CONOLOG CORP - FORM 10-Q/A

Attached files

file	filename
EX-32 - CONOLOG CORP	c62080_ex32.htm
EX-31.1 - CONOLOG CORP	c62080_ex31-1.htm
EX-31.2 - CONOLOG CORP	c62080_ex31-2.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

AMENDMENT NO.1

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED April 30, 2010

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ____________________

Commission file number 0-8174

Conolog Corporation

(Exact name of registrant as specified in its charter)


Delaware		22-1847286

(State or other jurisdiction of organization)		(I. R. S. Employer Identification No.)

5 Columbia Road
Somerville, NJ 08876
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (908) 722-8081

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes o No x

The number of shares of common stock outstanding as of June 11, 2010 was 6,965,039.


	Conolog Corporation
	Form 10-Q
	April 30, 2010

	Explanatory Note

The accompanying unaudited interim financial statements and notes thereto as of July 31, 2009 and April 30, 2010 and for the three and nine month periods ended April 30, 2010 and 2009, have not been reviewed in accordance with Statement of Auditing Standards No. 100 (“SAS 100”), as required by Rule 10-01(d) of Regulation S-X promulgated under the Securities Act of 1934. The Company intends to file an amendment to this Form 10-Q to file unaudited interim financial statements reviewed in accordance with SAS 100 as required by Rule 10-01(d) as promptly as practicable after it has resolved outstanding matters addressed in a comment letter it has received from the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”).

Because the financial statements contained in this Form 10-Q do not meet the requirements of Rule 10-01 (d) of Regulation S-X, the Company may not be considered current in our filings under the Securities Exchange Act of 1934. Filing an amendment to this report, when the independent registered public accountants’ review is complete, would eliminate certain consequences of a deficient filing, but the Company may become ineligible to use Form S-3 to register securities until all required reports under the Securities Exchange Act of 1934 have been timely filed for the 12 months prior to the filing of the registration statement for those securities. The Company is evaluating the impact of filing a deficient Form 10-Q due to lack of a review by an independent registered public accounting firm on its covenants under its contractual commitments, its obligations under NASDAQ Stock Market listing standards, and the Securities Exchange Act.

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant’s caused this report to be signed on its behalf by the undersigned, thereunto and duly authorized


	CONOLOG CORPORATION

Date: June 30, 2010	By /s/ Robert S. Benou

	Robert S. Benou
	Chairman, Chief Executive Officer,
	(Principal Executive Officer)
	Chief Financial Officer and Treasurer,
	(Chief Accounting Officer)

INDEX


PART I	FINANCIAL INFORMATION

Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Contrary to the rules of the Securities and Exchange Commission, the Company’s condensed consolidated financial statements included in this filing have not been reviewed by our independent public accountant in accordance with professional standards for conducting such reviews.

	Condensed Consolidated Balance Sheets as of April 30, 2010 and July 31, 2009

	Condensed Consolidated Statements of Operations for the six and nine months ended April 30, 2010 and 2009

	Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2010 and 2009

	Notes to Condensed Consolidated Financial Statements

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Item 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 4T.	CONTROLS AND PROCEDURES

PART II	OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS

Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Item 3.	DEFAULTS UPON SENIOR SECURITIES

Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 5.	OTHER INFORMATION

Item 6.	EXHIBITS

	SIGNATURES AND CERTIFICATIONS

CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)


	April 30, 2010			Restated July 31, 2009

ASSETS
Current Assets:
Cash and cash equivalents	$	1,097,410		$	27,358
Accounts receivable, net of allowance		396,118			245,980
Prepaid expenses		15,896			70,843
Prepaid service agreements		435,651			—
Current portion of note receivable		—			14,864
Inventory		700,000			425,920
Other current assets		5,000			5,000

Total Current Assets		2,650,075			789,965


Property and equipment:
Net Property and Equipment		360,775			396,704


Other Assets:
Other non-current assets		262,234
Non-current inventory		547,721			425,000
Deferred financing fees, net of amortization		51,507			8,445
Note receivable, net of current portion		83,103			69,846

Total Other Assets		944,565			503,291


TOTAL ASSETS	$	3,955,415		$	1,689,960


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	181,682		$	217,456
Accrued expenses		47,334			26,132
Derivative Liability		20,847,678			—
Current Convertible debenture, net of discount		—			34,318

Total Current Liabilities		21,076,694			277,906


Non-Current Liabilities:

Convertible debenture, net of discount	$	355,634			—

Total Liabilities		21,432,328			277,906


Stockholders’ Equity:
Preferred stock, par value $.50; Series A; 4% cumulative; 500,000 shares authorized; 155,000 shares issued and outstanding		77,500			77,500
Preferred stock, par value $.50; Series B; $.90 cumulative; 500,000 shares authorized; 1,197 shares issued and outstanding		597			597
Common stock, par value $0.01; 30,000,000 shares authorized; 6,965,680 and 1,842,485 shares issued and outstanding at April 30, 2010 and July 31, 2009 respectively		69,679			18,425
Contributed capital		61,471,520			52,385,432
Accumulated deficit		(78,964,475	)		(50,938,166	)
Treasury shares at cost - 2 shares		(131,734	)		(131,734	)


Total Stockholders’ Equity		(17,476,913	)		1,412,054


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,955,415		$	1,689,960

The accompanying notes are an integral part of the condensed consolidated financial statements

CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations (Unaudited)


	For the Three Months Ended April 30,						For the Nine Months Ended April 30,
	2010			2009			2010			2009


OPERATING REVENUES
Product revenue	$	515,897		$	293,920		$	1,095,913			1,239,560


Cost of product revenue
Cost of goods sold		220,403			78,159			514,394			312,522

Total Cost of product revenue		220,403			78,159			514,394			312,522


Gross Profit (Loss) from Operations		295,494			215,761			581,519			927,038

Selling, general and administrative expenses
General and administrative (includes non-cash stock grants)		849,894			1,152,063			3,434,412			2,285,610


Total selling, general and administrative expenses		849,894			1,152,063			3,434,412			2,285,610

Loss Before Other Income (Expenses)		(554,400	)		(936,302	)		(2,852,893	)		(1,358,572	)

OTHER INCOME (EXPENSES)
Interest expense		(4,946,564	)		(6,289	)		(22,415,385	)		(75,563	)
Interest income		1,244			76			2,661			13,888
Other Income		—			(320	)		284,703			354,947
Change in Fair Market value of derivatives		13,965,643			—			(2,102,682	)
Induced conversion cost		—			(142,071	)		(150,201	)		(347,982	)
Amortization		(438,666	)		(36,155	)		(1,263,444	)		(373,703	)

Total Other Income (Expense)		8,581,657			(184,759	)		(25,644,348	)		(428,413	)

Income (Loss) before provision for income taxes		8,027,257			(1,121,061	)		(28,497,241	)		(1,786,985	)
Provision for income taxes		—			—			—			—

NET INCOME (LOSS)	$	8,027,257		$	(1,121,061	)	$	(28,497,241	)	$	(1,786,985	)
Preferred stock dividends	$	(1,045	)	$	—		$	(3,135	)	$	—

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	8,026,212		$	(1,121,061	)	$	(28,500,376	)	$	(1,786,985	)
NET INCOME (LOSS) PER COMMON SHARE
BASIC EARNINGS (LOSS)	$	1.22		$	(1.19	)	$	(7.24	)	$	(2.46	)
DILUTIVE EARNINGS (LOSS)	$	0.47		$	—		$	—		$	—

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC		6,596,113			939,688			3,938,957			727,420

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTIVE		17,068,624			—			—			—

The accompanying notes are an integral part of the condensed consolidated financial statements

CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended April 30, 2010 and 2009


	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(28,497,241	)	$	(1,786,985	)
Adjustments to reconcile net loss to net cash used in operations:
Amortization and Depreciation		69,150			8,000
Amortization of prepaid consulting expense		35,763			11,921
Stock based compensation		1,381,800			378,876
Change in Fair Market value of derivatives		2,102,682			—
Induced conversion cost		150,201			347,982
Amortization and interest discount on convertible debt and warrants		24,013,198			112,399
Stock issued interest		39,545			—
Changes in assets and liabilities
(Increase) Decrease in accounts receivable		(150,176	)		119,193
(Increase) decrease in accounts receivable - other		—			16,592
Decrease (increase) in prepaid expenses		(380,703	)		(14,085	)
(Increase) in inventories		—			(341,199	)
Decease in other assets		—			—
Deferred financing fees		(43,062	)		261,304
(Decrease) in accounts payable		(35,774	)		(64,043	)
Increase in accrued expenses		21,202			5,676

Net cash used in operations		(1,293,415	)		(944,369	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(33,220	)		—
Redemption of certificates of deposit					600,182

Net cash used in investing activities		(33,220	)		600,182

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock		1,000,000			—
Proceeds from issuance of convertible debentures		1,000,000
Proceeds from exercise of warrants		635,070			—
Payments of financing fees related to convertible debentures		(240,000	)
Proceeds from note receivable		1,607			10,649

Net cash provided by financing activities		2,396,677			10,649

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,070,042			(333,538	)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR		27,358			680,647

CASH AND CASH EQUIVALENTS - END OF YEAR		1,097,400			347,109

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest expense	$	—		$	7,931

Income Taxes		—			—

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Debt converted to equity	$	748,550		$	633,327

Common stock issued for services to be provided	$	506,200		$	—

Common stock (cancelled) issued for services to be provided	$	—		$	(19,890	)

Common stock (cancelled) issued for deferred compensation	$	—		$	(561,210	)

Common stock issued for accrued interest	$	39,545		$	67,631

Common stock issued for deferred compensation		1,381,800		$	1,345,465

The accompanying notes are an integral part of the condensed consolidated financial statements

CONOLOG CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED APRIL 30, 2010
(Unaudited)

Note 1 – Unaudited Financial Statements

The condensed unaudited interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the July 31, 2009 audited consolidated financial statements and the accompanying notes thereto.

These condensed unaudited consolidated financial statements reflect all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the operations and cash flows for the period presented.
Results of operations for the nine months ended April 30, 2010 should not necessarily be taken as indicative of the results of operations that may be expected for the fiscal year ending July 31, 2010.

The Company has filed an 8-K, on March 22, 2010 regarding non-reliance for the 10-Q for the period October 31, 2009.
Adjustments to the October 31, 2010 10-Q relate to the accounting for derivative liability on convertible debt and warrants.
All accounting adjustments for these convertible debentures and warrants have been property recorded for the nine month period ended April 30, 2010. .

Note 2 – Conversion of Debt

On September 8, 2008, the Company reduced the exercise price of the warrants issued in connection with the Subscription Agreement, dated March 12, 2007 (the “Subscription Agreement”), from $1.20 per share to $0.50 per share. As a result of the reduction of the warrant exercise price, pursuant to Section 12 (b) of the Subscription Agreement, the conversion price of the Convertible Notes issued in connection with the Subscription Agreement is now $0.50 per share. Any shares in excess of the shares that already have been registered for sale on conversion of the Notes will not be registered under the Securities Act of 1933, as amended, and, therefore, may not be offered for sale, pledged or hypothecated in the absence of an effective registration statement or an opinion of counsel reasonably satisfactory to the Company that such registration is not required.

On March 9, 2009 the Maturity Date of the Convertible debt was extended from March 11, 2009 to August 31,2009. In addition, from the date of March 9, 2009 until immediately after the Maturity Date, the holders may convert at a conversion rate of 75% of the average closing bid prices for the five trading days preceding the date of the Conversion Notice.

As a result of the above reductions in exercise and conversion prices, for the three months ended October 31, 2009 investors have converted $37,950 of debt for 46,592 common stock shares. The Company has recognized an Induced Conversion cost related to these conversions of $31,208 for the three months ended October 31, 2009.

The Company entered into a Subscription Agreement (the” Subscription Agreement”), dated as of August 3, 2009 ( the “Closing Date”), with three investors, pursuant to which it sold an aggregate of One Million Dollars of its principal amount of secured promissory notes (the “Notes”). On the Closing Date the Company received gross proceeds of $500,000 and $500,000 (the “Escrowed Funds”) was placed in escrow pursuant to an Escrow Agreement between the Company, the Subscribers and the escrow agent. Pursuant to the Subscription Agreement, the Company was required to file a preliminary proxy statement with the Securities and Exchange Commission by September 2, 2009 seeking approval for the transactions contemplated by the Subscription Agreement and the Company was obtained approval of its shareholders on September 24, 2009.

At a special meeting of shareholders held on September 24, 2009, the shareholder approval was obtained. As a result, the escrow funds were released and after 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.)

The amount of the note was increased to $500,000. The initial interest rate of the Notes is 4% per annum and upon the shareholder Approval the interest rate became 8% per annum. Interest accrues from the date of the Closing Date and is be payable quarterly, in arrears, commencing six months after the Closing Date and on the maturity date of the Note. The Conversion Price of the Notes is $.78 (the “Fixed Conversion Price”) as may be adjusted (the “Initial Conversion Price”). Commencing six months after the Closing Date, the Conversion Price shall be the Fixed Conversion Price or 75% of the lowest three closing bid prices for the Company’s common stock for the ten days prior to when the Note is converted.

The Company also issued the Subscribers Class A Warrants to purchase 1,282,051 shares of the Company’s Common Stock at $1.12 per share. The Class A warrants are exercisable for a period beginning on August 3, 2009 and terminate on August 3, 2014. Pursuant to the Subscription Agreement, the Company also issued the Subscribers a total of 40,000 class B Warrants.

The Class B Warrants entitle the Subscribers after September 24, 2009 until July 3, 2012, to purchase up to $4,000,000 of principal amount of the Company’s 8% notes on the same terms as the original Notes and 40,000 warrants (exercisable in 1,000 blocks) to purchase 128,205 shares of the Company’s Common Stock, per 1,000 Warrants, at a per share purchase price equal to 105 % of the closing bid price of the Company’s common stock or the exercise price of the Class A Warrants. For each $100,000 of principal of notes purchased pursuant to the Class B Warrants,the Subscribers will surrender 1,000 Class B Warrants.

The Notes cannot be converted to the extent such conversion would cause the Subscriber, together with such holder’s affiliates, to beneficially own in excess of 4.99% of the of the Company’s outstanding common stock immediately following such conversion.

The Company paid the selling agent for this transaction, a cash fee of $100,000 (10% of the aggregate gross proceeds received by the Company) and issued warrants to purchase 256,410 shares of the Company’s common stock (20% of the shares issuable to the subscribers upon conversion of the Notes). Fees paid to the selling agent will be amortized over the term of the subscription agreement.

At the Special Meeting of Shareholders held on September 24, 2009, Shareholder approval was obtained for the Company’s 2009 Restrictive Stock Incentive Plan.

On September 28, 2009, the Company entered into an Advisory Service Agreement with Garden State Securities Inc. (GSS) to perform certain Advisory and Business services. The Board of Directors has approved the Company to issue 200,000 restricted common shares to GSS.

On October 21, 2009, two holders of the Company’s outstanding Convertible Notes dated August 3, 2009 converted principal amounts of $221,256 and interest amounts of $3,855 and were issued a total of 288,605 restricted common shares. On January 29, 2010, two holders of the Company’s 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 Board of Directors voted to reduce 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.

On February 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 at the rate of $0.78 per share, but in no event greater than $1.00 per share. Class C Common Stock Purchase Warrants (2,564,102 warrants) were issued with the new secured promissory notes. The exercise price of the Class C Warrants is $1.12. These notes and Class C Warrants 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. Please see Note 5.

Note 3 – Major Customers

The Company’s revenues from four customers accounted for $641,867 or 59% of total revenues in the nine months ended April 30, 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 April 30, 2010 amounted to $204,947 of 52% of total accounts receivable.

Note 4 – 2009 Stock Incentive Plan

In accordance with the Company’s 2009 Stock Incentive Plan, on November 20, 2009, 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 and recorded as stock compensation expense at time of grant. This non-cash expense was recorded in General and Administrative costs on the Condensed Consolidated Statements of Operations.

Note 5 – Warrant and Conversion liabilities

Secured promissory notes in the amount of $1,000,000 were issued on August 3, 2009 along with 2,564,102 Class A common stock purchase warrant. These notes and Class A Warrants 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, $1,000,000 of secured promissory notes and the 2,564,102 Class A common stock purchase warrants have been converted and exercised.

On November 30, 2009 the Company filed a Registration Statement to register 635,070 common stock shares underlying the Class A Warrants. On December 29, 2009 the Board of Directors voted to adjust the exercise price of these 635,070 Class A Warrants from $1.12 to $1.00 and 1,929,032 Class A Warrants from $1.12 to $0.01. 635,070 These Class A Warrants were subsequently exercised at $1.00 per warrant for a total of $635,070. The remaining Class A Warrants ($0.01) were exercised on a Cashless basis for 1,926,265 shares of common stock.

During the 3^rd quarter, 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 at the rate of $0.78 per share, but in no event greater than $1.00 per share. Class C Common Stock Purchase Warrants (2,564,102 warrants) were issued with the new secured promissory notes.

The exercise of the Class B Warrants resulted in the issuance of secured promissory notes and the issuance of Class C common stock purchase warrants which are considered derivative equities, The Company has determined these Class B Warrants should also to be recognized as derivative liabilities and separately accounted for at fair value. The Company determined the fair value of the embedded conversion feature and the free-standing class B warrants utilizing a Black-Scholes pricing model. The fair values were measured at the commitment date, at the conversion or exercise date, as applicable, and at the end of the interim period, based on the following range of assumptions: strike price - $0.78 (conversion feature) and $1.00 - $1.12 (warrants); expected life – 18 months from commitment date (conversion feature) and 5 years from commitment date (warrants); risk-free rate – 2.36% - 2.43%; dividend yield – none; volatility – 117.4% (conversion feature) and 108.0% (warrants). The total commitment date value of the derivative liabilities of $16,139,959 was recorded with a charge to interest expense of $14,665,698.

The secured promissory notes totaling $1,000,000 were issued on February 25, 2010 and March 3, 2010. The notes and the 2,564,102 Class C common stock purchase warrants issued with these notes contain a provision whereby if the Company were to issue common stock prior to the complete conversion or payment of the notes or exercise of the warrants, for a consideration less than the fixed conversion price of the note or exercise price of the warrants, then the conversion price or exercise price would be reduced to such other lower price. The Company has determined that this provision precludes the conversion feature and underlying warrants from being treated as indexed to the Company’s own stock, requiring these conversion features and warrants to be recognized as derivative liabilities and separately accounted for at fair value. The Company determined the fair value of the embedded conversion feature and the free-standing warrants utilizing a Black-Scholes pricing model. The fair values were measured at the commitment date, at the conversion or exercise date, as applicable, and at the end of the interim period, based on the following range of assumptions: strike price - $0.78 (conversion feature) and $1.00 - $1.12 (warrants); expected life – 18 months from commitment date (conversion feature) and 5 years from commitment date (warrants); risk-free rate – 2.36% - 2.43%; dividend yield – none; volatility – 117.4% (conversion feature) and 108.0% (warrants). The total commitment date value of the derivative liabilities of $5,689,078 was recorded as a debt discount of $1,000,000 and a charge to interest expense of $4,689,079. The debt discount is being amortized over the life of the notes, with the amortizable base adjusted for conversions of debt on a pro rata basis. A total of $355,634 in amortization expense was recognized during the three months ended April 30, 2009 for amortization of the debt discount. Upon partial conversion of debt ($289,400 in principal was converted during the three months ended April 30, 2010), the fair value of the converted shares was determined using the Black-Scholes model on the conversion date and this value ($488,625) was removed from the carrying fair value of the derivative liability. The change in fair value of the derivative liabilities for the three months ended April 30, 2010 of $1,050,200 (income) was measured at April 30, 2010 based on the net change in the commitment date value of the derivative liabilities plus the value of derivative liabilities converted during the period upon conversions of debt. At April 30, 2010, a total of 371,038 common shares were convertible under these convertible notes.

Note 6 - Loss Per Share of Common Stock

Loss per share of common stock is computed by dividing net loss (after dividends on preferred shares) by the weighted average number of shares of Common Stock outstanding during the year. The preferred dividends are not reflected in arriving at the net loss as they are not material and would have no effect on earnings per share available to common shareholders. The effect of assuming the exchange of Series A Preferred Stock and Series B Preferred Stock in 2009 and 2008 would be anti-dilutive.

Note 6 – Restatement of Opening Balances Sheets

The Company has restated the Condensed Consolidated Balance Sheets at July 31, 2009 to reflect adjustment made to the Company’s financial information, as amended on From 10-K for the fiscal year ended July 31, 2009. At that time the Company did not properly account for the timely amortization of certain costs related to its Stock Grant Plan and the Company has revised the amount of inventory to be reserved in accordance with Generally Accepted Accounting Principles and, as a result, cannot be relied upon.

Note 7 – Subsequent Events

On February 25, 2010, the Company received a comment letter from the Securities and Exchange Commission (“SEC”) regarding the Company’s 2009 Form 10-K and October 31, 2009 Form 10-Q. The Company prepared and submitted to the SEC its responses to the comment letter on April 8, 2010. The SEC reviewed the Company’s responses and on May 6, 2010 the SEC responded with a follow up comment letter which requested additional information or clarification regarding, among other matters, the level of inventory in relation to sales,

measurement and recognition of share based compensation, accounting and measurement of derivative liabilities, and the adequacy of certain disclosures. The Company responded to the SEC in their letter dated June 1, 2010.

On June 10, 2010 the Board of Directors amended the provisions of the secured promissory notes, Class B and C Common Stock Purchase Warrants (contained within the August 3, 2009 Subscription Agreement) to (1) set a fixed conversion and exercise price of these promissory notes and warrants at $0.60 and $0.50 respectively and (2) eliminate the reset provision therefore removing the derivative nature of the instrument which would require accounting for a liability at fair value.

On June 8, 2010, a Form 8-K, Item 4.02 Non-reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Period. was filed by the management of Conolog Corporation. Management concluded that its financial statements for the year ended July 31 2009, which are included in its Form 10-K for the year ended July 31, 2009 and the financial statements for three month periods ended October 31, 2009 and January 31, 2010 which are included in its 10-Q for the three months ended October 31, 2009 and January 31, 2010 did not properly account for the timely amortization of certain costs related to its Stock Grant Plan and the Company has revised the amount of inventory to be reserved in accordance with Generally Accepted Accounting Principles and, as a result, cannot be relied upon. The Company has correctly accounted for these costs in subsequent filings with the Securities and Exchange Commission.

On June 18, 2010 Thomas R. Fogg, the Company’s Vice-President of Engineering, passed away.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Contrary to the rules of the Securities and Exchange Commission, the Company’s condensed consolidated financial statements included in this filing have not been reviewed by our independent public accountant in accordance with professional standards for conducting such reviews.

Due to the complex development of the derivative calculation required for the Class B Common Stock Purchase Warrants a complete review of this Form 10-Q would not have be completed by the required due date.

When the review is complete, the Company will amend this Form 10-Q.

Results of Operations (three months ended April 30, 2010 compared to the three months ended April 30, 2009.

For the three months ended April 30, 2010 product revenues were $515,897 compared to $293,920 for the three months ended April 30, 2009. The Company attributes this increase to additional customer purchase order releases.

Cost of goods sold (Materials and Labor) increased to $220,403 for the quarter ended April 30, 2010 from $78,159 for the same quarter ended April 30, 2009. This increase in cost can be attributed to the increase in products produced and shipped within the quarter and by an increase in fixed labor costs.

Gross profit for the three month periods ended April 30, 2010 and 2009, amounted to $295,494 or 57% of revenues and $215,761 or 73% of revenues respectively.

Total Selling, general and administrative expenses decreased to $849,894 for the three months ended April 30, 2010 compared to $1,152,063 for the three months ended April 30, 2009. This decrease for the three month period was primarily due to a non-cash expense of $1,381,800 for the annual stock incentive grant to employees, officers and directors which was amortized in an earlier period.

Other non-cash non-operating income (expenses) increased to $8,581,657 for the three months ended April 30, 2010 compared to ($184,759) for the three months ended April 30, 2009. This increase consisted primarily of changes in fair market value of derivatives of $13,965,643 offset by related interest expense ($4,946,564) related to recording of equity derivatives on debt.

As a result of the foregoing, the Company reported net income from operations for the three months ended April 30, 2010 of $8,027,257, or $1.22 earnings per share- Basic and $0.47 earnings per share- Diluted, compared to a net loss from operations of ($1,121,061), or ($1.19) (loss) per share –Basic and diluted, for the three months ended April 30, 2009.

Basic earnings per share is computed based on the weighted average number of common shares outstanding, including potential common shares outstanding for conversion and exercise of secured promissory notes and warrants to purchase common stock, which are recognized as derivative liabilities and separately accounted for at fair value for each reporting period.

The Company determined the fair value of the embedded conversion feature and the free-standing warrants utilizing a Black-Scholes pricing model. The fair values were measured at the commitment date, at the conversion or exercise date, as applicable, and at the end of the interim period, based on the following range of assumptions: strike price - $0.78 (conversion feature) and $1.00 - $1.12 (warrants); expected life – 18 months from commitment date (conversion feature) and 5 years from commitment date (warrants); risk-free rate – 2.36% - 2.43%; dividend yield – none; volatility – 117.4% (conversion feature) and 108.0% (warrants).

Results of Operations (nine months ended April 30, 2010 compared to the nine months ended April 30, 2009.

For the nine months ended April 30, 2010 product revenues were $1,095,913 compared to $1,239,560 for the nine months ended April 30, 2009. The Company attributes this decrease to the scheduling in receiving customer purchase order releases. The Company believes that this scheduling of releases will adjust in the following quarter.

Cost of goods sold (Materials and Labor) increased to $514,394 for the nine months ended April 30, 2010 from $312,522 for the same nine months period ended April 30, 2009. The Company attributes this increase in cost of $201,872 to production of more costly systems combined with an increase in fixed labor costs.

Gross profit for the nine month periods ended April 30, 2010 and 2009, amounted to $581,519 or 53% of revenues and $927,038 or 75% of revenues respectively.

Total Selling, general and administrative expenses increased to $3,434,412 for the nine months ended April 30, 2010 compared to $2,285,610 for the nine months ended April 30, 2009.This increase of $1,148,802 was primarily due to the amortization of a non-cash expense of $1,381,800 for the annual stock incentive grant to employees, officers and directors in an earlier period.

Other non-cash non-operating expenses increased to $25,644,348 for the nine months ended April 30, 2010 compared to $428,413 for the nine months ended April 30, 2009. This increase in expenses consisted primarily of negative change in fair market value of derivatives of ($2,102,682) and the increase in interest expense ($23,678,829) related to recording of equity derivatives on debt.

As a result of the foregoing, the Company reported a net loss from operations for the nine months ended April 30, 2010 of ($28,500,376), or ($7.24) (loss) per share –Basic and Diluted, compared to a net loss of ($1,786,985), or ($2.46) (loss) per share for the nine months ended April 30, 2009.

The Company determined the fair value of the embedded conversion feature and the free-standing warrants utilizing a Black-Scholes pricing model. The fair values were measured at the commitment date, at the conversion or exercise date, as applicable, and at the end of the interim period, based on specific assumptions for each reporting period including: strike price (conversion feature and warrants); expected life – 18 months from commitment date (conversion feature) and 5 years from commitment date (warrants); risk-free rate; dividend yield – none; and volatility.

LIQUIDITY AND FINANCIAL CONDITION

Inventories from the Company’s product segment increased from $850,920 at July 31, 2009 to $1,247,721 for the nine months ended April 30, 2010, an increase of $188,455. The Company classifies ( in accordance with GAAP) as current assets only that amount of inventory it expects to realize in the next 1 year operating cycle, the balance of the inventory is classified as non-current Accounts Receivable-trade increased to $396,118 for the nine months ended April 30, 2010 from $245,980 as of July 31, 2009.

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. The Company also anticipates additional financing during the next12 months of up to $3,000,000 from current investors.

FORWARD LOOKING STATEMENTS
This quarterly report contains certain “forward-looking statements” within the meaning of Section 27A of The Securities Act of 1933, as amended and section 21E of The Securities Act of 1934, as amended. Such Statements are subject to certain risks and uncertainties, including, among other things, significant variations in recognizing revenue due to customer-caused delays, and intense competition from more well known companies, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above, among other factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically declines any obligations, to publicly release the results of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

N/A

ITEM 4T – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Our management, including our principal executive officer and our principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the filing date of Form 10-Q Quarterly Report. Based upon their evaluation as of April 31, 2010, the end of the period covered by this 10-Q report, the Company’s chief executive officer and chief financial officer concluded that, the Company’s disclosure controls and procedures are not effective to ensure that information required to be included in the Company’s periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

The significant deficiency consisted primarily of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely effective reviews.

Additionally, due to the Company’s poor expertise in applying the FASB Codification guidance in regard to interpreting the requirement for a derivative liability; the error in the presentation of employee stock-based compensation and an error in calculating earnings per share, it has engaged outside expects to advise management on all required disclosures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10Q that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

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 has filed for a judgment seeking full payment and penalty against the makers.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: During the quarter ended April 30, 2010, a Note Holders exercised conversion rights to convert $289,400 principal and $13,217 of interest to 387,971 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 – Removed and Reserved

ITEM 5. Other Information – None

ITEM 6 .Exhibits


Exhibit Number		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act.

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant’s caused this report to be signed on its behalf by the undersigned, thereunto and duly authorized


	CONOLOG CORPORATION

Date: June 21, 2010	By /s/ Robert S. Benou

	Robert S. Benou
	Chairman, Chief Executive Officer,
	(Principal Executive Officer)
	Chief Financial Officer and Treasurer,
	(Chief Accounting Officer)

CONOLOG CORP - FORM 10-Q/A - July 1, 2010

Attached files

CONOLOG CORP Reports