Attached files
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EXCEL - IDEA: XBRL DOCUMENT - CONOLOG CORP | Financial_Report.xls |
EX-32.1 - CONOLOG CORP | c67873_ex32-1.htm |
EX-31.1 - CONOLOG CORP | c67873_ex31-1.htm |
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q |
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended: October 31, 2011 |
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or |
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number: 000-8174 |
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Conolog Corporation |
(Exact Name of registrant as specified in its charter) |
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Delaware |
22-1847286 |
(State or other Jurisdiction of |
(I.R.S. Employer |
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5 Columbia Road |
Somerville, NJ 08876 |
(Address of principal executive offices) |
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(908) 722-8081 |
(Registrants telephone number, including area code) |
Indicate by check mark whether the registrant: (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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act:
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o |
Large Accelerated Filer |
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Accelerated Filer |
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Non-Accelerated Filer |
x |
Smaller Reporting Company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of December 20, 2011, there were 18,644,452 shares outstanding of the registrants common stock.
TABLE OF CONTENTS
i
PART IFINANCIAL INFORMATION
Item 1. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
ii
PART I FINANCIAL INFORMATION
CONOLOG CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
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October 31, |
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July 31, |
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ASSETS |
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Current Assets: |
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Cash and equivalents |
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$ |
249,883 |
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$ |
7,907 |
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Accounts receivable, net of allowance |
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19,454 |
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476,435 |
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Inventory, net of reserve for obsolescence |
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463,278 |
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389,489 |
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Prepaid expenses |
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15,248 |
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25,932 |
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Other current assets |
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259 |
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Total Current Assets |
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747,863 |
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900,022 |
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Property and equipment: |
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Machinery and equipment |
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1,362,952 |
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1,362,952 |
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Furniture and fixtures |
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430,924 |
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430,924 |
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Automobiles |
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34,097 |
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34,097 |
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Computer software |
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231,002 |
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231,002 |
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Leasehold improvements |
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30,265 |
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30,265 |
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Total property and equipment |
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2,089,240 |
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2,089,240 |
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Less: accumulated depreciation |
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(2,006,048 |
) |
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(2,001,882 |
) |
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Net Property and Equipment |
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83,192 |
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87,358 |
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Other Assets: |
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Deferred financing fees, net of amortization |
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Total Other Assets |
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TOTAL ASSETS |
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$ |
831,055 |
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$ |
987,380 |
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LIABILITIES AND STOCKHOLDERS DEFICIENCY |
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Current Liabilities: |
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Accounts payable |
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$ |
266,137 |
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$ |
376,636 |
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Accrued expenses |
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1,180,491 |
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1,033,002 |
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Notes payable - Officer |
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170,000 |
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256,350 |
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Total Current Liabilities |
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1,616,628 |
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1,665,988 |
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Total Liabilities |
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1,616,628 |
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1,665,988 |
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Stockholders Deficiency: |
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Preferred stock, par value $.50; Series A; 4% cumulative; 500,000 shares authorized 155,000 shares issued and outstanding at October 31, 2011 and July 31, 2011, respectively |
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77,500 |
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77,500 |
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Preferred stock, par value $.50; Series B; $.90 cumulative; 500,000 shares authorized; 1,197 shares issued and outstanding at October 31, 2011 and July 31, 2011, respectively |
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597 |
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597 |
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Common stock, par value $0.01; 30,000,000 shares authorized; 17,569,452 shares issued at October 31, 2011 and 12,455,380 shares issued at July 31, 2011, respectively |
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175,695 |
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124,554 |
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Contributed capital |
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80,431,414 |
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79,971,148 |
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Accumulated deficit |
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(81,339,045 |
) |
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(80,720,673 |
) |
Less: Treasury shares at cost - 2 shares |
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(131,734 |
) |
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(131,734 |
) |
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Total Stockholders Deficiency |
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(785,573 |
) |
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(678,608 |
) |
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TOTAL LIABILITIES AND STOCKHOLDERS DEFICIENCY |
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$ |
831,055 |
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$ |
987,380 |
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The accompany notes are an integral part of these condensed consolidated financial statements
1
CONOLOG CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
For the Three Months Ended October 31,
(Unaudited)
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2011 |
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2010 |
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OPERATING REVENUES |
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Product revenue |
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$ |
58,437 |
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$ |
526,911 |
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Cost of product revenue |
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Cost of goods sold |
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28,420 |
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269,804 |
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Total Cost of product revenue |
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28,420 |
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269,804 |
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Gross Profit from Operations |
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30,017 |
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257,107 |
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Selling, general and administrative expenses |
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General and adminitsrative |
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615,043 |
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707,582 |
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Research and development |
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14,295 |
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48,257 |
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Selling expenses |
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15,712 |
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16,784 |
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Total operating expenses |
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645,050 |
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772,623 |
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Loss from operations |
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(615,033 |
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(515,516 |
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OTHER INCOME (EXPENSES) |
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Interest expense |
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(6,025 |
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(56,479 |
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Interest income |
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47 |
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Amortization of debt discount |
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(167,946 |
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Amortization of financing fees |
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(80,043 |
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Total Other Income (Expense) |
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(5,978 |
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(304,468 |
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Net Loss before income taxes benefits (expense) |
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(621,011 |
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(819,984 |
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Income tax benefit (expense) |
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2,639 |
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(11,601 |
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NET LOSS APPLICABLE TO COMMON SHARES |
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$ |
(618,372 |
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$ |
(831,585 |
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Net Loss per basic and diluted common share |
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$ |
(0.04 |
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$ |
(0.12 |
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Weighted Average number of common shares outstanding |
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13,845,073 |
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6,967,881 |
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The accompany notes are an integral part of these condensed consolidated financial statements
2
CONOLOG CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
For the Three Months Ended October 31,
(Unaudited)
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2011 |
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2010 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
(618,372 |
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$ |
(831,585 |
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Adjustments to reconcile net loss to net cash used in operations: |
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Depreciation |
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4,166 |
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4,000 |
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Amortization of common stock issued for services |
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80,000 |
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Amortization of deferred financing fees |
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80,043 |
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Amortization of discount of convertible debentures |
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167,946 |
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Changes in assets and liabilities |
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(Increase) decrease in accounts receivable |
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456,981 |
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(394,990 |
) |
(Increase) decrease in prepaid expenses |
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10,684 |
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131,735 |
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(Increase) decrease in inventories |
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(73,789 |
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68,350 |
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(Increase) in other current assets |
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259 |
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Increase (decrease) in accounts payable |
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(110,499 |
) |
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116,956 |
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Increase (decrease) in accrued expenses |
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147,489 |
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56,479 |
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Net cash used in operations |
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(183,081 |
) |
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(521,066 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of property and equipment |
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(5,899 |
) |
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Net cash used in investing activities |
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(5,899 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of common stock |
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511,407 |
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Payments of loans from officers |
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(86,350 |
) |
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Net cash provided by financing activities |
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425,057 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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241,976 |
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(526,965 |
) |
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD |
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7,907 |
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713,005 |
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CASH AND CASH EQUIVALENTS - END OF PERIOD |
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249,883 |
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186,040 |
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The accompany notes are an integral part of these condensed consolidated financial statements
3
CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders Deficiency
For the Three months ended October 31, 2011
(Unaudited)
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Series A |
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Series B |
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Common Stock |
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Contributed |
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Accumulated |
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Treasury Stock |
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Total |
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Preferred Stock |
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Preferred Stock |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Balance at July 31, 2011 (Audited) |
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155,000 |
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$ |
77,500 |
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1,197 |
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$ |
597 |
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12,455,380 |
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$ |
124,554 |
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$ |
79,971,148 |
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$ |
(80,720,673 |
) |
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2 |
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$ |
(131,734 |
) |
$ |
(678,608 |
) |
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Common shares issued for cash in private placement |
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5,114,072 |
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51,141 |
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460,266 |
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511,407 |
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Net loss for the period |
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(618,372 |
) |
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(618,372 |
) |
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Balance at October 31, 2011 (Unaudited) |
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155,000 |
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$ |
77,500 |
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1,197 |
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$ |
597 |
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17,569,452 |
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$ |
175,695 |
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$ |
80,431,414 |
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$ |
(81,339,045 |
) |
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2 |
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$ |
(131,734 |
) |
$ |
(785,573 |
) |
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The accompany notes are an integral part of these condensed consolidated financial statements
4
CONOLOG
CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 Companys products are used for transceiving various quantities, data and protective relaying functions in industrial, utility and other markets. The Companys 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 provided 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 Companys wholly-owned subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to the Companys vice-president of operations of Atlas Design.
The accompanying condensed consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these condensed consolidated financial statements is unaudited but in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These condensed consolidated financial statements, including notes, have been prepared in accordance with the requirements of Form 10-Q and Article 8 of Regulation S-X and the Securities and Exchange Commission (SEC) and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Results for the interim period are not necessarily indicative of results that may be expected for the entire year or for any other interim period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and additional information as contained in our Annual Report on Form 10-K for the year ended July 31, 2011.
Going Concern
The accompanying condensed 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 $618,372 and $2,502,084 for the three months ended October 31, 2011 and the year ended July 31, 2011, respectively, and used cash from operations in the amounts of $183,081for the three months ended October 31, 2011and $1,055,549 for the year ended July 31, 2011, respectively. At October 31, 2011, the Company had negative working capital of $868,765 and a stockholders deficiency of $785,573. These factors raise substantial doubt as to the Companys ability to continue as a going concern. The accompanying condensed 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. In the event that the Company cannot generate sufficient cash flow from its operations or raise proceeds from offering debt or equity securities, the Company may be forced to curtail or cease its activities. There can be no assurance that the Company will be successful in achieving its goals.
5
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed 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, 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 October 31, 2011, 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 October 31, 2011 and July 31, 2011, 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 29%, 23% and 23% of accounts receivable as of October 31, 2011. Two customers accounted for approximately 93% and 4% of accounts receivable as of July 31, 2011. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations.
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 managements 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 inventory reserve review. The Company estimated a usage rate for its raw material component parts for what it expects to use over a 36 month period. Any excess inventory based on this projected usage rate is written off as excess and obsolete. The Company then reserves 100% of the estimated usage that is over 12 months and less than 36 months. Certain raw material parts which have been written down to a zero value, may still be maintained in inventory to satisfy possible requirements under the warranty programs but are valued at zero. The Company evaluates the inventory parts based on their age and usage over a 36 month period to determine inventory obsolescence and reserve adjustments.
6
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories (continued)
Inventory consisted of the following as of October 31, 2011 and July 31, 2011:
|
|
|
|
|
|
|
|
|
|
October 31, 2011 |
|
July 31, 2011 |
|
||
|
|||||||
Finished Goods |
|
$ |
250,647 |
|
$ |
162,507 |
|
Work-in-process |
|
|
68,466 |
|
|
87,664 |
|
Raw materials |
|
|
193,165 |
|
|
188,318 |
|
|
|
|
|
|
|
|
|
|
|
|
512,278 |
|
|
438,489 |
|
Less: Inventory reserve |
|
|
49,000 |
|
|
49,000 |
|
|
|
|
|
|
|
|
|
Inventory, net |
|
$ |
463,278 |
|
$ |
389,489 |
|
|
|
|
|
|
|
|
|
The Company 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 October 31, 2011 and July 31, 2011, inventory reserves amounted to $49,000 and $49,000, respectively. For the three months period ended October 31. 2011 no inventory was written off as obsolete and for the year ended July 31, 2011, $50,000 was written off and charged to cost of sales.
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 $4,166 and $4,000 for the three months period ended October 31, 2011 and 2010, 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.
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 Companys financial instruments include cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, and notes payable officer. All of these items 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 notes payable officer approximates fair value because of the short maturity of these instruments. .
7
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 October 31, 2011 and July 31, 2011, $0 of deferred financing costs remained to be amortized. Amortization of deferred financing costs amounted to $0, and $80,043 for the three months ended October 31, 2011 and 2010, respectively.
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.
Advertising / Public Relations Costs
Advertising/Public Relations costs are charged to operations when incurred. These expenses were $0 and $14,120 for the three months ended October 31, 2011 and 2010, respectively.
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.
Revenue Recognition
Revenue is recorded in accordance with the guidance of the SECs 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.
Research and Development
Research and Development costs are expensed as incurred. Research and Development costs were $14,295 and $48,257 for the three months period ended October 31, 2011 and 2010, respectively.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and amounted to $2,532 and $2,581 for the three months period ended October 31, 2011and 2010, respectively.
8
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Companys 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 Companys 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.
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 year ended 2010, 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 Jerseys approval of the technology tax benefit transfer certificate and receipt of a contract to purchase a fixed amount of these NOLs.
9
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Warranty
The Company provides a 12 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 provided that 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 Companys facility in Somerville, New Jersey. The Companys service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Companys 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.
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.
Loss Per Share of Common Stock
Basic loss per share of common stock is computed by dividing the Companys net loss by the weighted average number of shares of Common Stock outstanding during the period. The preferred dividends are not reflected in arriving at the net loss as they are not material and would have no effect on loss per share available to common shareholders. Diluted loss per shares is based on the treasury stock method and includes the effect from potential issuance of common stock such as shares issuable pursuant to the exercise of warrants and conversions of debentures. The Company did not have any dilutive securities for the three month periods ended October 31, 2011 and 2010. Potentially dilutive securities at October 31, 2011, consist of 982,837 common shares from outstanding warrants and 155,006 common shares from preferred stock. Potentially dilutive securities at October 31, 2010, consisted of 2,951,036 common shares from outstanding warrants, 1,666,667 common shares from convertible debt and 155,006 common shares from preferred stock.
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 are 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 managements estimates and assumptions are inaccurate, the Companys 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.
10
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Future Impact of Recently Issued Accounting Standards
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a material impact on the Companys financial position or results of operations.
In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on the Companys results of operations or financial condition.
Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
11
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - INCOME TAXES
The tax provision for the three months ended October 31, 2011, was a benefit of $2,639 and for the three months ended October 31, 2010, was a tax expense of $11,601. The Company has no open tax years prior to 2005 for the State of New Jersey and 2003 for the federal income tax purposes which are subject to examination.
At July 31, 2011 and 2010, the Company has net loss carryforwards for federal income tax purpose of $29,218,000 and $26,890,000, respectively, which is available to offset future federal taxable income through 2030. At July 31, 2011 and 2010, the Company has net operating loss carryforwards for state income tax purposes of approximately $9,223,000 and $6,900,000 respectively to offset future state taxable income through 2030.
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 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 100% of the deferred tax asset to a valuation allowance as of October 31, 2011 and July 31, 2011.
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 October 31, 2011, 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 Companys position to deduct the write off of the obsolete inventory for income tax purposes. The Company maintains some of its obsolete inventory utilization in repairing its products previously sold in accordance with the Companys 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 Companys inventory system as they were deemed to have no value and therefore the Company deducted the amounts on its income tax returns.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
October 31, 2011 |
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
135,000 |
|
Additions based on tax positions related to current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
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 Companys NJ NOLs 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 12 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 $22,000 as of October 31, 2011 which has been included in accrued expenses in the Balance Sheet. During the three month period ended October 31, 2011, the Company has included $6,000 of interest expense in the statement of operations.
12
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 STOCKHOLDERS DEFICIENCY
The Series A Preferred Stock provides 4% cumulative dividends, which were $130,858 ($0.85 per share) and $130,083 ($0.84 per shares) in arrears at October 31, 2011 and July 31, 2011, 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 $208,358 and $207,583 at October 31, 2011 and July 31, 2011, respectively.
The Series B Preferred Stock provides cumulative dividends of $0.90 per share, which were $43,442 ($36.29 per share) and $43,173 ($36.06 per share) in arrears at October 31, 2011 and July 31, 2011, 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 $61,397 and $61,128 at October 31, 2011 and July 31, 2011, respectively.
On October 6, 2011, the Company issued and sold an aggregate of 5,114,072 of its common stock for $511,407, in a private placement offering.
No stock warrants were issued, cancelled or exercised during the three month periods ended October 31, 2011 and 2010.
A summary of the Companys warrants is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of |
|
Strike Price |
|
Expiration |
|
|||
|
|
|
|
|
|
|
|
|||
Outstanding Warrants as of October 31, 2011: |
|
|
|
|
|
|
|
|
|
|
3/12/07 Warrants |
|
|
84,750 |
|
$ |
21.00 |
|
|
3/12/12 |
|
11/2/07 Warrants |
|
|
33,355 |
|
$ |
33.20 |
|
|
11/2/12 |
|
Selling Agent Warrants |
|
|
256,410 |
|
$ |
0.10 |
|
|
2/26/15 |
|
Class C Warrants |
|
|
608,322 |
|
$ |
0.10 |
|
|
2/26/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance as of October 31, 2011 |
|
|
982,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 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 October 31, 2011 and July 31, 2011, 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 Companys Common Stock to the Companys officers, directors, employees and consultants. The Companys 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 Companys Common Stock to the Companys officers, directors, employees and consultants under each plan.
The specific number of shares of the Companys Common Stock granted to any officer, director, employee or consultant will be determined by the Board.
Pursuant to the Corporations 2009 Stock Incentive Plan, no common shares of Company stock were issued to current officers, directors, employees and consultants for the three months ended October 31, 2011 and for the year ended July 31, 2011.
Securities Issued for Services
During the three months ended October 31, 2011, the Company did not issue any shares of common stock to non-employees for services rendered during the period.
NOTE 6 - MAJOR CUSTOMERS
The following summarizes sales to major customers (each 10% or more of net sales) by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Total |
|
Sales to Major |
|
Number of |
|
Percentage of |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
October 31, 2011 |
|
$ |
58,437 |
|
$ |
43,326 |
|
|
5 |
|
|
73.1% |
|
October 31, 2010 |
|
$ |
526,911 |
|
$ |
490,019 |
|
|
2 |
|
|
93.0% |
NOTE 7 COMMITMENTS
Total rental expense for all operating leases of the Company amounted to approximately $21,460 and $13,920 during the three months ended October 31, 2011 and 2010, respectively. The Company currently leases its facilities on a month-to-month basis.
14
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 COMMITMENTS (continued)
The Companys 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 October 31, 2011, was $450,000 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 Companys 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. During the three months ended October 31, 2011, and 2010, the Companys CEO did not receive any payment of his salary and forgave $0 and $105,000 of his salary, respectively. The Company has accrued and expensed $112,500 for the unpaid portion of his salary for the three months ended October 31.2011.
The Companys 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 October 31, 2011 was $260,200 and he receives annual increases of $6,000 on January 1st of each year. The Companys President and Chief Operating Officer is entitled to an annual bonus equal to 3% of the Companys 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. During the three months ended October 31, 2011 and 2010, the Companys President and Chief Operating Officer was paid $39,933 and $39,842 of his salary, respectively. During the three months ended October 31, 2010, the Companys president forgave $19,208 of his salary. The Company has accrued $25,117 for the unpaid portion of his salary and expensed $65,050 for the three months ended October 31, 2011.
The Company has an outstanding balance with its former auditors Withum, Smith & Brown and has agreed to pay the balance of $122,500 as follows:
|
|
|
|
|
Monthly installment payments of $1,000 commencing March 25, 2011. |
|
|
8% of all additional net financing received by the Company over the next 22 months beginning February 25, 2011 and ending December 31. 2012. |
|
|
If there is still a remaining balance after December 31, 2012, the balance will be paid in Conolog common stock at the fair market value of the stock on December 31, 2012. |
NOTE 8LOANS FROM OFFICERS
On July 28, 2011, Conolog Corporation issued a two promissory notes in favor of Robert Benou in the aggregate principal amount of $256,350, consisting of amounts advanced by Mr. Benou to the Company between January 24, 2011 and July 18, 2011. Mr. Benou is the Chief Executive Officer and Chairman of the Company. The Note is payable on demand and does not bear interest. The Note is subject to various default provisions, and the occurrence of such an Event of Default will cause the outstanding principal amount under the Note, together with any and all other amounts payable under the Note, to become immediately due and payable to Mr. Benou. The outstanding balance as of October 31, 2011, is $170,000.
15
CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Three
Months |
|
Three
Months |
|
||
|
|
|
|
|
|
|
|
CASH PAID DURING THE PERIOD FOR: |
|
$ |
25 |
|
$ |
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes |
|
$ |
|
|
$ |
11,601 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: |
|
|
|
|
|
|
|
None |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
NOTE 10 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 years 2011 and 2010, this maximum allowable deferred contribution was $16,500 ($22,500 for employees 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 for both the three months ended October 31, 2011 and fiscal year ended July 31, 2011, respectively.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the Filings) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Companys management as well as estimates and assumptions made by Companys management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words anticipate, believe, estimate, expect, future, intend, plan, or the negative of these terms and similar expressions as they relate to the Company or the Companys management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the Risk Factors section of the Companys Annual Report on Form 10-K for the fiscal year ended July 31, 2011, filed with the SEC on November 15, 2011, relating to the Companys industry, the Companys operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require managements judgment in its application. There are also areas in which managements judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
We are engaged in the design and manufacture of (i) digital communications equipment specifically designed for the protection of electric utilities transmission lines. (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, 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) fiber optic monitoring and routing equipment to measure transmission levels and direct communication flow through multiple transmission heads via electrical to light conversions; 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.
17
Description of Revenues
We derive operating revenues from the sales of products used in fiber optic and other transmissions, telephones and telephone exchanges, automatic transmission of data for utilities, 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
Three months ended October 31, 2011 compared to the three months ended October 31, 2010).
Operating Revenues:
Sales for the first quarter ended October 31, 2011 were significantly lower as compared to the prior year three month period, the sales revenue decreased $468,474 or 89% to $58,437, compared to total revenues of $526,911. The significant decrease is a result of the timing of orders and contract deliveries dates. In 2010, the Company was completing a significant contract order for the delivery of the PDR-2000. In 2011, the orders for PDR-2000 were low but the Company expects orders for the PDR-2000 to be equal or better than prior years annual sales. The timing and delivery of products will be different than prior years quarterly sales. Military sales was another area with a significant decline in sales, military sales declined $25,734 mainly due to cut backs in government military spending.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products sold |
|
2011 |
|
%
to |
|
2010 |
|
%
to |
|
$ change |
|
% chg |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|||||||||||||||||||
PDR-2000 digital teleprotection |
|
$ |
19,274 |
|
|
33 |
% |
$ |
457,700 |
|
|
87 |
% |
$ |
-438,426 |
|
|
-96 |
% |
PTR-1500 analog teleprotection |
|
|
4,411 |
|
|
8 |
% |
|
0 |
|
|
0 |
% |
|
4,411 |
|
|
100 |
% |
Telemetry equipment |
|
|
28,878 |
|
|
49 |
% |
|
28,400 |
|
|
5 |
% |
|
478 |
|
|
2 |
% |
Military Sales |
|
|
1,166 |
|
|
2 |
% |
|
26,900 |
|
|
5 |
% |
|
-25,734 |
|
|
-96 |
% |
Spare parts |
|
|
4,419 |
|
|
7 |
% |
|
11,000 |
|
|
2 |
% |
|
-6,581 |
|
|
-60 |
% |
Freight |
|
|
396 |
|
|
1 |
% |
|
4,700 |
|
|
1 |
% |
|
-4,304 |
|
|
-92 |
% |
Discounts |
|
|
(107 |
) |
|
0 |
% |
|
-1,789 |
|
|
0 |
% |
|
1,682 |
|
|
-94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Revenues |
|
$ |
58,437 |
|
|
100 |
% |
$ |
526,911 |
|
|
100 |
% |
$ |
-468,474 |
|
|
-89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Cost of Revenue:
Total product cost of goods sold for the quarter ended October 31, 2011, amounted to $28,420 compared to $269,804 for the quarter ended October 31, 2010, a decrease of $241,384 or 89%. The decrease in cost of goods sold is a result of the sales volume decrease of 89% versus the prior year.
Gross Profit
The gross profit percentage of 51.4% for the quarter ended October 31, 2011, an increase from 48.8% for the quarter ended October 31, 2010, can be attributed mainly to sales at a higher sales margin for the products sold.
Operating Expenses:
General and Administrative: For the quarter ended October 31, 2011, general and administrative expenses decreased $92,539 to $615,043 from $707,582. This decrease of 13.1% can mostly be attributed to (a) a reduction in Professional Fees Expense of $331,032 which was $449,330 in the previous period, due to the restatement of financial data for the fiscal years ended October 31, 2009 and October 31, 2010; (b) a reduction in Travel and Entertainment expense of $39,019, due to reduced business travel. These decreases were offset by (c) an increase of $180,010 in Payroll Expense, due to Officer Compensation that was accrued this quarter rather than forgiven, as it was in the previous period, and (d) an increase of Marketing Expense of $79,321 related to the marketing campaigns for the companys FIDRA and GlowWorm products.
Research and Development: For the quarter ended October 31, 2011, research and development cost was $14,295, a decrease of $33,962 as compared to the prior year total of $48,257. Our research and development costs can mainly be attributed to enhancing the FIDRA and GlowWorm products.
Selling Expenses: For the quarter ended October 31, 2011, selling expenses were $15,712, a decrease of $1,072 versus the prior year total of $16,784, mainly due to the decrease in Commission Expense related to decreased sales.
Total Other Income and Expenses:
For the quarter ended October 31, 2011, other income/expense was expense of $5,978, a decrease of $298,490 as compared to the quarter ended October 31, 2010. This large decrease in other expense is primarily a result of recording of Amortization and Interest Expense related to a subscription agreement entered into on August 3, 2009, which had a conversion feature embedded in the Companys convertible debt and certain warrants.
Income Tax Benefit:
In 1998, the State of New Jersey enacted legislation allowing emerging technology and/or biotechnology companies to sell their unused New Jersey Net Operating Loss (NOL) Carryover and Research and Development Tax Credits (R&D Credits) to corporate taxpayers in New Jersey. During the quarters ended October 31, 2011 and 2010, the Company did not enter into agreements to sell its unused tax losses. In the quarters ended October 31, 2011, and October 31, 2010, the Company did not receive any proceeds from the sale of its NOLs.
Net Loss:
The Company recorded a net loss of $618,372 for the quarter ended October 31, 2011, as compared to a net loss of $831,585 for quarter ended October 31, 2010. The decrease in net loss of $213,213 can mainly be attributed to noncash transactions related to the subscription agreement entered into in August 2009, which resulted in amortization costs related to derivative financial instruments of $304,468. For the quarter ended October 31, 2011, gross profit decreased $227,090, general and administrative costs were $92,539 lower than the prior period, research and development was also down versus the prior period in the approximate amount of $33,962, and selling expense was $1,072 lower. As a result of the foregoing, the Company reported a net loss applicable to
19
common shares of ($0.04) basic and diluted loss per share compared to ($0.12) basic and diluted loss per share for the quarter ended October 31, 2011.
LIQUIDITY AND CAPITAL RESOURCES
We have had recurring losses from operations of $618,372 for the three months period ended October 31, 2011, and used cash from operations in the amount of $183,081 and $521,066 for the three months periods ended October 31, 2011 and 2010, respectively. At October 31, 2011, the Company had cash and cash equivalents of $249,883.
At October 31, 2011, the Company had total current assets of $747,863 and total current liabilities of $1,616,628, resulting in a working capital deficit of $868,765 compared to a working capital deficit of $765,966 at the fiscal year ended July 31, 2011. The Companys current assets consists of $249,883 in cash and cash equivalents, $19,454 in accounts receivable, $463,278 in inventory and $15,248 in prepaid expenses and other current assets. Accounts receivable decreased from $476,435 at July 31, 2011 to $19,454 at October 31, 2011, resulting from the timing of collections and lower sales during the quarter ended October 31, 2011.
On October 6, 2011, the Company entered into subscription agreements with 14 accredited investors for the issuance and sale of an aggregate of 5,114,072 shares of the Companys common stock, par value $.01 per share for an aggregate purchase price of $0.10 per share and the Company received proceeds of $511,407. The Company intends to use the proceeds of the placement for general corporate purposes, including general and administrative expenses.
Cash expenditures have exceeded revenues for the prior quarters and Management expects this consumption of cash to continue into the next three quarters. Our operations have been, and will continue to be, funded from existing cash balances and private placements of equity funding. During the fiscal year ended July 31, 2011, we raised $316,350 from loans made to the company by Robert Benou. To date, Mr. Benou has received repayments totaling $146,350, of which, repayments totaling $86,350 were made during the quarter ended October 31, 2011. 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 $183,081 for the quarter ended October 31, 2011, as compared to $521,066 net cash used in operating activities for the quarter ended October 31, 2010, a decrease of $337,985. The use of cash of approximately $183,000 for the three months ended October 31, 2011 can be attributed to: (a) accounts receivable balance decline due to the of collections open receivable, resulting in cash provided of approximately $457,000 (b) cash used in operational activities was approximately $614,000 for fiscal first quarter 2012, and (c) increase in inventory balances and accrued expenses and decreases in accounts payable and prepaid expenses make up the balance of approximately $26,000.
INVESTING ACTIVITIES
There was no use of cash used in investing activities for the quarter ended October 31, 2011. For the quarter ended October 31, 2010 net cash used investing activities was $5,899 for the purchase of equipment.
FINANCING ACTIVITIES
Net cash provided from financing activities was $425,057 for the quarter ended October 31, 2011, as compared to none provided in the same three month period in 2010. In the quarter ended October 31, 2011, the Company received proceeds of $511,407 from sale of common stock through a private placement. These funds were used for repayment of $86,350 against the loans made by Robert Benou during the fiscal year ended July 31, 2011.
20
INFLATION
Management believes that the results of operations have not been affected by inflation and management does not expect inflation to have a significant effect on its operations in the future.
CRITICAL ACCOUNTING POLICIES
The Companys 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 Companys 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 managements estimates and assumptions are inaccurate, the Companys 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 SECs Staff Accounting Bulletin (SAB) No. 104, which supersedes SAB No. 101. Revenue from product sales is recognized at the time of shipment (when title has passed) upon fulfillment of acceptance terms; products are not sold on a conditional basis. Therefore, when delivery has occurred the sale is complete as long as the collection of the resulting receivable is probable.
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The preparation of financial statements requires our management to make estimates and assumptions relating to the collectability of our accounts receivable. Management specifically analyzes historical bad debts, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The Company has a concentration risk in trade accounts receivable with significant sales to the government and local agencies. The credit evaluation process has mitigated the credit risk, such losses have been minimal, and within management expectations.
INVENTORY VALUATIONS, COMPONENTS AND AGING
Inventories are valued at lower of cost or market using the first-in, first-out (FIFO) method. Finished goods costs included raw materials, labor and manufacturing overhead costs. Excess and obsolete inventory costs are expensed and a reserve for slow-moving inventory is made on managements 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
21
assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates.
The Company provides a twelve-year warranty on all commercial products and is required by government regulation to design and produce military products with a minimum 25-year operating life in addition to shelf life.
The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our reserve review. The Company estimated a usage rate for its raw material component parts for what it expects to use over a 36 month period. Any excess inventory based on this projected usage rate is written off as excess and obsolete. The Company then reserves 100% of the estimated usage that is over 12 months and less than 36 months. Certain raw material parts which have been written down to a zero value, may still be maintained in inventory to satisfy possible requirements under the warranty programs but are valued at zero. The Company evaluates the inventory parts based on their age and usage over a 36 month period to determine inventory and obsolescence and reserve adjustments.
WARRANTY
The Company provides a twelve-year warranty on its commercial products and 25 years on its military products: the warranty covers parts and labor. The Company, at its option, repairs or replaces products that are found defective during the warranty period providing proper preventive maintenance procedures have been followed by customers. 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 Companys facility in Somerville, New Jersey. The Companys service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Companys 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 Companys 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 Companys New Jersey Net Operating Loss Carryovers. In the event the Company receives an assessment for interest and/or penalties by major tax jurisdiction it would be classified in the financial statements as general and administrative expense.
STOCK BASED COMPENSATION
The Company follows the authoritative guidance for accounting for stock-based compensation. This guidance requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based upon their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company also follows the guidance for equity instruments issued to consultants.
FAIR VALUE OF FINANCIAL INSTRUMENTS
22
The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and short term convertible Debentures approximates fair value because of the short maturity of these instruments. The recorded value of long-term debt approximates its fair value as the terms and rates approximate market rates.
FAIR VALUE MEASUREMENTS
The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
|
|
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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a material impact on the Companys financial position or results of operations.
In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
23
carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on the Companys results of operations or financial condition.
Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
PART IIOTHER INFORMATION
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
There have been no material changes from the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended July 31, 2011, filed with the SEC on November 15, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of the Companys equity securities during the quarter ended October 31, 2011, that were not otherwise disclosed on a Form 8-K.
Item 3. Defaults upon Senior Securities.
There were no defaults upon senior securities during the quarter ended October 31, 2011.
Item 4. (Removed and Reserved).
None.
|
|
|
Exhibit No. |
|
Description |
|
|
|
4.1 |
|
Promissory Note in the amount of $65,000, issued by Conolog Corporation in favor of Robert Benou (incorporated by reference to exhibit 4.1 of the Registrants Current Report on Form 8-K filed with the Commission on August 4, 2011) |
|
|
|
4.2 |
|
Promissory Note in the amount of $191,350, issued by Conolog Corporation in favor of Robert Benou (incorporated by reference to exhibit 4.1 of the Registrants Current Report on Form 8-K filed with the Commission on August 4, 2011) |
|
|
|
10.1 |
|
Form of Subscription Agreement by and among Conolog Corporation and the subscribers named therein (incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed with the Commission on October 12, 2011). |
|
|
|
10.2 |
|
Amendment to Subscription Agreement by and among Conolog Corporation and the subscribers named therein (incorporated by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K filed with the Commission on October 12, 2011). |
|
|
|
31.1 |
|
Certification by the Chief Executive Officer and Chief Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).* |
25
|
|
|
32.1 |
|
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
101.INS |
|
XBRL Instance Document (furnished herewith) |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema (furnished herewith) |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase (furnished herewith) |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase (furnished herewith) |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase (furnished herewith) |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase (furnished herewith) |
* Filed herewith
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
CONOLOG CORPORATION |
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Date: December 20, 2011 |
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/s/ Robert Benou |
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By: |
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Name: Robert Benou |
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Title: |
Chief Executive Officer |
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(Principal Executive Officer) |
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Chief Financial Officer |
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(Principal Financial Officer) |
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