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EX-32 - CONOLOG CORPc63369_ex32.htm
EX-3.2 - CONOLOG CORPc63369_ex3-2.htm
EX-4.1 - CONOLOG CORPc63369_ex4-1.htm
EX-10.2 - CONOLOG CORPc63369_ex10-2.htm
EX-10.5 - CONOLOG CORPc63369_ex10-5.htm
EX-10.1 - CONOLOG CORPc63369_ex10-1.htm
EX-31.1 - CONOLOG CORPc63369_ex31-1.htm
EX-3.1.6 - CONOLOG CORPc63369_ex3-16.htm
EX-21.1 - CONOLOG CORPc63369_ex21-1.htm
EX-10.1.1 - CONOLOG CORPc63369_ex10-11.htm
EX-23.1 - CONOLOG CORPc63369_ex23-1.htm

 

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

 

x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended July 31, 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
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

 

 

 

5 Columbia Road, Somerville, NJ

 

08876


 


(Address of principal executive office)

 

(Zip code)


 

Issuer’s telephone number, including area code:

(908) 722-8081

Securities registered pursuant to Section 12(b) of the Act:


 

 

Title of each class

Name of each exchange in which registered



Common Stock, $0.01 par value

NASDAQ Capital Markets


 

 

 

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes o No x

 

Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 o No x

 

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 (& 232.405of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yeso No o

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definition of “large accelerated filer, “accelerated filer, and “small reporting company” 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 in Rule 12b-2 of the Act)    o yes x No

The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing sale price of $0.40 on November 29, 2010 was $2,364,450.

The number of shares outstanding of the Registrant’s common stock outstanding, excluding treasury shares, as of November 29, 2010 was 6,967,881.


TABLE OF CONTENTS

 

 

 

PART I

 

 

 

 

 

Item 1. BUSINESS

 

1

 

 

 

Item 2. DESCRIPTION OF PROPERTY

 

7

 

 

 

Item 3. LEGAL PROCEEDINGS

 

7

 

 

 

Item 4. (REMOVED AND RESERVED)

 

8

 

 

 

PART II

 

 

 

 

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

8

 

 

 

Item 6. SELECTED FINANCIAL DATA

 

9

 

 

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

9

 

 

 

Item 8. FINANCIAL STATEMENTS

 

17

 

 

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

18

 

 

 

Item 9A. CONTROLS AND PROCEDURES

 

18

 

 

 

Item 9B –OTHER INFORMATION

 

20

 

 

 

PART III

 

 

 

 

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

20

 

 

 

Item 11. EXECUTIVE COMPENSATION,

 

22

 

 

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

23

 

 

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORS INDEPENDENCE

 

24

 

 

 

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

24

 

 

 

PART IV

 

 

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

25

 

 

 

SIGNATURES

 

28



PART 1

ITEM 1 - BUSINESS

FORWARD LOOKING STATEMENTS

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of our management, as well as assumptions made by information currently available to our management. Frequently, but not always, forward-looking statements are indentified by the future tense and by words such as “believes’, “expects”, “anticipates”, “intends”, “will”, “may”, “could”, “would”, “projects”, “continues”, “estimates”, or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs or current expectations.

Forward-looking statements are expressly qualified in their entirely by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.

GENERAL INFORMATION
Conolog Corporation (“The Company”, “we”, “us”, “our”) is engaged in the design, production (directly and/or through subcontractors) and distribution of small electronic and electromagnetic components and sub-assemblies for use in telephone, radio and microwave transmission and reception and other communication areas that are used in both military and commercial applications. Our products are used for transceiving various quantities, data and protective relaying functions in industrial, utility and other markets.

HISTORY
We were organized in 1968 and were engaged primarily in the design and manufacture electronic components and systems for military applications.

In July 1971, we merged with DSI Systems, Inc., then engaged in the development and manufacture of terminal viewers for digital retrieval of microfilm. Later that year, we changed our name to Conolog Corporation.

In 1981 we acquired one of our customers, INIVEN Corporation (“INIVEN”). At that time, we were manufacturing, on behalf of INIVEN, a line of transmitters and receivers used for controlling and transceiving the measurement of the flow of gases and liquids, by gas and water utilities for controlling the flow of waste water and sewage and measuring and controlling traffic.

During 1987, we made a strategic decision to redirect our focus from military to commercial markets. Since that time, we have refocused on manufacturing and marketing our products for the commercial marketplace rather than depend on the military and defense-related markets. Our primary emphasis was on products for electric utilities, co-generation of power, gas and water companies, traffic control for departments of transport (DOT) and airports utilizing DSP (Digital Signal Processing) technology.

In September 1998, we acquired the assets of Atlas Design, Inc., a human resource outsourcing company, to further our strategy of mergers and acquisitions, and to assist in providing qualified engineering and technical staff in support of our longer term contracts.

In January 2001, we acquired substantially all of the assets of Prime Time Staffing Inc. and Professional Temp Solutions, Inc. These companies provided permanent and temporary employees for the graphics design firms, book publishing companies and engineering businesses.

1


HISTORY (continued)
During the year ended July 31, 2001, we formed a wholly owned subsidiary, Lonogoc Corporation (Currently inactive). In August, 2000, Lonogoc Corporation purchased the assets of Independent Computer Maintenance Corporation, which provided installation, maintenance, and troubleshooting of computer systems and networks. On October 22, 2002, we entered an agreement to rescind the Asset Purchase Agreement between us and Independent Computer Maintenance Corporation. Under the rescission agreement, Conolog and its subsidiary agreed to transfer all assets previously purchased pursuant to the Asset Purchase Agreement, to the extent they still exist, to the former seller. The return of the purchase price paid for the assets was $600,000, $300,000 in cash at closing, a note, which is secured by a first mortgage on a condominium, for $150,000 bearing an interest rate of 7.5% of which will be paid over 24 months in equal monthly installments of $6,750 per month beginning December 2002, and an unsecured note receivable for $137,350 payable over 10 years beginning December 2004 bearing an interest rate of 5%. During fiscal 2009, the maker of the note stopped making payments on this note receivable and the Company reserved $83,100 at July 31, 2009. During fiscal 2010 the maker of the note 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.

In March 2004, we ceased operating our staffing business. The assets of our wholly-owned subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to the subsidiary’s Vice President. In consideration of the sale, we received $34,000 in cash.

PRODUCTS
We are engaged in the design and manufacture of (i) transducers, which are electro-magnetic devices which convert electrical energy into mechanical and other forms of physical energy, or conversely convert mechanical and other forms of physical energy into electrical energy; (ii) digital signal processing (DSP) systems and electromagnetic wave filters for differentiation among discreet audio and radio frequencies; (iii) audio transmitters and modulators, for the transmission over telephone lines, microwave circuits, or satellite, of electrical signals obtained from transducers, data generated in electronic code form or by computers or other similar equipment (not manufactured by us); (iv) audio receivers and demodulators which are small systems which receive and decode the signals from the audio transmitters and convert them into digital codes for input into computers, teletypes or other similar equipment (not manufactured by us) or convert such signals into mechanical or other form of energy, such as opening or closing valves, or starting or stopping a motor; (v) magnetic “networks” which are devices that permit the matching or coupling of different types of communication equipment together or many identical or similar equipment together or onto telephone or other transmission lines so as not to cause interference; and (vi) analog transmitters and receivers, which permit the coding/transmission and receiving/decoding of a constantly variable data, such as the water level in a tank, pressure in a pipe or temperature, by actually displaying the exact information at the receiving end in digital form for storing in a computer or other devices, or by physically displaying the information in a visual fashion such as a numerical readout or meter, and (vii) multiplexer supervisory controls, which enable callers with high volumes of supervisory data to transmit on fewer phone lines.

Such products are used in radio and other transmissions, telephones and telephone exchanges, air and traffic control, automatic transmission of data for utilities, tele-printing of transmitted data such as news and stock market information and for use by electric utilities in monitoring power transmission lines for faults and/or failures. Our products may be used independently or in combination with other products to form a system type configuration, whereby our equipment is pre-assembled in a large cabinet with other equipment in a configuration that would provide the end user with protection as well as operational status displays.

PRESENT STATUS/BUSINESS PRODUCT DESCRIPTION
We market and sell our products to three basic types of customers:

 

 

 

 

 

 

1)

Military Sales

 

 

Direct contract sales to military

 

 

As subcontractor to systems producers

 

 

Foreign governments

 

 

 

 

 

 

2)

Commercial Sales (Under the trade name “INIVEN” (a Division of Conolog))

 

 

Direct sales to end-users

 

 

Sales to system assemblers

 

 

Sales to contractors/installers

2


PRESENT STATUS/BUSINESS PRODUCT DESCRIPTION (continued)

 

 

 

 

3)

Commercial Sales - As Manufacturing Subcontractor to Systems Producers.

MILITARY SALES
Military sales are primarily our electromagnetic wave filters used in military radios, vehicles (cars, trucks or tanks), portable (backpack), special signaling equipment and exchanges (as in field command posts), ship to ship teletype signaling filters used in deployment of ships (UCC-1 and UCC-4 systems) as well as many other signaling applications where accurate electromagnetic frequency control is required.

Our military sales are received through independent sales representatives who are paid a commission.

COMMERCIAL “INIVEN” SALES AND PRODUCTS
“INIVEN” equipment is designed around four (4) core product groups:

 

 

 

 

1)

PTR and PDR Teleprotection Series (Protective Tone Relaying Communications Terminal), which includes the PTR-1000, PTR-1500 and PDR-2000.

 

 

 

 

2)

Audio Tone & Telemetry Equipment (Audio Tone Control, Telemetering and Data Transmission Systems), which includes Series “98”, “68”, “40” and “GEN-1”.

 

 

 

 

3)

Multiplex Supervisory Control System

 

 

 

 

4)

Communication Link Multihead Fiber Optic Couplers and Industrial Grade 1200 Baud Modems.

PTR AND PDR TELEPROTECTION SERIES
This product is designed for use exclusively by electric power generators (electric utilities and co-generators) in order to protect their transmission and distribution lines. The PTR-1000, by monitoring the output signal of the transmission equipment in less than one hundredth of a second protects the transmission and distribution lines.

The PTR-1000 is installed in pairs, one unit at each end of the line. Each unit is connected and in constant communication with the other, as they continuously monitors the line for faults. In the event of a fault occurring (such as a downed line or a short circuit) at either end and when confirmed by the receiving PTR-1000 unit, the line is immediately isolated for shut down, averting costly damage and downtime.

The PTR-1000 system is composed of a transmitter, dual receivers, a logic card (brain center and controller of the system), relay module, line interface module and power supply module. The transmitters at each end are independent and transmit (continuously) the status (information being monitored) at their end of the line.

The PTR-1500, is a quad system and performs as 2 duals or 4 singles with many unique features such as multiple line operation, event recording with date stamp with optional analog or digital transmission modes including optic fiber interface.

The PDR-2000 is an 8 channel high speed communication system for use in electric power transmission protection schemes. Unique features include event recording, on-board and remote programming, and ID (unit to unit identification on all communications), Packet Forwarding (ability to forward information such as trips and all events through indirect communication paths), password protection and multiple communication ports.

The PTR/PDR Teleprotection Series are designed for global use by electric utilities and any entity generating power for its own consumption with resale of surplus power to an electric utility, such as cities, municipalities, cooperatives and large corporations that find it more economical to generate their own electricity.

The PTR/PDR market is:

 

 

 

 

New installations; i.e., new transmission lines, new distribution segments, for utilities and cogenerators.

 

 

 

 

Existing installations not properly protected, improving efficiency and reducing down time.

 

 

 

 

Existing installations for upgrading to PTR/PDR technology, again improving efficiency and down time.

Sales efforts for the PTR/PDR are presently being conducted by the Company’s marketing executives, through independent manufacturers’ representatives and through distributors. Sales are targeted primarily to the largest utilities and co-generators.

3


PTR AND PDR TELEPROTECTION SERIES (continued)

In the United States alone, there are over 500 large entities generating electricity. They are:

 

 

 

 

Municipal Systems

 

 

 

 

Cooperative Systems

 

 

 

 

Federal, State and District Systems

 

 

 

 

Audio Tone and Telemetry Equipment

For many years there has been a need for a modularly independent system that would permit a user, from a distance, to control functions such as opening a valve, starting a motor, shutting down a compressor, changing a traffic signal, control landing lights at an airport, activate a hazard warning on a highway, and in return allow the user to receive information, such as the liquid level in a tank, the pressure in a pipe, the rate of flow out of a compressor, the flow of traffic, the status of a traffic light, airport lights, or confirmation that a command was performed. Such information is transmitted and received and the control functions are performed from a distance utilizing telephone lines, microwave link or direct wire.

These applications, by their nature, can be accomplished with slow speed signaling systems composed of a transmitter on one end and a receiver on the other to carry out the necessary instructions provided by the transmitter. Each set (transmitter/receiver combination) is called a channel. Because of the slow speed, up to 30 channels could be made to transmit and receive signals, in either direction on a single telephone line, microwave link or direct-wired line at the same time. This parallel transmission permits each transmitter/receiver pair to be independent of all the others.

This product line includes the first generation equipment, known as GEN-1, followed by later generations which include technological improvements and programmable capabilities to include:

GEN-1 Series - First generation with electromagnetic modules and first generation programmable modules without electro-magnetic modules.

“98” and “68” Series - The latest generation applies DSP and microprocessor technology with full programmability, in the field or at the factory.

“40” Series - Designed to function with the “98” or “68” series; transmits and receives variable analog data.

GEN-1 AND GEN-1 PROGRAMMABLE SERIES
The diversity of applications for this equipment makes it available for a wide range of users who are not restricted to a single industry. Typical industrial uses include: the measurement of water and gas, waste water, gasoline, oil, traffic, and electricity. Typical users include: utilities, co-generators, airports, navy yards, telephone companies, paper and pulp processors and wherever remote control and data acquisition is required.

Since our line has a distinct mechanical configuration, we designed our GEN-1 Programmable units and other improvements as replacements for existing units.

Our line of GEN-1 equipment is extensive and provides the user with the ability to perform multiple control functions, status monitoring as well as continuous variable data monitoring, such as a level in a tank or pressure gauge.

Sales for this line are primarily for the replacement of existing installations and for expansion of these installations where it would not be economical to install the latest technology, which would not be mechanically compatible.

Sales to this market are made in the same manner as the PTR/PDR market except that manufacturers’ representatives specialize in selling to this diverse market.

“98,” “68” and “40” Series represent our latest designs in the audio tone equipment utilizing the more advanced DSP technology, which provides high accuracy and long-term stability. These features have allowed us to greatly improve the scope, density and number of functions that can be performed on a single phone line, microwave link or direct line.

4


GEN-1 AND GEN-1 PROGRAMMABLE SERIES (continued)
Sales of these products are made by the same agents who sell our GEN-1 products, but are also directed to encompass more sophisticated users with larger amounts of data and control points. The mechanical configuration of the “98” series is more compact, permitting more equipment in a given space, while performing many more functions when it is connected to the “40” Series. The “68” Series is the “98” Series repackaged mechanically specifically for customers with older systems permitting them to upgrade their systems to DSP technology. The “40” Series, when connected to the “98” or “68” in the same chassis, permits the continuous monitoring of variable data.

Typical applications for these products include transmission of the variable data (such as volume, temperature, pressure and moisture) for water, gas, industrial gases, oil, gasoline, transportation equipment and telephone exchanges, and for use at airports, tunnels and bridges and for security and electricity systems.

MULTIPLEX SUPERVISORY (IM) CONTROL SYSTEM
This product is a response to the cost and scarcity of dedicated phone lines (connections whereby the phone link is dedicated to one subscriber), and enables customers with high volumes of supervisory data (where many functions are monitored from a single site) to transmit data on fewer phone lines (i.e., with more data per channel, up to a maximum of 30 channels per line).

Using the “98” DSP Series as its communications link, we designed the Multiplexer Supervisory Control System to handle 8 times the normal capacity per channel. The microprocessor-based system allows a single telephone line to handle up to 900 data inputs. This product line because of its data density capability may be utilized for a very broad range of applications. This product has only recently been introduced and our sales efforts for it are being conducted through its existing independent manufacturer’s sales representatives.

FIBER OPTIC LINK AND DATA MODEM
The expansion of fiber lines by our customers and their need to switch equipment from phone lines to fiber prompted us to design and introduce a fiber-optic-coupler line to interface with the many different fiber heads. In addition to complete data interface couplers we launched a series of 1200 Baud Modems (Industrial Grade) for operation under the same environmental specifications in line with our products.

OUR STRATEGY
Our strategy is to develop new commercial markets by continuing to develop new products and enhance existing products to improve both our market share and competitive position. Growth in commercial sales is expected to come through internal growth of existing products, new product introductions and the expansion of regional markets to meet the growing needs of our customers for more sophisticated and comprehensive products and services.

MARKETING AND SALES
In general, our products are marketed through telemarketing and customer contacts by our President and through independent manufacturing sales representatives and distributors.

COMPETITION
The market for our products is very competitive. There are several companies engaged in providing similar services and in the manufacturing the products of the type produced by us, most of which are substantially larger and have substantially greater name recognition or greater financial resources and personnel. The major competitive factors include availability of personnel, product quality, reliability, price, service and delivery. Competition is expected to continue and intensify. The market is also characterized by rapid technological changes and advances. We would be adversely affected if our competitors introduced technologically superior products or offered these products and services at significantly lower prices than our products. Our significant competitors are SL Industries, ABB and Siemens.

5


LARGEST CUSTOMERS
Our major customers during fiscal 2010 and 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

2009

 

 

 





 

 

$

 

%

 

$

 

%

 

 

 









Customer 1

 

$

133,658

 

 

11.3

%

$

186,002

 

 

12.5

%

Customer 2

 

 

376,138

 

 

31.9

%

 

638,095

 

 

43.0

%

 

 













 

 

$

509,796

 

 

43.2

%

$

824,097

 

 

55.5

%

 

 













Total Product Revenues

 

$

1,178,673

 

 

100.0

%

$

1,485,298

 

 

100.0

%

 

 













None of these customers has or had any material relationship other than purchasing our products.

As of July 31, 2010 our backlog is approximately $830,000 for PDR-2000 systems and military sales for the fiscal year ended July 31, 2011. We consider backlog to be received purchase orders or written commitments from customers for specified products.

INVENTORY

RAW MATERIALS
We believe that we have adequate sources of raw materials available for use in our business. Our products are assembled from a variety of standard electronic components, such as integrated circuits, transformers, transistors, passive components (i.e., resistors, capacitors and inductors), diodes and assorted hardware, such as, printed circuit boards, connectors and faceplates. We are not dependent upon any single supplier. We also purchase a number of other electronic components and sub-assemblies from various suppliers.

In the past, we manufactured and held in our inventory finished products pursuant to the military specifications and based upon the military forecast for future quantities and delivery schedules. Widespread military procurements were discontinued as a result of the end of the cold war and the downsizing of the military establishment. Consequently, management made a decision to write off a substantial amount of the military inventory in 2001 and 2002. As a result, we no longer manufacture military products in advance. Rather, we only schedule production as purchase orders are received.

MANUFACTURING
The Company currently rents approximately 7,000 square feet of the facility located at 5 Columbia Road, Somerville, New Jersey for a combination of manufacturing and office space. The Company assembles, under normal workload conditions, the product it sells; however, to accommodate the peak demands that occur from time to time, we can engage a number of subcontractors to assemble boards to our specifications. All assemblies, however, are inspected and fully tested by our quality, engineering and testing departments. We maintain test equipment and every product is burned-in (i.e., each product is run at full power for 48 hours) and tested prior to shipment.

WARRANTY AND SERVICE
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, 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 that are necessitated by misuse of such products are not covered by our warranty. In cases of defective products, the customer typically returns them to our facility in Somerville, New Jersey. Our service personnel then replace or repair the defective items and ship them back to the customer. Generally all servicing is completed at our plant 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.

6


RESEARCH AND DEVELOPMENT

New Products –

“GlowWorm” Fiber Optic Detector, an independent standalone product for detection of fiber optic cable failures without the need to cut the cable, was introduced in September 2010. The Company has a Patent Pending on this product. Marketing on this product has begun and we expect sales to begin in the third quarter of fiscal year ended July 31, 2011.

The CM-100 platform is a direct substation hardened communication consolidator that fills the existing gap in substation communications. The hardwired CM-100 will allow our existing products, including the PDR-2000, to operate seamlessly over fiber optics together with existing substation equipment. This system is in final testing and we anticipate will be ready for production in fiscal 2011. Cumulative research and product development expense approximates $2,479,000 as of July 31, 2010.

During fiscal years 2010 and 2009 we have invested $139,951 and $368,331 in research and product development, respectively.

The Company also completed developing a new platform for its GEN-1 products allowing for its use by the Canadian utilities.

PATENTS AND TRADEMARKS
We do not have any patents covering any of our present products. We use the name INIVEN for our commercial products. We believe that this name is recognized in our industry. We believe that our prospects are dependent primarily on our ability to offer our customers high quality, reliable products at competitive prices rather than on our ability to obtain and defend patents. We do not believe that our INIVEN name is of material importance to the Company’s business.

GOVERNMENTAL REGULATION
Our manufacturing facilities are subject to numerous existing and proposed federal and state regulations designed to protect the environment, establish occupational safety and health standards and cover other matters. We believe that our operations are in compliance with existing regulations and we do not believe that such compliance has had or will have any material effect upon our capital expenditures, earnings or competitive position. With respect to military sales, we are not subject to any special regulations. The products manufactured are done so in accordance with accepted commercial practices.

EMPLOYEES
As of July 31, 2010, we employed 15 people on a full-time basis, including two in management, two in sales, one clerical, one in accounting, one in purchasing, five in engineering and quality control and three in production. We have enjoyed good labor relations.

None of our employees are represented by a labor union or bound by a collective bargaining agreement. We have never suffered a work stoppage. We believe our future success will depend, in part, on our continued ability to recruit and retain highly skilled management, marketing and technical personnel.

ITEM 2 - DESCRIPTION OF PROPERTY

Our principal executive offices are located at 5 Columbia Somerville, New Jersey. The space consists of approximately 7,000 square feet of which approximately 5,000 square feet is dedicated to manufacturing, production and testing and approximately 2,000 square feet is dedicated to administrative and storage needs. Our current monthly rent expense is $ 4,600. In the opinion of management, the space is adequately covered by insurance.

ITEM 3 - LEGAL PROCEEDINGS

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 denied the allegations in the complaint.

7


ITEM 3 - LEGAL PROCEEDINGS (continued)

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. to date.

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.

ITEM 4 - RESERVED

PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET PRICE FOR COMMON STOCK
Our Common Stock is traded on the NASDAQ Capital Market, under the symbol CNLG. The following table lists the reported high and low bid prices of our stock each quarter for the fiscal periods indicated.

 

 

 

 

 

 

 

 

Common Stock

 

Fiscal Year 2010

 

High

 

Low

 

 

 


 


 

 

 

 

 

 

 

 

 

First Quarter

 

 

3.24

 

 

0.97

 

Second Quarter

 

 

2.75

 

 

1.25

 

Third Quarter

 

 

4.72

 

 

1.35

 

Fourth Quarter

 

 

1.70

 

 

0.65

 


 

 

 

 

 

 

 

 

Common Stock

 

Fiscal Year 2009

 

High

 

Low

 

 

 


 


 

 

 

 

 

 

 

 

 

First Quarter

 

 

4.90

 

 

1.35

 

Second Quarter

 

 

3.75

 

 

1.05

 

Third Quarter

 

 

6.64

 

 

1.11

 

Fourth Quarter

 

 

2.01

 

 

1.07

 

On February 11, 2009, the Company affected a 5:1 reverse stock split. The prices shown in the above chart have been adjusted to give retroactive effect to the reverse stock split.

As of July 31, 2010, the Company’s Common Stock was held by approximately 450 shareholders of record. Our transfer agent is Continental Stock Transfer & Trust Company, with offices at 17 Battery Place, 8th floor, New York, New York, telephone number (212) 509-4000. As transfer agent for our shares of common stock the transfer agent is responsible for all record-keeping and administrative functions in connection with the common shares of stock.

8


MARKET PRICE FOR COMMON STOCK (continued)
Dividends. Holders of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors of the Company. To date, the Company has neither declared nor paid any dividends on its Common Stock or on its Preferred A or Preferred B shares. The Company anticipates that no such dividends will be paid in the foreseeable future. Rather, the Company intends to apply any earnings, if any, to the expansion and development of its business. Any payment of cash dividends on any of its securities in the future will be dependent upon the future earnings of the Company, including its financial condition, capital requirement and other factors, which the Board of Directors deems relevant.

EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth the information indicated with respect to our compensation plans under which our common stock is authorized for issuance.

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

 

 

Number of Securities to be issued
upon exercise of outstanding
options, warrants and rights
(a)

 

Weighted average
exercise price of
outstanding options,
warrants and rights
(b)

 

Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)

 









 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

On July 9, 2002 our stockholders approved our 2002 Stock Option Plan under which up to 40 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.

 

N/A

 

158*

 









 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

 

N/A

 

 

 

 

 









 

 

 

 

 

 

 

 

Total

 

158

 

 

 

 

 









*Represents retroactive application of reverse stock splits.

ITEM 6 – SELECTED FINANCIAL DATA
N/A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Statements used in this Form 10-K, in filings by the Company with the Securities and Exchange Commission (the “SEC”), in the Company’s press releases or other public or stockholder communications, or made orally with the approval of an authorized executive officer of the Company that utilize the words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions speaking to anticipated actions, results or projections in the future speak only as of the date made, are based on certain assumptions and expectations which may or may not be valid or actually occur, and which involve various risks and uncertainties, such as those set forth above under “Risk Factors”. The Company cautions readers not to place undue reliance on any such statements and that the Company’s actual results for future periods could differ materially from those anticipated or projected. Unless otherwise required by applicable law, the Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

9


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following discussion should be read in conjunction with our consolidated financial statements and related notes included as part of this report.

Overview

We are engaged in the design and manufacture of (i) transducers, which are electro-magnetic devices which convert electrical energy into mechanical and other forms of physical energy, or conversely convert mechanical and other forms of physical energy into electrical energy; (ii) digital signal processing (DSP) systems and electromagnetic wave filters for differentiation among discreet audio and radio frequencies; (iii) audio transmitters and modulators, for the transmission over telephone lines, microwave circuits, or satellite, of electrical signals obtained from transducers, data generated in electronic code form or by computers or other similar equipment (not manufactured by us); (iv) audio receivers and demodulators which are small systems which receive and decode the signals from the audio transmitters and convert them into digital codes for input into computers, teletypes or other similar equipment (not manufactured by us) or convert such signals into mechanical or other form of energy, such as opening or closing valves, or starting or stopping a motor; (v) magnetic “networks” which are devices that permit the matching or coupling of different types of communication equipment together or many identical or similar equipment together or onto telephone or other transmission lines so as not to cause interference; and (vi) analog transmitters and receivers, which permit the coding/transmission and receiving/decoding of a constantly variable data, such as the water level in a tank, pressure in a pipe or temperature, by actually displaying the exact information at the receiving end in digital form for storing in a computer or other devices, or by physically displaying the information in a visual fashion such as a numerical readout or meter, and (vii) multiplexer supervisory controls, which enable callers with high volumes of supervisory data to transmit on fewer phone lines.

Description of Revenues

We derive operating revenues from the sales of products used in radio and other transmissions, telephones and telephone exchanges, air and traffic control, automatic transmission of data for utilities, tele-printing of transmitted data such as news and stock market information and for use by electric utilities in monitoring power transmission lines for faults and/or failures. Our products may be used independently or in combination with other products to form a system type configuration, whereby our equipment is pre-assembled in a large cabinet with other equipment in a configuration that would provide the end user with protection as well as operational status displays.

Description of Expenses

 Our expenses include the following: (i) Costs of revenues, which consists primarily of costs to manufacture the products we ship, these costs include raw materials, direct labor, overhead expenses associated with manufacturing and freight shipping costs; (ii) General and administrative (“G&A”) expenses, which consists of compensation and benefits for all non-manufacturing employees, compensation costs also includes stock-based awards to employees and directors. Also included in G&A expenses is professional services for legal, accounting and business consultants, as well as, rent, depreciation and general corporate expenditures.; and (iii) Selling costs, consisting mainly of commissions and trade shows expenditures; (iv) Research and Development expenses represent the costs of our development efforts related to new products; (v) Other income (expense) consist of interest income on cash and cash equivalents, interest expense consist of interest expense on convertible debentures. Other expenses consist of change in fair value of derivatives associated with the convertible debentures, along with amortization of debt discount and deferred financing fees also associated with the convertible debentures.

Results of Operations

Year Ended July 31, 2010 Compared with the Year Ended July 31, 2009, as restated

Operating Revenues: For the last two years the majority of the Company’s sales revenue has been generated from sales of the PDR-2000 and PTR-1500 Teleprotection products. For the fiscal year ended July 31, 2010 we had total product revenue sales of $1,178,673 compared to revenues of $1,485,298 for the fiscal year ended July 31, 2009, a decrease of $306,625 or 20%. The decline in sales revenues can be attributed to (a) a decrease of approximately $273,000 or 83% decline in the PTR-1500 products as customers are switching from old analog technical to digital technology, (b) A 7% decline in the PDR-2000 sales due to a delay in current projects by public utilities companies, (c) Telemetry sales decline of approximately $103,000 or 36% due natural rhythm of our markets, we expect this category to further decline in the coming years, (d) Military sales increased approximately $128,000 due to an unexpected military supply contract for current and next fiscal year.

10


Results of Operations (continued)

Year Ended July 31, 2010 Compared with the Year Ended July 31, 2009, as restated

Operating Revenues (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Sales changes by product line for the fiscal years ended July 31, 2010 and 2009.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products sold

 

2010

 

% to
total

 

2009

 

% to
total

 

$ change

 

% chg

 


 













PDR-2000 digital teleprotection

 

 

749,500

 

 

64

%

 

807,600

 

 

54

%

 

(58,100

)

 

-7.2

%

PTR-1500 analog teleprotection

 

 

54,700

 

 

5

%

 

328,100

 

 

22

%

 

(273,400

)

 

-83.3

%

Telemetry equipment

 

 

181,350

 

 

15

%

 

284,100

 

 

19

%

 

(102,750

)

 

-36.2

%

Military Sales

 

 

170,500

 

 

14

%

 

42,000

 

 

3

%

 

128,500

 

 

306.0

%

Spare parts

 

 

24,000

 

 

2

%

 

25,000

 

 

2

%

 

(1,000

)

 

-4.0

%

Freights

 

 

3,923

 

 

0

%

 

5,800

 

 

0

%

 

(1,877

)

 

-32.4

%

Discounts

 

 

(5,300

)

 

0

%

 

(7,302

)

 

0

%

 

2,002

 

 

-27.4

%

 

 



 

 

 

 



 

 

 

 







Net Sales Revenues

 

 

1,178,673

 

 

100

%

 

1,485,298

 

 

100

%

 

(306,625

)

 

-20.6

%

 

 



 

 

 

 



 

 

 

 







Cost of Revenue: Total product cost for the fiscal year ended July 31, 2010 amounted to $694,554 compared to $788,037 for the fiscal year ended July 31, 2009, a decrease of $93,483 or 11.8% decline. Cost used in material and labor increase slightly by $18,678 versus the prior year, mainly due to an approximate increase of $56,000 or 19% increase in direct labor in manufacturing as result of a 3% wage increase. This labor increase was slightly offset by a decline in material costs related to lower sales volume versus the prior year, this volume decrease was partially offset by small increases in materials cost of approximately 4%. Inventory obsolescence expense for the year ended July 31, 2010 was approximately $75,500 compared to approximately $170,000 for fiscal year 2009, a decline of approximately $94,500 this decline in the obsolescence expense can be attributed to significant write-down of inventory taken in 2009 due to significant quantities of inventory that was purchased in prior years and now qualified per the Company’s inventory policy to be written-off in 2009.

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.

Operating Expenses: Total Operating expenses for fiscal July 31, 2010 were $4,016,764. These expenses included general and administrative expenses in the amount of $3,759,490 that included a non-cash expense for stock compensation plan to employees and consultants of $1,536,000. Research and development expense of $139,951 and selling expenses of $117,323. Total Operating expenses for fiscal July 31, 2009, as restated, were $2,318,138, these expenses included $1,779,243 for general and administrative which had no non-cash expense for the stock compensation, $368,331 for research and development and $170,564 for selling expenses. The Company attributes the net increase (excluding stock compensation plan) of $162,626 primarily to increased spending in business and financial consultants which was partially offset by a decrease in research and development costs of $228,380.

General and Administrative: For the fiscal year ended July 31, 2010, general and administrative expenses increased $1,980,247 to $3,759,490 from $1,779,243 for the year ended July 31, 2009. This increase of 111% can be attributed to the following: (a) the issuance of stock to employees and consultants which created a noncash expense of $1,536,000, (b) increase in professional fees in the amount of approximately $476,000 associated with outside consultant fees related to financing and public relations, legal and accounting fees needed to assist in bringing SEC filings current, (c) increase in compensation expenses of approximately $33,500, and (d) all other costs associated with non-manufacturing overhead items such as rent, utilities, telephone and travel increased approximately $23,000.

Research and Development: For the fiscal year ended July 31, 2010 research and development cost were $139,951 a decrease of $228,380 versus the prior year total of $368,331. This decline in our research and development costs can mainly be attributed to the completion of a project to enhance the software used in the PDR-2000 in fiscal year 2009 in the amount of approximately $250,000.

Selling Expenses: For the fiscal year ended July 31, 2010 selling expenses were $117,323, as compared to $170,564 July 31, 2009, as restated, a decline of $53,241 or 31%. This decline is mainly due to reductions in commission paid due to lower sales volume and reduced costs for trade shows and marketing expenses.

11


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.

12


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.

13


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.

14


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.

15


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:

 

 

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.

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.

16


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.

17


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.

18


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 in Internal 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:

 

 

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 website www.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

 

 

 

 

 

Page

 

 


 

 

 

The following consolidated financial statements of the registrant are included in Item 8:

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

F-1

 

 

 

Consolidated Balance Sheets as of July 31, 2010 and 2009, as restated

 

F-2-F-3

 

 

 

Consolidated Statements of Operations for the years ended July 31, 2010 and 2009, as restated

 

F-4

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity for the years ended July 31, 2010 and 2009, as restated

 

F-5

 

 

 

Consolidated Statements of Cash Flows for the years ended July 31, 2010 and 2009, as restated

 

F-6

 

 

 

Notes to Consolidated Financial Statements

 

F-7 – F-45



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

 

 

 






























 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 






























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

 

 

 






























 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 






























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

 

 

 






























*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

 

 

 



 



 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

CASH PAID DURING THE YEAR FOR:

 

 

 

 

 

 

 

Interest expense

 

$

 

$

8,321

 

 

 



 



 

Income Taxes

 

 

11,099

 

 

520

 

 

 



 



 

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

 

$

 

 

 



 



 

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. 718 Compensation – 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

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Balance July 31, 2010

 

$

 

$

 

$

 

 

 



 



 



 


 

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:

 

 

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

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 31, 2010

 

$

 

$

 

$

 

 

 



 



 



 


 

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.

 

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.

 

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:

 

 

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

 

 

 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

Balance, August 1, 2009

 

$

 

$

 

$

 

Debt issuance

 

 

1,000,000

 

 

(1,000,000

)

 

 

Conversions

 

 

 

 

 

 

 

Amortization of debt discount

 

 

 

 

279,313

 

 

279,313

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 31, 2010

 

$

1,000,000

 

$

(720,687

)

$

279,313

 

 

 



 



 



 


 

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.

 

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)

 

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

 

NOTE 10 – DERIVATIVE LIABILITIES (continued)

 

Embedded Conversion Feature of August 2009 Debentures (continued)

 

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.

 

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.

 

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

 

NOTE 10 – DERIVATIVE LIABILITIES (continued)

 

Embedded Conversion Feature of August 2009 Debentures (continued)

 

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<