In addition, on February 26th and
March 3rd a total of $1,000,000 was received from existing
investors. The Company also anticipates additional financing during the next 9
months of up to $3,000,000 from current investors.
quarterly report contains certain forward-looking statements within the
meaning of Section 27A of The Securities Act of 1933, as amended and section
21E of The Securities Act of 1934, as amended. Such Statements are subject to
certain risks and uncertainties, including, among other things, significant
variations in recognizing revenue due to customer-caused delays, and intense
competition from more well known companies, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above, among other
factors, could affect the Companys financial performance and could cause the
Companys actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically declines any
obligations, to publicly release the results of any revisions, which may be
made to any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of unanticipated
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
ITEM 4T CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
It is managements responsibility to establish and maintain adequate
internal control over all financial reporting pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934 (the Exchange Act). Our management, including
our principal executive officer and our principal financial officer, have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures as of the filing date of Form 10-K Annual Report. Based
upon their evaluation as of January 31, 2010, the end of the period covered by
this 10Q report, the Companys chief executive officer and chief financial
officer concluded that, the Companys disclosure controls and procedures are not
effective to ensure that information required to be included in the Companys
periodic SEC filings is recorded, processed, summarized, and reported within
the time periods specified in the SEC rules and forms.
board of directors was advised by Management, that during their review of audit
procedures for fiscal 2009 Management identified a material weakness in the
Companys internal control over financial reporting.
consisted primarily of inadequate staffing and supervision that could lead to
the untimely identification and resolution of accounting and disclosure matters
and failure to perform timely and effective reviews. However, the size of the
Company prevents us from being able to employ sufficient resources to enable us
to have adequate segregation of duties within our internal control system.
Management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Changes in Internal Control over Financial
There were no
changes in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10Q that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.
Managements Report on Internal Control over
is responsible for establishing and maintaining adequate internal control over
financial reporting and for the assessment of the effectiveness of internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance to our management and Board of Directors regarding
the preparation and fair presentation of published financial statements. Our
management assessed the effectiveness of our internal control over financial
reporting as of July 31,2009. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control Integrated Framework. Based
on our assessment our management has concluded that our control and procedures
were not effective as of the end of the period covered by this Report due to
the existence of the significant internal control deficiencies described below.
consisted primarily of inadequate staffing and supervision that could lead to
the untimely identification and resolution of accounting and disclosure matters
and failure to perform timely effective reviews. This annual report does not
include an attestation report of the Companys registered accounting firm
regarding internal control over financial reporting. Managements report was
not subject to attestation by the Companys registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission.
PART II - OTHER
Item 1. Legal Proceedings A Promissory Note dated
October 22, 2002 from Natony Corp. and Independent Computer Maintenance, LLC to
Conolog Corporation came into default during November 2009. The Company is
currently filing for a judgment seeking full payment and penalty against the
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds: During the quarter ended January 31, 2010, two Note Holders
exercised conversion rights to convert $489,344 principal and $19,895.25 of
interest to 538,442 unregistered shares of common stock. In connection with the
foregoing, the Company relied upon the exemption from securities registration
afforded by Rule 506 of Regulation D as promulgated by the SEC under the
Securities Act of 1933, as amended (the Securities Act) an/or Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors, and transfer was restricted by
the Company in accordance with the requirements of the Securities Act of 1933.
Item 3. Defaults upon Senior Securities None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
a Special Meeting of Shareholders held on September 24, 2009, the Shareholder
Approval was obtained. As a result, the Escrowed Funds related to the August 3rd
Subscription Agreement were released and after the payment of fees in the
amount of $50,000 to Garden State Securities, Inc., the placement agent for the
transaction, the Company received net proceeds of $450,000 (prior to the
deduction of other fees and expenses related to the Offering).
the Special Meeting of Shareholders held on September 24, 2009, Shareholder
approval was obtained for the Companys 2010 Restrictive Stock Incentive Plan.
ITEM 5. Other Information None
ITEM 6. Exhibits
of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act
of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act
of Chief Executive Officer and Chief Financial Officer pursuant to Section 906
of the Sarbanes Oxley Act.
accordance with the requirements of the Exchange Act, the Registrants caused
this report to be signed on its behalf by the undersigned, thereunto and duly
Robert S. Benou
Chief Executive Officer,
Financial Officer and Treasurer,