CONOLOG CORP - FORM 10-Q - March 21, 2012

Attached files

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EX-32 - CONOLOG CORP	c68802_ex32.htm
EX-31.1 - CONOLOG CORP	c68802_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - CONOLOG CORP	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: January 31, 2012

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

For the transition period from to

Commission File Number: 000-8174

Conolog Corporation

(Exact Name of registrant as specified in its charter)


Delaware	22-1847286
(State or other Jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

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

(908) 722-8081
(Registrant’s 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 x No o

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


o	Large Accelerated Filer	o	Accelerated Filer

o	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 March 21, 2012, there were 20,244,454 shares outstanding of the registrant’s common stock.

TABLE OF CONTENTS


	Page
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.	1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16

Item 3. Quantitative and Qualitative disclosures about Market Risk.	24

Item 4. Controls and Procedures.	24

Item 1. Legal Proceedings.	26

Item1A. Risk Factors.	26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	26

Item 3. Defaults Upon Senior Securities.	26

Item 4. Mine Safety Disclosures.	26

Item 5. Other Information.	26

Item 6. Exhibits.	26

Signatures	28

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements.

INDEX TO FINANCIAL STATEMENTS


		PAGE

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 2012 AND JULY 31, 2011		2

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2012 AND 2011 AND THE SIX MONTHS ENDED JANUARY 31, 2012 AND 2011		3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JANUARY 31, 2012 AND 2011 AND THE SIX MONTHS ENDED JANUARY 31, 2012 AND 2011		4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		6

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements.

CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets


	January 31, 2012 (Unaudited)			July 31, 2011 (Audited)

ASSETS
Current Assets:
Cash and equivalents	$	21,281		$	7,907
Accounts receivable, net of allowance		111,064			476,435
Inventory, net of reserve for obsolescence		522,622			389,489
Prepaid expenses		73,194			25,932
Other current assets		—			259

Total Current Assets		728,161			900,022

Property and equipment:
Machinery and equipment		1,362,952			1,362,952
Furniture and fixtures		430,924			430,924
Automobiles		34,097			34,097
Computer software		231,002			231,002
Leasehold improvements		30,265			30,265

Total property and equipment		2,089,240			2,089,240
Less: accumulated depreciation		(2,010,162	)		(2,001,882	)

Net Property and Equipment		79,078			87,358


TOTAL ASSETS	$	807,239		$	987,380


LIABILITIES AND STOCKHOLDER’S DEFICIENCY
Current Liabilities:
Accounts payable	$	276,073		$	376,636
Accrued expenses		1,368,101			1,033,002
Notes payable - Officer		75,000			256,350

Total Current Liabilities		1,719,174			1,665,988



Total Liabilities		1,719,174			1,665,988


Stockholders’ Deficiency:
Preferred stock, par value $.50; Series A; 4% cumulative; 500,000 shares authorized 155,000 shares issued and outstanding at January 31, 2012 and July 31, 2011, respectively		77,500			77,500
Preferred stock, par value $.50; Series B; $.90 cumulative; 500,000 shares authorized; 1,197 shares issued and outstanding at January 31, 2012 and July 31, 2011, respectively		597			597
Common stock, par value $0.01; 30,000,000 shares authorized; 20,144,454 shares issued at January 31, 2012 and 12,455,380 shares issued at July 31, 2011, respectively		201,445			124,554
Contributed capital		80,652,164			79,971,148
Accumulated deficit		(81,711,907	)		(80,720,673	)
Less: Treasury shares at cost - 2 shares		(131,734	)		(131,734	)

Total Stockholders’ Deficiency		(911,935	)		(678,608	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY	$	807,239		$	987,380

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

CONOLOG CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)


	For the Three Months Ended January, 31						For the Six Months Ended January, 31
	2012			2011			2012			2011

OPERATING REVENUES
Product revenue	$	195,792		$	150,831		$	254,229		$	677,742


Cost of product revenue
Cost of goods sold		84,065			138,934			112,485			408,738


Total Cost of product revenue		84,065			138,934			112,485			408,738


Gross Profit		111,727			11,897			141,744			269,004


OPERATING EXPENSES
General and adminitsrative		582,594			844,769			1,118,315			1,552,351
Research and development		31,945			14,016			46,240			62,273
Selling expenses		88,132			17,274			183,166			34,058

Total operating expenses		702,671			876,059			1,347,721			1,648,682

Loss from Operations		(590,944	)		(864,162	)		(1,205,977	)		(1,379,678	)


OTHER INCOME (EXPENSES)
Interest expense		(5,122	)		(68,790	)		(11,147	)		(125,269	)
Interest income		28			251			75			251
Other expense		(11,461	)		—			(11,461	)		—
Other income		191			—			191			—
Induced conversion cost		—			(649,147	)		—			(649,147	)
Amortization of financing fees		—			(302,089	)		—			(382,132	)
Amortization of debt discount		—			(552,741	)		—			(720,687	)


Total Other Income (Expense)		(16,364	)		(1,572,516	)		(22,342	)		(1,876,984	)

Loss before provision for income taxes		(607,308	)		(2,436,678	)		(1,228,319	)		(3,256,662	)
Income tax benefit (expense)		234,445			(442	)		237,084			(12,043	)

NET LOSS APPLICABLE TO COMMON SHARES	$	(372,863	)	$	(2,437,120	)	$	(991,235	)	$	(3,268,705	)

NET LOSS PER BASIC COMMON SHARE	$	(0.02	)	$	(0.28	)	$	(0.06	)	$	(0.42	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		18,966,191			8,663,907			16,405,632			7,815,894

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

CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended January 31,
(Unaudited)


	2012			2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(991,234	)	$	(3,268,705	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation		8,280			10,500
Amortization of common stock issued for services					80,000
Amortization of deferred financing fees					382,132
Amortization of discount of convertible debentures					720,687
Induced conversion cost associated with convertible debt					649,147
Employee stock expense		99,000

Changes in assets and liabilities
(Increase) decrease in accounts receivable		365,371			(111,924	)
(Increase) decrease in prepaid expenses		(47,262	)		149,298
(Increase) decrease in inventories		(133,133	)		22,525
(Increase) decrease in other current assets		259			683
Increase (decrease) in accounts payable		(100,563	)		265,830
Increase (decrease) in accrued expenses		335,099			292,306

NET CASH USED IN OPERATIONS		(464,183	)		(807,521	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		—			(5,899	)

NET CASH USED IN INVESTING ACTIVITIES		—			(5,899	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		658,907			100,000
Proceeds from officer loans					15,000
Payments of loans from officers		(181,350	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		477,557			115,000


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		13,374			(698,420	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		7,907			713,005

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	21,281		$	14,585

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

CONOLOG CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Deficiency
For the six months ended January 31, 2012
(Unaudited)


	Series A				Series B
																		Treasury Stock					Total
	Preferred Stock				Preferred Stock				Common Stock				Contributed		Accumulated								Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			Shares		Amount			Deficiency


Balance at July 31, 2011 (Audited)		155,000	$	77,500		1,197	$	597		12,455,380	$	124,554	$	79,971,148	$	(80,720,673	)		2	$	(131,734	)	$	(678,608	)


Common shares issued for cash in private placement										6,589,072		65,891		593,016										658,907

Common shares issued to employees and directors										1,100,000		11,000		88,000										99,000

Net loss for the period																(991,234	)							(991,234	)


Balance at January 31, 2012 (Unaudited)		155,000	$	77,500		1,197	$	597		20,144,452	$	201,445	$	80,652,164	$	(81,711,907	)		2	$	(131,734	)	$	(911,935	)

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

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 Company’s products are used for transceiving various quantities, data and protective relaying functions in industrial, utility and other markets. The Company’s customers include primarily industrial customers, which include power companies located primarily throughout the United States, and various branches of the military.

The Company formed a wholly owned subsidiary, Nologoc Corporation. In September 1998, Nologoc Corporation purchased the assets of Atlas Design, Incorporated. In January, 2001, Nologoc Corporation purchased the assets of Prime Time Staffing, Incorporated and Professional Temp Solutions Incorporated. Atlas Design, Prime Time Staffing and Professional Temp Solutions 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 Company’s wholly-owned subsidiary, Nologoc, Inc. trading as Atlas Design, were sold to the Company’s 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 $1,205,977 and $2,502,084 for the six months ended January 31, 2012 and the year ended July 31, 2011, respectively, and used cash from operations in the amounts of $464,183 for the six months ended January 31, 2012 and $1,055,549 for the year ended July 31, 2011, respectively. At January 31, 2012, the Company had negative working capital of $991,013 and a stockholders’ deficiency of $911,935. These factors raise substantial doubt as to the Company’s 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.

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 January 31, 2012, 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 January 31, 2012 and July 31, 2011, were $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 95%, 3% and 2% of accounts receivable as of January 31, 2012. 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 management’s estimates.

Finished goods are products that have been completed in connection with specific orders and are awaiting shipment. Work-in-Process represents raw material components that have been requisitioned from the warehouse and are being assembled in the manufacturing area. Raw Materials consist of components parts purchased from various suppliers and are used to build our finished products. Various raw material parts are also maintained to support warranty claims for commercial and military products. Typical raw material products include PC boards, digital screen assemblies, guide rails, capacitors, terminals, power supplies, process chips, resistors, keypads, relays and face plates.

The Company provides a twelve-year warranty on all commercial products and is required by government regulation to design and produce military products with a minimum 25-year operating life in addition to shelf life.

The Company maintains a significant amount of raw material component parts and some of this raw material inventory is not expected to be realized within a twelve month operating cycle from the balance sheet date. For any raw material part which has not been purchased within the last twelve months from the balance sheet date, it is evaluated as part of the slow moving inventory and is part of our 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.

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 January 31, 2012 and July 31, 2011:


	January 31, 2012		July 31, 2011

Finished Goods	$	257,060	$	162,507
Work-in-process		96,670		87,664
Raw materials		217,892		188,318

		571,622		438,489
Less: Inventory reserve		49,000		49,000

Inventory, net	$	522,622	$	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 January 31, 2012 and July 31, 2011, inventory reserves amounted to $49,000 and $49,000, respectively. For the six month period ended January 31. 2012, 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 (3) and thirty-nine (39) years. Depreciation was $8,280 and $10,500 for the six months period ended January 31, 2012 and 2011, 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 Company’s 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.

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 January 31, 2012 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 six months ended January 31, 2012 and 2011, 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 $88,796 and $23,850 for the six months ended January 31, 2012 and 2011, 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 SEC’s Staff Accounting Bulletin (SAB) No. 104, which supersedes SAB No. 101. Revenue from product sales are recognized at the time of shipment (when title and risks and rewards of ownership have passed) upon fulfillment of acceptance terms; products are not sold on a conditional basis. Therefore, when delivery has occurred the sale is complete as long as the collection of the resulting receivable is probable.

Research and Development

Research and Development costs are expensed as incurred. Research and Development costs were $46,240 and $62,273 for the six months period ended January 31, 2012 and 2011, respectively.

Shipping and Handling Costs

Shipping and handling costs are expensed as incurred and amounted to $3,661 and $8,928 for the six months period ended January 31, 2012 and 2011, respectively.

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 Company’s evaluation, management has concluded that there are significant uncertain tax positions requiring recognition in the consolidated financial statements with respect to the sale of the Company’s New Jersey Net Operating Loss Carryovers. In the event the Company receives an assessment for interest and/or penalties by major tax jurisdiction it would be classified in the financial statements as general and administrative expense.

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 the six months period ended January 31, 2012, the Company entered into agreements to sell its unused NOLs. Recognition of this asset and income have been in accordance with the guidance of SAB Topic 13 and are recorded upon the State of New Jersey’s approval of the technology tax benefit transfer certificate and receipt of a contract to purchase a fixed amount of these NOLs.

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 Company’s facility in Somerville, New Jersey. The Company’s service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Company’s main facility and customers are charged a fee for those service items that are not covered by the warranty. We do not offer our customers any formal written service contracts. Our warranty costs have historically been insignificant and therefore a provision was not warranted. Management continues to monitor the costs and will provide a warranty provision if circumstances change.

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. On December 6, 2011, the company granted 1,100,000 shares of Common Stock (par value $0.01) to employees, officers, and directors. These shares were priced at $.09 per share for an expense of $99,000.

CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loss Per Share of Common Stock

Basic loss per share of common stock is computed by dividing the Company’s net loss by the weighted average number of shares of Common Stock outstanding during the 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. Potentially dilutive securities at January 31, 2012, consist of 982,837 common shares from outstanding warrants and 155,006 common shares from preferred stock. Potentially dilutive securities at January 31, 2011, consisted of 1,582,837 common shares from outstanding warrants 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 management’s estimates and assumptions are inaccurate, the Company’s reported amounts and disclosures of contingent assets and liabilities could be materially and adversely affected. Management considers its reserve for inventory and accounting for derivative liabilities to be significant estimates.

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 Company’s financial position or results of operations.

In December 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on the Company’s results of operations or financial condition.

Management does not believe that any other recently issued, but not currently effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.

CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3 - INCOME TAXES

The tax provision for the six months ended January 31, 2012, was a tax benefit of $237,084 and for the six months ended January 31, 2011, was a tax expense of $12,043. The Company has no open tax years for the State of New Jersey or federal income tax purposes, which are subject to examination.

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 six month period ended January 31, 2012, the Company entered into agreements to sell up to $254,687 of its unused tax losses. The Company received net proceeds of $227,945, during the six month period ended January 31, 2012, related to the sale and accordingly recorded them as a tax benefit in the period received. During the six month period ended January 31, 2011, the Company did not enter into such agreements and did not receive such tax benefits.

NOTE 4 – STOCKHOLDERS’ DEFICIENCY

The Series A Preferred Stock provides 4% cumulative dividends, which were $131,633 ($0.85 per share) and $130,083 ($0.84 per shares) in arrears at January 31, 2012 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 $209,133 and $207,583 at January 31, 2012 and July 31, 2011, respectively.

The Series B Preferred Stock provides cumulative dividends of $0.90 per share, which were $43,711 ($36.52 per share) and $43,173 ($36.06 per share) in arrears at January 31, 2012 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 $61,669 and $61,128 at January 31, 2012 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.

On December 6, 2011, the company granted 1,100,000 shares of Common Stock (par value $0.01) to employees, officers, and directors. These shares were priced at $.09 per share for an expense of $99,000.

Between December 14 and 22, 2011, the Company issued and sold an aggregate of 1,365,000 of its common stock for $136,500, in a private placement offering.

Between January 3 and 13, 2012, the Company issued and sold an aggregate of 110,000 of its common stock for $11,000, in a private placement offering.

No stock warrants were issued, cancelled or exercised during the six month periods ended January 31, 2012 and 2011.

A summary of the Company’s warrants is as follows:


	Number of Warrants		Strike Price		Expiration date

Outstanding Warrants as of January 31, 2012:
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	$	1.12		2/26/15
Class C Warrants		608,322	$	1.12		2/26/15


Outstanding Balance as of January 31, 2012		982,837

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 January 31, 2012 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 Company’s Common Stock to the Company’s officers, directors, employees and consultants. The Company’s 2008 and 2009 Stock Incentive Plan was approved by its shareholders, authorizing the Board to, from time-to-time, issue up to 800,000 shares of the Company’s Common Stock to the Company’s officers, directors, employees and consultants under each plan.

The specific number of shares of the Company’s Common Stock granted to any officer, director, employee or consultant will be determined by the Board.

Pursuant to the Corporation’s 2009 Stock Incentive Plan, no common shares of Company stock were issued to current officers, directors, employees and consultants for the six months ended January 31, 2012 and for the year ended July 31, 2011.

Securities Issued for Services

During the six months ended January 31, 2012, 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:


Six Months Ended	Total Revenue		Sales to Major Customers		Number of Customers		Percentage of Total

January 31, 2012	$	256,748	$	225,562		5		87.9	%
January 31, 2011	$	677,742	$	607,725		3		89.7	%

CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 7 – COMMITMENTS

Total rental expense for all operating leases of the Company amounted to approximately $40,600 and $27,840 during the six months ended January 31, 2012 and 2011, respectively. The Company currently leases its facilities on a month-to-month basis.

EMPLOYMENT CONTRACTS

The Company’s Chief Executive Officer is serving under an employment agreement commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or the Chief Executive Officer. His annual base salary as of January 31, 2012, was $470,000 and increases by $20,000 annually on January 1^st of each year. In addition, the Chief Executive Officer is entitled to an annual bonus equal to 6% of the Company’s annual “income before income tax provision” as stated in its annual Form 10-K. The employment agreement also entitles Chief Executive Officer to the use of an automobile and to employee benefit plans, such as; life, health, pension, profit sharing and other plans. Under the employment agreement, employment terminates upon death or disability of the employee and the employee may be terminated by the Company for cause. During the six months ended January 31, 2012, and 2011, the Company’s CEO did not receive any payment of his salary and forgave $0 and $107,500 of his salary, respectively. The Company has accrued and expensed $225,000 for the unpaid portion of his salary for the six months ended January 31, 2012.

The Company’s President and Chief Operating Officer is serving under an employment agreement commencing June 1, 1997 and ending May 31, 2002, which pursuant to its terms, renews for one-year terms until cancelled by either the Company or employee. His annual base salary as of January 31, 2012 was $264,500 and he receives annual increases of $6,000 on January 1^st of each year. The Company’s President and Chief Operating Officer is entitled to an annual bonus equal to 3% of the Company’s annual “income before income tax provision” as stated in its annual Form 10-K. The employment agreement also entitles him to the use of an automobile and to employee benefit plans, such as life, health, pension, profit sharing and other plans. Under the employment agreement, employment is terminated upon death or disability of the employee and employee may be terminated by the Company for cause. During the six months ended January 31, 2012 and 2011, the Company’s President and Chief Operating Officer was paid $83,467 and $61,873 of his salary, respectively. During the six months ended January 31, 2011, the Company’s president forgave $19,676 of his salary. The Company has accrued and expensed $43,783 for the unpaid portion of his salary for the six months ended January 31, 2012.

INSTALLMENT AGREEMENT:

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.

As of January 31, 2012, the remaining balance on this indebtedness was $92,704, which is included as part of accrued expenses on the Balance Sheet.

CONOLOG CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 8 – LOANS FROM OFFICERS

On July 28, 2011, Conolog Corporation issued 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 Notes are payable on demand and do not bear interest. The Notes are 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 January 31, 2012, is $75,000.

NOTE 9 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION


	Six Months Ended January 31, 2012		Six Months Ended January 31, 2011

CASH PAID DURING THE PERIOD FOR:
Interest expense	$	—	$	25

Income Taxes	$	—	$	—

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 the 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 did not make any matching contributions to the plan for either the six months ended January 31, 2012 or the fiscal year ended July 31, 2011.

NOTE 11 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date the financial statements were issued and up to the time of filing of the financial statements with the Securities and Exchange Commission.

On February 3, 2012, the Company issued and sold an aggregate of 100,000 of its common stock for $10,000, in a private placement offering.

Item 2. Management’s 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 Company’s management as well as estimates and assumptions made by Company’s 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 Company’s 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 Company’s 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 Company’s industry, the Company’s 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 management’s judgment in its application. There are also areas in which management’s 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.

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 January 31, 2012 compared to the three months ended January 31, 2011).

Operating Revenues:

Sales for the first quarter ended January 31, 2012 were higher compared to the prior year three month period, the sales revenue increased $45,042 or 30% to $195,792, compared to total revenues of $150,831. The increase is a result of the timing of orders and contract delivery dates. In 2011, the Company completed a significant contract order for the delivery of the PDR-2000. Military sales increased $2,280 due to sales of legacy equipment.

Sales changes by product line for the quarters ended January 31, 2012 and 2011.


Products sold	2012			% to total			2011		% to total			$ change			% chg


PDR-2000 Digital Teleprotection	$	174,270			89	%	$	139,700		92	%	$	34,570			25	%
PTR-1500 Analog Teleprotection		0			0	%		0		0	%		0			0	%
Telemetry Equipment		19.323			10	%		9,800		7	%		9,523			97	%
Military Sales		2,280			1	%		0		0	%		2,280			100	%
Repairs & Spare Parts		335			0	%		1,331		1	%		-996			-75	%
Discounts		(416	)		0	%		0		0	%		(416	)		100	%

Net Sales Revenues	$	195,792			100	%	$	150,831		100	%	$	44,961			30	%

Cost of Revenue:

Total product cost of goods sold for the quarter ended January 31, 2012, amounted to $84,065 compared to $138,934 for the quarter ended January 31, 2011, a decrease of $54,869 or 39%. The decrease in cost of goods sold is a result of the product options chosen by customers.

Gross Profit:

The gross profit percentage of 57.1% for the quarter ended January 31, 2012, an increase from 7.9% for the quarter ended January 31, 2011, is attributed to the very aggressive pricing on the PDR-2000 to one customer, in 2010, that was necessary to secure a contract in a competitive bid. The contract expired in fiscal 2011.

Operating Expenses:

General and Administrative: For the quarter ended January 31, 2012, general and administrative expenses decreased $262,175 to $582,594 from $844,769. This decrease of 31% can mostly be attributed to (a) professional fees decreasing $246,707 over the prior year three months period due to legal fees and accounting fees associated with the restatement of prior filed financial statements, and (b) public relations and filing fees also associated with re-filing issues decreased $121,499 versus the prior year three month period. The decreases were offset by a $99,000 expense for stock awards to employees and directors.

Research and Development: For the quarter ended January 31, 2012, research and development cost was $31,945, an increase of $17,929 as compared to the prior year total of $14,016. Our research and development costs can be attributed to enhancing the FIDRA and GlowWorm products.

Selling Expenses: For the quarter ended January 31, 2012, selling expenses were $88,132, an increase of $70,858 versus the prior year total of $17,274 mainly due to a substantial increase of marketing expense related to the marketing campaigns for the company’s FIDRA and GlowWorm products.

Total Other Income and Expenses:

For the quarter ended January 31, 2012, other income/expense was expense of $16,364, a decrease of $1,556,152 as compared to the quarter ended January 31, 2011. This large decrease in other income/expense is primarily a result of recording of amortization and interest expense related to a subscription agreement entered into on August 3, 2009, which had a conversion feature embedded in the Company’s convertible debt and certain warrants.

Income Tax Benefit:

In 1998, the State of New Jersey enacted legislation allowing emerging technology and/or biotechnology companies to sell their unused New Jersey Net Operating Loss (“NOL”) Carryover and Research and Development Tax Credits (“R&D” Credits) to corporate taxpayers in New Jersey. During the three month period ended January 31, 2012, the Company entered into agreements to sell up to $254,687 of its unused tax losses. The Company received net proceeds of $227,945, during the three month period ended January 31, 2012, related to the sale and accordingly recorded them as a tax benefit in the period received. During the three month period ended January 31, 2011, the Company did not enter into such agreements and did not receive such tax benefits.

Net Loss:

The Company recorded a net loss of $372,863 for the quarter ended January 31, 2012, as compared to a net loss of $2,437,120 for the quarter ended January 31, 2011. The decrease in net loss of $2,064,257 can mainly be attributed to (a) noncash transactions related to the subscription agreement entered into in August 2009, which resulted in amortization costs related to derivative financial instruments of $1,503,977, and (b) professional fees decreasing $246,707 over the prior year three months period due to legal fees and accounting fees associated with the restatement of prior filed financial statements. For the quarter ended January 31, 2012, gross profit increased $99,830, general and administrative costs were $262,175 lower than the prior period, while research and development was up versus the prior period by $17,929, and selling expense was $70,858 higher. As a result of the foregoing, the Company reported a net loss applicable to common shares of ($0.02) basic and diluted loss per share compared to ($0.28) basic and diluted loss per share for the quarter ended January 31, 2011.

Results of Operations

Six months ended January 31, 2012 compared to the six months ended January 31, 2011).

Operating Revenues:

Sales for the six month period ended January 31, 2012 were significantly lower as compared to the prior year six month period. The sales revenue decreased $423,513 or 63% to $254,229, compared to total revenue of $677,742. The significant decrease is a result of the timing of orders and contract deliveries dates. In 2011, the Company was completing a significant contract order for the delivery of the PDR-2000. The timing and delivery of products will be different than prior year’s 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.

Sales changes by product line for the six month periods ended January 31, 2012 and 2011.


Products sold	2012			% to total			2011			% to total			$ change			% chg


PDR-2000 digital teleprotection	$	197,955			78	%	$	597,400			88	%	-$	399,445			-67	%
PTR-1500 analog teleprotection		—			0	%		—			0	%		—			0	%
Telemetry equipment		48,488			19	%		43,132			6	%		5,356			12	%
Military Sales		3,448			1	%		26,900			4	%		-23,452			-87	%
Repairs & Spare Parts		4,754			2	%		12,100			2	%		-7,346			-61	%
Discounts		(416	)		0	%		(1,790	)		0	%		1,374			77	%

Net Sales Revenues	$	254,229			100	%	$	677,742			100	%	($	423,513	)		-63	%

Cost of Revenue:

Total product cost of goods sold for the six months ended January 31, 2012, amounted to $112,485 compared to $408,738 for the six months ended January 31, 2011, a decrease of $296,253 or 72%. The decrease in cost of goods sold is a result the product options chosen by customers.

Gross Profit:

The gross profit percentage of 55.8% for the six month period ended January 31, 2012, an increase from 16.1% for the six month period ended January 31, 2011, is attributed to the very aggressive pricing on the PDR-2000 to one customer, in 2010, that was necessary to secure a contract in a competitive bid. The contract expired in fiscal 2011.

Operating Expenses:

General and Administrative: For the six month period ended January 31, 2012, general and administrative expenses decreased $434,036 to $1,118,315 from $1,552,351. This decrease of 28% can mostly be attributed to (a) professional fees decreasing $577,739 over the prior year six month period due to legal fees and accounting fees associated with the restatement of prior filed financial statements, and (b) public relations and filing fees also associated with re-filing issues decreased $132,757 versus the prior year three month period. These decreases were offset by an increase of $180,010 in payroll expense, due to officer compensation that was accrued this quarter rather than forgiven.

Research and Development: For the six month period ended January 31, 2012, research and development cost was $46,240, a decrease of $16,033 as compared to the prior year total of $62,273. This decrease can be attributed to the termination of the Company’s CM-100 project.

Selling Expenses: For the six month period ended January 31, 2012, selling expenses were $183,166, an increase of $149,108 versus the prior year total of $34,058 mainly due to a substantial increase of marketing expense related to the marketing campaigns for the company’s FIDRA and GlowWorm products.

Total Other Income and Expenses:

For the six month period ended January 31, 2012, other income/expense was expense of $22,342, a decrease of $1,854,642 as compared to the six month period ended January 31, 2011. This large decrease in other income/expense is primarily a result of recording of amortization and interest expense related to a subscription agreement entered into on August 3, 2009, which had a conversion feature embedded in the Company’s convertible debt and certain warrants.

Income Tax Benefit:

In 1998, the State of New Jersey enacted legislation allowing emerging technology and/or biotechnology companies to sell their unused New Jersey Net Operating Loss (“NOL”) Carryover and Research and Development Tax Credits (“R&D” Credits) to corporate taxpayers in New Jersey. During the six month period ended January 31, 2012, the Company entered into agreements to sell up to $254,687 of its unused tax losses. The Company received net proceeds of $227,945, during the six month period ended January 31, 2012, related to the sale and accordingly recorded them as a tax benefit in the period received. During the six month period ended January 31, 2011, the Company did not enter into such agreements and did not receive such tax benefits.

Net Loss:

The Company recorded a net loss of $991,234 for the six month period ended January 31, 2012, as compared to a net loss of $3,268,705 for the six month period ended January 31, 2011. The decrease in net loss of $2,277,470 can mainly be attributed to (a) noncash transactions related to the subscription agreement entered into in August 2009, which resulted in amortization costs related to derivative financial instruments of $1,751,966, and (b) professional fees decreasing $577,739 over the prior year six month period due to legal fees and accounting fees associated with the restatement of prior filed financial statements. For the six month period ended January 31, 2012, gross profit decreased $127,260, general and administrative costs were $434,036 lower than the prior period, while research and development was down versus the prior period by $16,033, and selling expense was $149,108 higher. As a result of the foregoing, the Company reported a net loss applicable to common shares of ($0.06) basic and diluted loss per share compared to ($0.42) basic and diluted loss per share for the six month period ended January 31, 2011.

LIQUIDITY AND CAPITAL RESOURCES

We have had recurring losses from operations of $991,234 for the six month period ended January 31, 2012, and used cash from operations in the amount of $464,183 and $807,521 for the six month periods ended January 31, 2012 and 2011, respectively. At January 31, 2012, the Company had cash and cash equivalents of $21,281.

At January 31, 2012, the Company had total current assets of $728,161 and total current liabilities of $1,719,174, resulting in a working capital deficit of $991,013 compared to a working capital deficit of $765,966 at the fiscal year ended July 31, 2011. The Company’s current assets consists of $21,281 in cash and cash equivalents, $111,064 in accounts receivable, $522,622 in inventory and $73,194 in prepaid expenses and other current assets. Accounts receivable decreased from $476,435 at July 31, 2011 to $111,064 at January 31, 2012, resulting from the timing of collections and lower sales during the six month period ended January 31, 2012.

During the six month period ended January 31, 2012, the Company entered into subscription agreements with 27 accredited investors for the issuance and sale of an aggregate of 6,589,072 shares of the Company’s common stock, par value $.01 per share for an aggregate purchase price of $0.10 per share and the Company received proceeds of $658,907. The Company used 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 $241,350, of which, repayments totaling $181,350 were made during the six month period ended January 31, 2012. We are dependent on improved operating results and raising additional funds over the next twelve month period. There are no assurances that we will be able to raise additional funding. In the event that we are unable to generate sufficient cash flow or receive proceeds from offerings of debt or equity securities, the Company may be forced to curtail or cease it activities and/or operations.

OPERATING ACTIVITIES

Net cash used in operating activities was $464,183 for the six month period ended January 31, 2012, as compared to $807,521 net cash used in operating activities for the six month period ended January 31, 2011, a decrease of $343,338. The use of cash of $464,183 for the six months ended January 31, 2012 can be attributed to: (a) accounts receivable balance decline due to the of collections open receivables, resulting in cash provided of $365,371 and (b) increases in inventory balances, accrued expenses, and prepaid expenses and decreases in accounts payable.

INVESTING ACTIVITIES

There was no use of cash used in investing activities for the six month period ended January 31, 2012. For the six month period ended January 31, 2011 net cash used investing activities was $5,899 for the purchase of equipment.

FINANCING ACTIVITIES

Net cash provided from financing activities was $477,557 for the six month period ended January 31, 2012, as compared to $115,000 provided in the same six month period in 2011. In the six month period ended January 31, 2012, the Company received proceeds of $658,907 from sale of common stock through a private placement. These funds were used for repayment of $181,350 against the loans made by Robert Benou during the fiscal year ended July 31, 2011.

INFLATION

Management believes that the results of operations have not been affected by inflation and management does not expect inflation to have a significant effect on its operations in the future.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external professional advice and other assumptions believed to be reasonable. The following critical accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect the Company’s consolidated financial statements.

USE OF ESTIMATES

assumptions made by management as based upon available current information, historical experience and other factors that are believed to be reasonable under the circumstances. The estimates and assumptions made by management involve risks and uncertainties which could cause reported amounts to differ materially from actual future results. If management’s estimates and assumptions are inaccurate, the Company’s reported amounts and disclosures of contingent assets and liabilities could be materially and adversely affected. Management considers its reserve for inventory and accounting for derivative liabilities to be significant estimates.

REVENUE RECOGNITION

Revenue is recorded in accordance with the guidance of the SEC’s Staff Accounting Bulletin (SAB) No. 104, which supersedes SAB No. 101. Revenue from product sales 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

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 Company’s facility in Somerville, New Jersey. The Company’s service personnel will replace or repair the defective items and ship them back to the customer. All servicing is completed at the Company’s main facility and customers are charged a fee for those service items that are not covered by the warranty. We do not offer our customers any formal written service contracts. Our warranty costs have historically been insignificant and therefore a provision was not warranted. Management continues to monitor the costs and will provide a warranty provision if circumstances change.

INCOME TAXES

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. On December 6, 2011, the company granted 1,100,000 shares of Common Stock (par value $0.01) to employees, officers and directors. These shares were priced at $.09 per share for an expense of $99,000.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and short term convertible Debentures approximates fair value because of the short maturity of these instruments. The recorded value of long-term debt approximates its fair value as the terms and rates approximate market rates.

FAIR VALUE MEASUREMENTS


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 December 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on the Company’s results of operations or financial condition.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We do not hold any derivative instruments and do not engage in any hedging activities.

Item 4.Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

Our Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the

end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Principal Executive Officer 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.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A. Risk Factors.

Not applicable because we are a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On December 6, 2011, the Company issued 1,100,000 shares of the Company’s restricted common stock to members of the Board of Directors, employees and consultants of the Company.

Item 3. Defaults upon Senior Securities.

There were no defaults upon senior securities during the quarter ended January 31, 2012.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.


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)).*


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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CONOLOG CORPORATION

Date: March 21, 2012	By:	/s/ Robert Benou

		Name: Robert Benou
		Title: Chief Executive Officer (Principal Executive Officer) Chief Financial Officer (Principal Financial Officer)

Attached files

CONOLOG CORP Reports

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