Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

#### **Washington, D.C. 20549**

#### ** **

##### **FORM 10-Q**

##### ** **

**(Mark One)**

 

**x****     ****Quarterly ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

** **

**For theQuarter Ended September 30, 2009**

** **

**or**

 

**o****        ****TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

** **

**For thetransition period from                     to**

 

**Commission File Number 000-09273**

** **

**MOCON, INC.**

(Exactname of registrant as specified in its charter)

 

| **Minnesota**                   | ** ** | **41-0903312**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. employer    |
| incorporation or organization)  |       | identification no.) |

 

**7500 Boone Avenue North, Minneapolis, Minnesota 55428**

(Address ofprincipal executive offices) (Zip code)

 

**(763) 493-6370**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    YES xNOo

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).    YES o NO o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  

 

| Large accelerated filer o                                              |   | Accelerated filer o         |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o  (do not check if a smaller reporting company) |   | Smaller reporting company x |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).    YES o NO x

 

5,169,743 Common Shares were outstanding as of October 31, 2009.

 

 

 

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Table of Contents

 

MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended September 30,2009

 
| ** **                                                                                                                                                                                                                                                                                                                                   | **Page  Number**                                                                                                   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|
| PART I. FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                           |                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |
| Item 1.                                                                                                                                                                                                                                                                                                                                      | Financial  Statements                                                                                              |   |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
|                                                                                                                                                                                                                                                                                                                                         | Consolidated Balance Sheets (Unaudited)  September 30, 2009 and December 31, 2008                        | 1 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
|                                                                                                                                                                                                                                                                                                                                         | Consolidated Statements of Income (Unaudited)  Three months and nine months ended September 30, 2009 and 2008 | 2 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
|                                                                                                                                                                                                                                                                                                                                         | Consolidated Statements of Cash Flows (Unaudited)  Nine months ended September 30, 2009 and 2008              | 3 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
|                                                                                                                                                                                                                                                                                                                                         | Notes to Consolidated Financial Statements (Unaudited)                                                             | 4-9 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
| Item 2.                                                                                                                                                                                                                                                                                                                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 9-19 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
| Item 3.                                                                                                                                                                                                                                                                                                                                      | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 19-20 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
| Item 4T.                                                                                                                                                                                                                                                                                                                                     | Controls and Procedures                                                                                            | 20 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
| PART II.  OTHER INFORMATION                                                                                                                                                                                                                                                                                                             |                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
| Item 1A.                                                                                                                                                                                                                                                                                                                                     | Risk Factors                                                                                                       | 20 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
| Item 2.                                                                                                                                                                                                                                                                                                                                      | Unregistered  Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity  Securities               | 21 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |   |
| Item 6.                                                                                                                                                                                                                                                                                                                                      | Exhibits                                                                                                           | 22 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |
| Signatures                                                                                                                                                                                                                                                                                                                                   | 23                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |
| Exhibit Index                                                                                                                                                                                                                                                                                                                           | 24                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                         |                                                                                                               |
| *In this report, references to  “MOCON,” “the Company,” “we,” “our,” or “us,” unless the context otherwise  requires, refer to MOCON, Inc. and its subsidiaries.*

* *

*All trademarks or trade names  referred to in this report are the property of their respective owners.* |

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.  FinancialStatements

 

MOCON,INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
| ** **                                                                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                                                                                                                                            |       |                   |       |                  |       |
| ASSETS                                                                                                                                          |       |                   |       |                  |       |
| Current assets:                                                                                                                                 |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                       |       | $                      | 5,662,117  |                  | $          | 4,553,479 |   |
| Marketable securities,  current                                                                                                                 |       | 6,076,587              |       | 7,087,373             |       |
| Trade accounts  receivable, less allowance for doubtful accounts of $135,158 in 2009 and  $137,182 in 2008                                      |       | 4,158,868              |       | 4,514,359             |       |
| Other receivables                                                                                                                               |       | 136,639                |       | 255,923               |       |
| Inventories                                                                                                                                     |       | 4,419,694              |       | 4,731,859             |       |
| Prepaid income taxes                                                                                                                            |       | 589,799                |       | 465,641               |       |
| Prepaid expenses                                                                                                                                |       | 410,930                |       | 385,264               |       |
| Deferred income taxes                                                                                                                           |       | 362,773                |       | 362,773               |       |
| Total current assets                                                                                                                            |       | 21,817,407             |       | 22,356,671            |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Marketable securities,  noncurrent                                                                                                              |       | 1,418,120              |       | 4,468,064             |       |
| Property, plant and  equipment, net of accumulateddepreciation of $4,500,795 in 2009 and  $4,274,454 in 2008                                    |       | 1,728,425              |       | 1,826,269             |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Other assets:                                                                                                                                   |       |                   |       |                  |       |
| Goodwill                                                                                                                                        |       | 3,335,384              |       | 3,267,926             |       |
| Technology rights and  other intangibles, net                                                                                                   |       | 704,752                |       | 659,298               |       |
| Deferred income taxes                                                                                                                           |       | 298,094                |       | 298,094               |       |
| Other                                                                                                                                           |       | 79,546                 |       | 76,905                |       |
| Total other assets                                                                                                                              |       | 4,417,776              |       | 4,302,223             |       |
|                                                                                                                                            |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                                                                    |       | $                      | 29,381,728 |                  | $          | 32,953,227 |   |
|                                                                                                                                            |       |                   |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                      |       |                   |       |                  |       |
| Current liabilities:                                                                                                                            |       |                   |       |                  |       |
| Accounts payable                                                                                                                                |       | $                      | 1,278,619  |                  | $          | 1,676,448 |   |
| Accrued compensation and  vacation                                                                                                              |       | 1,130,945              |       | 1,498,428             |       |
| Other accrued expenses                                                                                                                          |       | 283,607                |       | 310,828               |       |
| Accrued product  warranties                                                                                                                     |       | 211,108                |       | 229,087               |       |
| Dividends payable                                                                                                                               |       | 465,277                |       | 503,308               |       |
| Deferred revenue                                                                                                                                |       | 349,378                |       | 245,793               |       |
| Total current liabilities                                                                                                                       |       | 3,718,934              |       | 4,463,892             |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Noncurrent liabilities:                                                                                                                         |       |                   |       |                  |       |
| Obligations to former  employees                                                                                                                |       | 57,472                 |       | 55,522                |       |
| Accrued income taxes                                                                                                                            |       | 194,873                |       | 215,820               |       |
| Total noncurrent  liabilities                                                                                                                   |       | 252,345                |       | 271,342               |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Total liabilities                                                                                                                               |       | 3,971,279              |       | 4,735,234             |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                      |       |                   |       |                  |       |
| Capital stock –  undesignated. Authorized 3,000,000 shares                                                                                 |       | —                 |       | —                |       |
| Common stock – $0.10 par  value. Authorized 22,000,000shares; issued and outstanding 5,169,743  shares in 2009and 5,592,314 shares in 2008 |       | 516,974                |       | 559,231               |       |
| Additional paid-in  capital                                                                                                                     |       | 57,319                 |       | 2,868,669             |       |
| Retained earnings                                                                                                                               |       | 24,033,283             |       | 24,268,266            |       |
| Accumulated other  comprehensive income                                                                                                         |       | 802,873                |       | 521,827               |       |
| Total stockholders’  equity                                                                                                                |       | 25,410,449             |       | 28,217,993            |       |
|                                                                                                                                            |       |                   |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                |       | $                      | 29,381,728 |                  | $          | 32,953,227 |   |

 

See accompanying notes toconsolidated financial statements.

 

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MOCON, INC. ANDSUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFINCOME

(Unaudited)

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales:                                        |       |                   |       |                   |       |   |   |   |   |
| Products                                      |       | $                      | 6,116,215  |                   | $          | 6,985,047 |   | $ | 17,873,446 |   | $ | 21,010,620 |   |
| Consulting services                           |       | 484,344                |       | 444,191                |       | 1,320,208 |   | 1,259,774 |   |
| Total sales                                   |       | 6,600,559              |       | 7,429,238              |       | 19,193,654 |   | 22,270,394 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Cost of sales:                                |       |                   |       |                   |       |   |   |   |   |
| Products                                      |       | 2,385,444              |       | 2,602,113              |       | 7,273,843 |   | 8,256,538 |   |
| Consulting services                           |       | 297,020                |       | 264,426                |       | 783,765 |   | 742,886 |   |
| Total cost of sales                           |       | 2,682,464              |       | 2,866,539              |       | 8,057,608 |   | 8,999,424 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Gross profit                                  |       | 3,918,095              |       | 4,562,699              |       | 11,136,046 |   | 13,270,970 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Selling, general and  administrative expenses |       | 2,267,755              |       | 2,586,565              |       | 7,340,218 |   | 7,610,490 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Research and development  expenses            |       | 470,330                |       | 433,630                |       | 1,439,961 |   | 1,460,594 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Operating income                              |       | 1,180,010              |       | 1,542,504              |       | 2,355,867 |   | 4,199,886 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Other income                                  |       | 91,729                 |       | 134,051                |       | 320,308 |   | 422,665 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Income before income  taxes                   |       | 1,271,739              |       | 1,676,555              |       | 2,676,175 |   | 4,622,551 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Income taxes                                  |       | 398,000                |       | 595,000                |       | 888,000 |   | 1,604,000 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Net income                                    |       | $                      | 873,739    |                   | $          | 1,081,555 |   | $ | 1,788,175 |   | $ | 3,018,551 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Net income per common  share:                 |       |                   |       |                   |       |   |   |   |   |
| Basic                                         |       | $                      | 0.17       |                   | $          | 0.19 |   | $ | 0.33 |   | $ | 0.54 |   |
| Diluted                                       |       | $                      | 0.16       |                   | $          | 0.19 |   | $ | 0.32 |   | $ | 0.53 |   |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Weighted average common  shares outstanding:  |       |                   |       |                   |       |   |   |   |   |
| Basic                                         |       | 5,250,543              |       | 5,579,932              |       | 5,467,507 |   | 5,555,078 |   |
| Diluted                                       |       | 5,312,984              |       | 5,700,069              |       | 5,533,108 |   | 5,672,630 |   |

 

See accompanying notes toconsolidated financial statements.

 

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MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Cash flows from operating  activities:                                             |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 1,788,175  |   | $ | 3,018,551 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                   |       |   |   |
| Stock-based compensation  expense                                                  |       | 173,050                |       | 227,929 |   |
| Loss on disposition of  long-term assets                                           |       | 8,053                  |       | 31,776 |   |
| Depreciation and  amortization                                                     |       | 440,284                |       | 433,482 |   |
| Deferred income taxes                                                              |       | —                 |       | (56,708 | ) |
| Excess tax benefit from  employee stock plans                                      |       | (25                    | )          | (24,570 | ) |
| Changes in operating  assets and liabilities:                                      |       |                   |       |   |   |
| Trade accounts receivable                                                          |       | 78,020                 |       | (191,663 | ) |
| Other receivables                                                                  |       | 118,892                |       | (33,377 | ) |
| Inventories                                                                        |       | 344,180                |       | (629,838 | ) |
| Prepaid income taxes                                                               |       | (98,825                | )          | — |   |
| Prepaid expenses                                                                   |       | (25,050                | )          | (505,210 | ) |
| Accounts payable                                                                   |       | (118,054               | )          | 503,968 |   |
| Accrued compensation and  vacation                                                 |       | (375,317               | )          | (69,365 | ) |
| Other accrued expenses                                                             |       | (25,331                | )          | (33,901 | ) |
| Accrued product  warranties                                                        |       | (20,008                | )          | 25,216 |   |
| Accrued income taxes                                                               |       | (25,560                | )          | (55,846 | ) |
| Deferred revenue                                                                   |       | 103,585                |       | (68,545 | ) |
| Net cash provided by  operating activities                                         |       | 2,366,069              |       | 2,571,899 |   |
|                                                                               |       |                   |       |   |   |
| Cash flows from investing  activities:                                             |       |                   |       |   |   |
| Purchases of marketable  securities                                                |       | (979,101               | )          | (7,658,216 | ) |
| Proceeds from maturities  of marketable securities                                 |       | 5,037,304              |       | 5,450,686 |   |
| Purchases of property,  plant and equipment                                        |       | (258,816               | )          | (348,626 | ) |
| Proceeds from sale of  property and equipment                                      |       | 3,066                  |       | 7,817 |   |
| Purchases of patents and  trademarks                                               |       | (106,785               | )          | (112,775 | ) |
| Other                                                                              |       | (2,641                 | )          | (2,582 | ) |
| Net cash provided by  (used in) investing activities                               |       | 3,693,027              |       | (2,663,696 | ) |
|                                                                               |       |                   |       |   |   |
| Cash flows from financing  activities:                                             |       |                   |       |   |   |
| Proceeds from the  exercise of stock options                                       |       | 7,685                  |       | 491,062 |   |
| Purchases and retirement  of common stock                                          |       | (3,602,083             | )          | (1,968 | ) |
| Excess tax benefit from  employee stock plans                                      |       | 25                     |       | 24,570 |   |
| Dividends paid                                                                     |       | (1,493,473             | )          | (1,359,833 | ) |
| Net cash used in  financing activities                                             |       | (5,087,846             | )          | (846,169 | ) |
|                                                                               |       |                   |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                      |       | 137,388                |       | (75,108 | ) |
|                                                                               |       |                   |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                              |       | 1,108,638              |       | (1,013,074 | ) |
|                                                                               |       |                   |       |   |   |
| Cash and cash  equivalents:                                                        |       |                   |       |   |   |
| Beginning of period                                                                |       | 4,553,479              |       | 5,207,105 |   |
| End of period                                                                      |       | $                      | 5,662,117  |   | $ | 4,194,031 |   |
|                                                                               |       |                   |       |   |   |
| Supplemental disclosures  of cash flow information:                                |       |                   |       |   |   |
| Cash paid during the  period for income taxes                                      |       | $                      | 971,979    |   | $ | 1,752,228 |   |
|                                                                               |       |                   |       |   |   |
| Supplemental schedule of  noncash investing and financing activities:              |       |                   |       |   |   |
| Amortization of  cumulative unrealized gain on marketable securities               |       | $                      | (2,527     | ) | $ | (18,937 | ) |
| Dividends accrued                                                                  |       | $                      | 465,277    |   | $ | 475,873 |   |

 

See accompanying notes toconsolidated financial statements.

 

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MOCON, INC. AND SUBSIDIARIES

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Consolidated Financial Statements

 

Theconsolidated balance sheet as of September 30, 2009, and the consolidatedstatements of income and cash flows for the three- and nine-month periods endedSeptember 30, 2009 and 2008 have been prepared in accordance withaccounting principles generally accepted in the United States of America.  These interim unaudited consolidatedfinancial statements reflect all adjustments which are, in the opinion ofmanagement, necessary to fairly present the financial position, results ofoperations and cash flows at September 30, 2009, and for all periodspresented.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted.

 

Theresults of operations for the three- and nine-month periods ended September 30,2009 are not necessarily indicative of operating results for the fullyear.  It is suggested that theseconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and notes included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008, previously filed with theSecurities and Exchange Commission.

 

We operate in a single industry segment: the developing, manufacturing,and marketing of measurement, analytical, monitoring and consulting productsfor customers in the barrier packaging, food, pharmaceutical, consumerproducts, industrial hygiene, air quality monitoring, oil and gas explorationand other industries throughout the world.

 

*Principles of Consolidation*

 

Theconsolidated financial statements include the accounts of MOCON, Inc. andits subsidiaries after elimination of inter-company transactions and accounts.

 

*Foreign Currency Translation*

* *

Thefinancial statements for operations outside the United States are maintained intheir local currency.  All assets andliabilities of our foreign subsidiaries are translated to United States dollarsat period-end exchange rates, while revenue and expense accounts are translatedat the average exchange rates during the period transactions occurred.  Translation adjustments arising from the useof differing exchange rates are included in accumulated other comprehensiveincome or loss in stockholders’ equity. Gains and losses on foreign currency transactions are included in otherincome or loss.

 

*Use of Estimates*

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period.  Management adjusts such estimates andassumptions when facts and circumstances change.  Illiquid credit markets, volatile equity,foreign currency and energy markets, and declines in business and consumerspending have combined to increase the uncertainty inherent in such estimatesand assumptions.  Actual results coulddiffer from those estimates.

 

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*Subsequent Events*

* *

Wehave evaluated subsequent events through November 13, 2009, the date theseconsolidated financial statements were issued.

 

*Fair Value of Financial Instruments*

 

Thecarrying value of cash equivalents, accounts receivable, accounts payable andshort-term debt approximates fair value due to the short maturity of thoseinstruments.

 

*Recently Issued AccountingPronouncements*

* *

InJune 2009, the Financial Accounting Standards Board (FASB) issued Update No. 2009-01,which establishes The FASB Accounting Standards Codification (ASC) as thesource of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in the preparation of financial statementsin conformity with generally accepted accounting principles (GAAP).  The ASC is effective for interim and annualperiods ending after September 15, 2009. We have adopted the ASC when referring to GAAP in this report on Form 10-Qfor the quarter ended September 30, 2009. The adoption of the ASC did not have an impact on our consolidatedfinancial statements.

 

InSeptember 2006, the FASB issued guidance, now codified as ASC Topic 820, *Fair Value Measurements and Disclosures*, which defines fairvalue, establishes a framework for measuring fair value and expands disclosuresabout fair value measurements.  In February 2008,the FASB released additional guidance, also now codified under ASC Topic 820,which provided for delayed application of certain guidance related tonon-financial assets and non-financial liabilities not measured at fair valueon a recurring basis.  We adopted ASCTopic 820 in the first quarter 2008, except as it applies to thosenon-financial assets and non-financial liabilities, which was adopted in the firstquarter 2009.  Although we believe theadoption of this guidance may impact the way that we determine the fair valueof goodwill, indefinite-lived intangible assets, and other long-lived assets,we do not expect it to have a material impact on our results of operations orfinancial condition.

 

Note 2 — Inventories

 

Inventories consist of the following:

 

| ** **        | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------|------------|------------------------------|------------|-----------------------------|------------|
| Finished products |       | $                            | 904,486    |                        | $          | 829,861 |   |
| Work-in-process   |       | 1,436,464                    |       | 1,633,577                   |       |
| Raw materials     |       | 2,078,744                    |       | 2,268,421                   |       |
|              |       | $                            | 4,419,694  |                        | $          | 4,731,859 |   |

 

Note 3 — Net Income Per Common Share

 

Basic net income per common share is computed by dividing net income bythe weighted average number of shares of common stock outstanding during theperiod.  Diluted net income per commonshare is computed using the treasury stock method to compute the weightedaverage common stock outstanding assuming the conversion of potential dilutivecommon shares.

 

The following table presents a reconciliation of the denominators usedin the computation of net income per common share — basic, and net income percommon share — diluted, for the three- and nine-month periods ended September 30, 2009and 2008:

 

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| ** **                                                              | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted shares of common stock  outstanding – basic               |       | 5,250,543                                   |       | 5,579,932                                  |       | 5,467,507 |   | 5,555,078 |   |
| Weighted  shares of common stock assumed upon exercise of stock options |       | 62,441                                      |       | 120,137                                    |       | 65,601 |   | 117,552 |   |
| Weighted  shares of common stock outstanding – diluted             |       | 5,312,984                                   |       | 5,700,069                                  |       | 5,533,108 |   | 5,672,630 |   |

 

For the three- and nine-month periods ended September 30, 2009,there were 481,024 stock options outstanding that were excluded from the abovecomputation because they were anti-dilutive.

 

Note 4 — Goodwill and Intangible Assets

 

Asof September 30,2009 and December 31, 2008, goodwill amounted to $3,335,384 and$3,267,926, respectively.  The increasewas due to foreign currency translation relating to the acquisition of PaulLippke Handels-GmbH.  Other identifiableintangible assets (all of which are being amortized except projects in process)are as follows:

 
| ** **                  | ** ** | **As of  September 30, 2009** | ** ** |
|-----------------------------|------------|------------------------------------|------------|
| ** **                  | ** ** | **Cost**                           | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                     |       | $                                  | 958,207    |   | $ | (390,804 | ) | $ | 567,403 |   | 10 to 17 years |   |
| Trademarks and  trade names |       | 470,846                            |       | (393,497 | ) | 77,349 |   | 5 to 17 years |   |
| Other  intangibles          |       | 778,596                            |       | (718,596 | ) | 60,000 |   | 3 years |   |
|                        |       | $                                  | 2,207,649  |   | $ | (1,502,897 | ) | $ | 704,752 |   |   |   |

 
| ** **                 | ** ** | **As of December 31, 2008** | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **Cost**                    | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                    |       | $                           | 860,422    |   | $ | (365,329 | ) | $ | 495,093 |   | 10 to 17 years |   |
| Trademarks and trade names |       | 465,756                     |       | (381,551 | ) | 84,205 |   | 5 to 17 years |   |
| Other intangibles          |       | 778,596                     |       | (698,596 | ) | 80,000 |   | 3 years |   |
|                       |       | $                           | 2,104,774  |   | $ | (1,445,476 | ) | $ | 659,298 |   |   |   |

 

Totalamortization expense for the three-month periods ended September 30, 2009and 2008 was $21,588 and $29,293, respectively, and $63,285 and $85,755 for thenine-month periods ended September 30, 2009 and 2008.  Projects in process are not amortized untilthe patent or trademark is granted by the regulatory agency.  Estimated amortization expense for theremainder of 2009 and each of the four succeeding fiscal years and thereafterbased on the intangible assets as of September 30, 2009 is as follows:

 

| ** **          | ** ** | **Estimated  Expense** | ** ** |
|---------------------|------------|------------------------|------------|
| 2009                |       | $                      | 22,147     |   |
| 2010                |       | $                      | 79,867     |   |
| 2011                |       | $                      | 66,228     |   |
| 2012                |       | $                      | 33,803     |   |
| 2013                |       | $                      | 29,110     |   |
| 2014 and thereafter |       | $                      | 144,847    |   |

 

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### Note 5 — Marketable Securities

###  

As of January 1, 2008, the classification ofour marketable debt securities was changed from available-for-sale toheld-to-maturity.  This change was madedue to our current intent and ability to hold these securities until maturityor the call date as the case may be. Currently, all of our marketable securities mature within twoyears.  Held-to-maturity securities arerecorded at amortized cost, adjusted for the amortization or accretion ofpremiums or discounts.  A decline in themarket value of any held-to-maturity security below the amortized cost basisthat is deemed other than temporary is charged to income, resulting in theestablishment of a new cost basis for the security.  There was no impairment during the first ninemonths of 2009, therefore no adjustment to the amortized cost basis was made.  Under the prior method, these securities wererecorded at fair value and the unrealized holding gains and losses wereexcluded from income and reported as a separate component of stockholders’equity until realized.  For the debtsecurities that were outstanding at December 31, 2007, there was approximately$25,000 of unrealized gain that was recorded in stockholders’ equity, which wasamortized over the remaining life of the securities.  This unrealized gain was fully amortized asof March 31, 2009.

 

The amortized cost and fair value for held-to-maturitysecurities by major security type at September 30, 2009 were as follows:

 
| ** **              | ** ** | **September 30, 2009** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Amortized   Cost**        | ** ** | **Fair  Value** | ** ** |
| Certificates of deposit |       | $                           | 4,100,959  |   | $ | 4,101,000 |   |
| Municipal bonds         |       | 3,393,748                   |       | 3,422,629 |   |
|                    |       | $                           | 7,494,707  |   | $ | 7,523,629 |   |

 

Note 6 — Comprehensive Income

 

Othercomprehensive income pertains to foreign currency translation adjustments thatare not included in net income but rather are recorded directly in stockholders’equity.

 
| ** **                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                                          |       | $                                          | 873,739    |                                      | $          | 1,081,555 |   | $ | 1,788,175 |   | $ | 3,018,551 |   |
| Foreign currency translation adjustment                             |       | 293,571                                    |       | (450,679                                  | )          | 283,573 |   | (120,324 | ) |
| Amortization of cumulative unrealized gain on marketable securities |       | —                                     |       | (4,475                                    | )          | (2,527 | ) | (18,937 | ) |
| Comprehensive income                                                |       | $                                          | 1,167,310  |                                      | $          | 626,401 |   | $ | 2,069,221 |   | $ | 2,879,290 |   |

 

Note 7 — Note Payable - Bank

 

Duringthe second quarter 2009, we executed a $1,000,000 revolving line of creditagreement with a bank to supplement our working capital requirements.  The full amount of the line was borrowedduring the second quarter 2009 and repaid in the third quarter, together withinterest calculated at 2.25% above the daily three month LIBOR rate.  There were no restrictive covenants orcompensating balance requirements associated with this line of credit.  As of September 30, 2009, there were noamounts outstanding under this line of credit.

 

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Note 8 — Warranty

 

We provide a warranty for most of our products.  Warranties are for periods ranging fromninety days to one year, and cover parts and labor for non-maintenance repairs,at our location.  Operator abuse,improper use, alteration, damage resulting from accident, or failure to followmanufacturer’s directions are excluded from warranty coverage.

 

Warranty expense is accrued at the time of sale based on historicalclaims experience.  Warranty reserves arealso accrued for special rework campaigns for known major productmodifications.  We also offer extendedwarranty service contracts for select products when the factory warranty periodexpires.

 

Warranty provisions and claims for the nine-month periods ended September 30,2009 and 2008 were as follows:

 
| ** **           | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Beginning  balance   |       | $                                          | 229,087    |   | $ | 201,373 |   |
| Warranty  provisions |       | 187,349                                    |       | 284,346 |   |
| Warranty  claims     |       | (205,328                                   | )          | (259,830 | ) |
| Ending balance       |       | $                                          | 211,108    |   | $ | 225,889 |   |

 

Note 9 — Income Taxes

 

MOCON, Inc. or one of our subsidiaries files income tax returns inthe U.S. federal jurisdiction, several state jurisdictions, China andGermany.  With limited exceptions, we areno longer subject to income tax examinations by taxing authorities for taxableyears before 2006.

 

As of December 31, 2008, the liability for gross unrecognized taxbenefits was $168,000, which included potential benefits of $121,000 that, ifrecognized, would affect the effective tax rate.  During the nine months ended September 30,2009, there were no significant changes to the total gross unrecognized taxbenefits that would have a material effect on results of operations.  In the third quarter 2009, the provision forunrecognized tax benefits was reduced slightly to reflect the closing of thestatute of limitations on a certain tax year. It is expected that the amount of unrecognized tax benefits forpositions which we have identified will not change significantly in the nexttwelve months.

 

Note 10 — Stock-Based Compensation

 

As of September 30, 2009, we have reserved 234,675 shares of commonstock for options and other stock-based incentive awards that are stillavailable for grant under our 2006 stock incentive plan, and 844,012 shares foroptions that have been granted under either the 2006 stock incentive plan orthe 1998 stock option plan but have not yet been exercised.  We issue new shares of common stock uponexercise of stock options.  There were no options granted in the firstnine months of 2009.

 

Amountsrecognized in the consolidated financial statements related to stock-basedcompensation are as follows:

 
| ** **                                           | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total cost of  stock-based compensation              |       | $                                           | 57,319     |                                       | $          | 73,862 |   | $ | 173,050 |   | $ | 227,929 |   |
| Amount of  income tax benefit recognized in earnings |       | (2,657                                      | )          | (8,256                                     | )          | (8,306 | ) | (38,435 | ) |
| Amount charged  against net income                   |       | $                                           | 54,662     |                                       | $          | 65,606 |   | $ | 164,744 |   | $ | 189,494 |   |

 

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The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model (Black-Scholes).  We use historical data to estimate theexpected price volatility, expected option life and expected forfeiturerate.  We base our estimate of expectedvolatility for awards granted on daily historical trading data of our commonstock for a period equivalent to the expected term of the award.  The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant for the estimated lifeof the option.  We estimate the expectedterm consistent with historical exercise and cancellation activity of ourprevious share-based grants with a ten-year contractual term.  Forfeitures are based on historicalexperience.  The dividend yield iscalculated based upon the dividend payments made during the prior four quartersas a percent of the average stock price for that period.

 

A summary of the option activity for the first nine months of 2009 isas follows:

 
| ** **                              | ** ** | **Number of  Shares** | ** ** | **Weighted   Average  Exercise   Price per   Share** | ** ** | **Weighted  Average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------|------------|
| Outstanding at December 31, 2008   |       | 848,562               |       | $                                                    | 8.81       |                                                   | 4.9        |                              | $          | 567,879 |   |
| Options granted                         |       | —                |       | —                                               |       | —                                                 |       |                              |       |
| Options cancelled/expired               |       | (3,550                | )          | $                                                    | 10.31      |                                                   | —     |                              |       |   |
| Options exercised                       |       | (1,000                | )          | $                                                    | 7.69       |                                                   | —     |                              |       |   |
| Outstanding at September 30,  2009 |       | 844,012               |       | $                                                    | 8.81       |                                                   | 4.1        |                              | $          | 556,099 |   |
|                                    |       |                  |       |                                                 |       |                                                   |       |                              |       |
| Exercisable at September 30, 2009  |       | 708,043               |       | $                                                    | 8.60       |                                                   | 3.8        |                              | $          | 556,099 |   |

 

The total intrinsic value of options exercised was $0 and $154,901during the three-month periods ended September 30, 2009 and 2008,respectively, and $985 and $296,689 during the first nine months of 2009 and2008, respectively.

 

A summary of the status of our unvested option shares as of September 30,2009 is as follows:

 
| ** **                          | ** ** | **Number of   Shares** | ** ** | **Weighted  Average   Grant Date   Fair Value** | ** ** |
|-------------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|
| Unvested at December 31, 2008  |       | 163,469                |       | $                                               | 2.47       |   |
| Options granted                     |       | —                 |       | —                                          |       |
| Options cancelled                   |       | (2,375                 | )          | $                                               | 2.59       |   |
| Options vested                      |       | (25,125                | )          | $                                               | 2.40       |   |
| Unvested at September 30, 2009 |       | 135,969                |       | $                                               | 2.48       |   |

 

As of September 30, 2009, there was $225,030 of total unrecognizedcompensation cost related to unvested stock-based compensation granted underour plans.  That cost is expected to berecognized over a weighted-average period of 1.4 years.  The total fair value of option shares vestedduring the three-month periods ended September 30, 2009 and 2008 was$20,100 and $26,883, respectively, and $60,300 and $80,651 during thenine-month periods ended September 30, 2009 and 2008, respectively.

 

Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

ThisManagement’s Discussion and Analysis provides material historical andprospective disclosures intended to enable investors and other users to assessour financial condition and results of operations.  Statements that are not historical areforward-looking and involve risks and uncertainties discussed 

 

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belowunder the caption “Forward-Looking Statements.” The following discussion of the results of operations and financialcondition of MOCON should be read in conjunction with our consolidatedfinancial statements and the related notes thereto included elsewhere in thisreport.

 

### ***Overview***

### ** **

### *Description of Business*

###  

MOCON, Inc. designs, manufactures, markets andservices products, and provides consulting services, primarily in themeasurement and analytical instrument and services markets.  Our products include instruments that measuregases and chemical compounds in a variety of applications.  We continually seek growth opportunitiesthrough technological and product improvement, by acquiring and developing newproducts, and by acquiring companies we consider to be strategically important.

 

We have three primary operating locations in theUnited States — Minnesota, Colorado and Texas — and foreign facilities inGermany and China.  We use a combinationof a direct sales force and independent sales representatives to market ourproducts and services in the United States, Canada, Germany and China, and usea network of independent sales representatives to market and service ourproducts and services in other foreign countries.  In recent years, over half of our revenueshave come from international customers.

 

Our current plans for growth include continued strongfunding for research and development (approximately 6% to 8% of our revenue) tofoster new product development, together with strategic acquisitions whereappropriate.  Our products are used bycustomers in many different markets.  Asignificant focus of our product development and marketing efforts in 2009 hasbeen in the food and beverage markets.  Ourtarget customers in this market are primarily interested in three things:developing successful new consumer products, maintaining high quality in theirproducts and ensuring the shelf life and safety of their products.  Food safety has been in the news a great deallately, and our newest products help address the increased consumer emphasis onhealth and safety.

 

### *Market Strategy*

 

Our BevAlert® system tests the purity of carbon dioxide usedto carbonate soft drinks, beer and mineral waters around the world.  As manufacturers of these consumer beveragesexpand their businesses and operations, especially into underdevelopedcountries, they are increasingly investing in better instrumentation to ensurethe final product is free of potential contaminants.  We feel our BevAlert system is well suited toaddressing the concerns of manufacturers of beverages, and we estimate that theaddressable market for purity testing systems in the beverage industry could beas much as an aggregate of $105 million over the next ten years.  We believe this could be a growth opportunityfor us as our sales of the BevAlert system have been ramping up in the past twoyears.

 

We have recently developedand introduced our OpTech-O2TM Platinum oxygen analyzer, which is able tomeasure the oxygen concentration in a food, beverage, pharmaceutical or medicaldevice package without piercing the package. This new technology, which went into production in the third quarter of2009, will enable manufacturers in these industries to track and trace theirproducts during manufacture and distribution, and follow changes in oxygenlevels as they occur.  Applicationsinclude looking for poor heat seals or leaks, excessive package permeation,poor gas flushing and microbial growth. All of these issues affect product acceptance, product quality andproduct safety.  We believe theaddressable market for products in these industries that have the functionalityof our OpTech-O2 Platinumoxygen analyzer could be as high as an aggregate of $75 million over the nextten years.

 

In the cases of both the BevAlert and the OpTechproducts, MOCON is targeting the worldwide increase in concern for consumersafety in the food and beverage markets. Our strategy is to continue to position ourselves as a leader in theconsumer and industrial safety marketplace by offering unique products andservices into large and growing markets.

 

### ***Results ofOperations***

### ** **

The following table sets forth the relationshipbetween various components of our results of operations, 

 

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stated as a percent of sales, for the three- andnine-month periods ended September 30, 2009 and 2008:

 
| ** **                                   | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                                        |       | 100.0                                       |       | 100.0                                      |       | 100.0 |   | 100.0 |   |
| Cost of sales                                |       | 40.6                                        |       | 38.6                                       |       | 42.0 |   | 40.4 |   |
| Gross profit                                 |       | 59.4                                        |       | 61.4                                       |       | 58.0 |   | 59.6 |   |
| Selling, general and administrative expenses |       | 34.4                                        |       | 34.8                                       |       | 38.2 |   | 34.2 |   |
| Research and development expenses            |       | 7.1                                         |       | 5.8                                        |       | 7.5 |   | 6.5 |   |
| Operating income                             |       | 17.9                                        |       | 20.8                                       |       | 12.3 |   | 18.9 |   |
| Other income                                 |       | 1.3                                         |       | 1.8                                        |       | 1.6 |   | 1.9 |   |
| Income before income taxes                   |       | 19.2                                        |       | 22.6                                       |       | 13.9 |   | 20.8 |   |
| Income taxes                                 |       | 6.0                                         |       | 8.0                                        |       | 4.6 |   | 7.2 |   |
| Net income                                   |       | 13.2                                        |       | 14.6                                       |       | 9.3 |   | 13.6 |   |

###  

### *Comparison of Financial Resultsfor the Three- and Nine-Month Periods Ended September 30, 2009 and 2008*

### * *

### *Sales*

###  

Sales for the three-month period ended September 30,2009 were $6,601,000, down 11% compared to $7,429,000for the same period in 2008.  Althoughtotal sales in the current quarter were higher than the first and secondquarters of 2009, the global economic slowdown continued to affect sales acrossmost major product lines and foreign market regions. On a geographical basis,sales decreased 25% in our foreign markets, offset somewhat by an increase of11% in our domestic markets.  This increasein our domestic market was primarily due to a lower than normal quarter in theprior year.  Domestic and foreign salesaccounted for 47% and 53%, respectively, of our consolidated third quartersales in 2009, and 38% and 62% of our consolidated sales, respectively, for thesame period in 2008.

 

Sales for the nine-month period ended September 30,2009 were $19,194,000, down 14% compared to $22,270,000for the same period in 2008.  Sales inthe prior period benefited from a weaker U.S. dollar which made our productsand services more attractive in the European market.  On a geographical basis, sales decreased 10%and 17% in our domestic and foreign markets, respectively.  Domestic and foreign sales accounted for 46%and 54%, respectively, of our consolidated sales for the first nine months of2009, and 44% and 56% for the same period in 2008.

 

The following table summarizes total sales by product line for thethree- and nine-month periods ended September 30, 2009 and 2008:

 
| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Permeation  products and services                         |       | $                                          | 3,686,452  |                                      | $          | 3,814,399 |   | $ | 10,898,104 |   | $ | 12,050,577 |   |
| Gas,  headspace, and other analyzer products and services |       | 2,546,196                                  |       | 3,395,414                                 |       | 7,293,244 |   | 9,175,977 |   |
| Other  instruments and services                           |       | 367,911                                    |       | 219,425                                   |       | 1,002,306 |   | 1,043,840 |   |
|                                                      |       | $                                          | 6,600,559  |                                      | $          | 7,429,238 |   | $ | 19,193,654 |   | $ | 22,270,394 |   |

 

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The following table sets forth the relationshipbetween various components of domestic and foreign sales for the three- andnine-month periods ended September 30, 2009 and 2008:

 
| ** **           | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|----------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Domestic sales       |       | $                                           | 3,134,175  |                                       | $          | 2,812,010 |   | $ | 8,797,511 |   | $ | 9,760,948 |   |
| Foreign sales:       |       |                                        |       |                                       |       |   |   |   |   |
| Europe               |       | 1,588,609                                   |       | 1,992,022                                  |       | 4,951,756 |   | 5,765,695 |   |
| Asia                 |       | 1,531,533                                   |       | 1,781,861                                  |       | 4,074,714 |   | 4,706,561 |   |
| Other                |       | 346,242                                     |       | 843,345                                    |       | 1,369,673 |   | 2,037,190 |   |
| Total foreign  sales |       | 3,466,384                                   |       | 4,617,228                                  |       | 10,396,143 |   | 12,509,446 |   |
|                 |       | $                                           | 6,600,559  |                                       | $          | 7,429,238 |   | $ | 19,193,654 |   | $ | 22,270,394 |   |

 

***Permeation Products and Services*** —Sales of our permeation products and services, which accounted for 56% and 51%of our consolidated third quarter sales in 2009 and 2008, respectively,decreased 3% during the third quarter 2009 compared to the same period in2008.  The decrease was a result of lowershipments to our international markets, partially offset by an increase inshipments in our domestic markets. International sales of permeation products and services accounted for68% of the total sales of this product group in the third quarter 2009, and 75%of the total sales in this product group for the third quarter 2008.

 

Sales of our permeation products and services, whichaccounted for approximately 57% and 54% of our consolidated sales during thefirst nine months in 2009 and 2008, respectively, decreased 10% during thefirst nine months of 2009 compared to the same period in 2008.  The decrease was primarily the result oflower international shipments, as domestic sales were relatively constantbetween the periods. International sales of permeation products and servicesaccounted for 66% of the total sales of this product group in the first ninemonths of 2009, and 69% of the total sales in this product group for the thirdquarter 2008.

 

***Gas, Headspace, and Other Analyzer Products andServices*****— Sales of ourgas, headspace, and other analyzer products and services, which accounted for39% and 46% of our consolidated third quarter sales in 2009 and 2008, decreased25% during the third quarter 2009 compared to the same period in 2008.  Within this group, sales of our gas analyzerproducts through our Baseline subsidiary decreased 23% due primarily to lower demand for gas chromatograph andtotal hydrocarbon analyzer instruments to the oil and gas drilling andenvironmental markets.  In addition, theprior year benefitted from a large order for gas chromatographs for anenvironmental application. The decrease in sales of instruments was partiallyoffset by an increase in sales of gas sensors and detectors.  Also in this group, sales of our packagingproducts decreased 21% during the third quarter 2009 compared to the sameperiod in 2008 primarily due to lower demand for our headspace analyzer andleak detection equipment, primarily in our foreign markets.

 

Sales of our gas, headspace, and other analyzerproducts and services, which accounted for 38% and 41% of our consolidatedsales during the first nine months in 2009 and 2008, respectively, decreased21% during the first nine months of 2009 compared to the same period in2008.  Sales of our gas analyzer productsdecreased 25% due to lower demand for capital equipment instruments.  This decrease was partially offset by anincrease in sales of gas sensors and detectors. Sales of our packaging products decreased 6% during the first ninemonths of 2009 compared to the same period in 2008 primarily due to lower demandfor our headspace analyzer and leak detection equipment, primarily in ourforeign markets.

 

***Other Instruments and Services*****— Sales in our other instruments and servicescategory, which accounted for 5% and 3% of our consolidated third quarter salesin 2009 and 2008, respectively, 

 

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increased 68% in the third quarter 2009, compared tothe same period in 2008.  This increasewas due primarily to an increase in contract manufacturing of samplepreparation products and increased sales of non-MOCON products by our Germansubsidiary.

 

Sales in our other instruments and servicescategory, which accounted for 5% of our consolidated sales during the first ninemonths in both 2009 and 2008, decreased 4% during the first nine months of2009, compared to the same period in 2008. This decrease was due primarily to a reduction in contract manufacturingof sample preparation products.

 

### *Gross Profit*

###  

The gross profit margins for our product sales were61.0% and 62.7% for the three-month periods ended September 30, 2009 and2008, respectively.  Although the marginis lower in the current period, it is better than the first two quarters of2009 and above historical trends.  Thisimprovement was partially the result of changes in the manufacturing processfor sensors and detectors to increase efficiency and reduce rework.  The prior year margin was strong due to aprice increase on gas chromatographs and higher plant utilization.  The gross profit margins for our consultingservices were 38.7% and 40.5%, respectively, for the three-month periods ended September 30,2009 and 2008.  This decrease wasprimarily due to the varying margins between consulting service projects.

 

For the nine months ended September 30, 2009and 2008, the gross profit margins for our products were 59.3% and 60.7%,respectively.  This decrease wasprimarily due to lower shipment of permeation equipment which typically carriesa higher margin, as well as lower volume over which to allocate fixedmanufacturing costs.  For the nine monthsended September 30, 2009 and 2008, the gross profit margins for ourconsulting services were consistent at 40.6% and 41.0%, respectively.

 

*Selling, General and AdministrativeExpenses*

 

Selling, general and administrative (SG&A)expenses were $2,268,000 in the three-month period ended September 30,2009, compared to $2,587,000 in the same period of 2008.  As a percentage, SG&A expenses wereconsistent at 34.4% and 34.8% of consolidated sales in the third quarters of2009 and 2008, respectively.  Higherwages and benefits were offset by lower incentive compensation, travel,marketing and stock option expenses in the third quarter 2009 compared to thesame period in 2008.

 

SG&A expenses were $7,340,000 in the nine-monthperiod ended September 30, 2009, compared to $7,610,000 in the same periodof 2008.  As a percentage, SG&Aexpenses were 38.2% and 34.2% of consolidated sales in the first nine months of2009 and 2008, respectively.  Thispercentage increase was due to the lower sales level in 2009.  Higher wages and benefits and increasedmarketing and trade show expenses were offset by lower incentive compensation,stock option expense, travel and professional fees in the first nine months of2009 compared to the same period in the prior year.

 

### *Research and Development Expenses*

###  

Research and development (R&D) expenses were$470,000, or 7.1% of sales in the third quarter 2009, compared to $434,000, or5.8% of sales, in the same period of 2008. R&D expenses were $1,440,000, or 7.5% of sales in the first ninemonths of 2009, compared to $1,461,000, or 6.5% of sales, in the same period of2008.  A significant portion of theresources expended in the third quarter 2009 and the year-to-date were relatedto the development of the OpTech-O2 Platinum oxygen analyzer.

 

Our intent is to continue to spend between 6% and 8%of consolidated sales on R&D.

 

### *Other Income*

###  

Other income for the three- and nine-month periods ended September 30,2009 and 2008 was as

 

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follows:

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest income                       |       | $                                          | 92,251     |                                      | $          | 149,408 |   | $ | 313,167 |   | $ | 429,686 |   |
| Foreign currency exchange (loss) gain |       | (102                                       | )          | (15,357                                   | )          | 4,491 |   | (9,564 | ) |
| Other                                 |       | (420                                       | )          | —                                    |       | 2,650 |   | 2,543 |   |
|                                  |       | $                                          | 91,729     |                                      | $          | 134,051 |   | $ | 320,308 |   | $ | 422,665 |   |

 

Interest income decreased for both the third quarterand nine months ended September 30, 2009, compared to the same periods in2008, due to lower average yields on lower average interest bearinginvestments.

 

### *Income Tax Expense*

###  

Our provision for income taxes was 31.3% of incomebefore income taxes for the third quarter ended September 30, 2009, comparedto 35.5% of income before income taxes for the third quarter ended September 30,2008.  This decrease in the effective taxrate in the third quarter 2009 was primarily due to the impact of discreteitems arising from the completion of the 2008 income tax returns as well as areduction in the reserve for uncertain tax positions as a result of theexpiration of the statute of limitations in certain jurisdictions.

 

For the nine months ended September 30, 2009,our provision for income taxes was 33.2% of income before income taxes comparedto 34.7% of income before income taxes for the similar period in the prioryear.  The lower rate in the current yearwas primarily due to the effects of discrete items recorded in the thirdquarter 2009.

 

### Based on current projected annual operating resultsand current income tax rates, we expect the effective tax rate for theremainder of 2009 to be in the range of 33% to 36%.  This rate fluctuates over time based on theincome tax rates in the various jurisdictions in which we operate, and also thelevel of profits in those jurisdictions.

### * *

### *Net Income*

###  

Net income was $874,000 in the third quarter 2009,compared to $1,082,000 in the third quarter 2008.  Diluted net income per share was $0.16 and$0.19 in the third quarters of 2009 and 2008, respectively.  For the nine months ended September 30,2009, net income was $1,788,000, or $0.32 per diluted share, compared to netincome of $3,019,000, or $0.53 per diluted share in the prior year.

 

*Liquidity and Capital Resources*

 

We have historically financed our operations,capital expenditures and other liquidity needs through our cash flows generatedfrom operations.  We have a commitmentfor a $5 million revolving line of credit to supplement current working capitalrequirements.  This line would replacethe prior commitment of $1 million and would be used to supplement ouravailable cash on hand in the event we see a strategic use. Total cash, cashequivalents and marketable securities decreased $2,952,000 during the firstnine months of 2009 to $13,157,000 as of September 30, 2009, compared to$16,109,000 at December 31, 2008. The primary reason for this decrease was due to the repurchase duringthe first three quarters of 2009 of an aggregate of 423,571 shares of ourcommon stock for a total of $3,602,000. Our working capital as of September 30, 2009 increased $206,000 to$18,098,000, as compared to $17,893,000 at December 31, 2008.  We invest our excess cash in marketablesecurities consisting primarily of 

 

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municipal bonds, certificates of deposits and U.S.treasury obligations.  We believe that acombination of our existing cash, cash equivalents and marketable securities,revolving credit line and cash flow from operations will continue to beadequate to fund our operations, capital expenditures, dividend payments andauthorized stock repurchases for at least the next twelve months.  Purchases of property and equipment decreased$90,000 to $259,000 in the first nine months of 2009 as compared to the sameperiod in 2008, and we had no material commitments for capital expenditures asof September 30, 2009.

 

One of our strategic objectives is, as market andbusiness conditions warrant, to consider acquisitions of businesses, productsor technologies.  We may need to fundsuch activities, should they arise, with a combination of cash on hand and debtand/or equity financing, although no assurance can be given that such debtand/or equity financing will be available at reasonable terms or at all.  In addition, there can be no assurance thatwe would be able to continue to pay dividends or pay dividends at currentlevels.  If we raise additional funds byissuing debt, we may be subject to restrictive covenants that could limit ouroperational flexibility and higher interest expense could dilute earnings pershare.  Any plan to raise additionalcapital may involve an equity-based or equity-linked financing, which may bedilutive to existing shareholders.

 

*Cash Flow*

 

Cash Flow from Operating Activities

 

Our primary source of funds is cash provided byoperating activities which totaled $2,366,000 and $2,572,000 in the first ninemonths of 2009 and 2008, respectively. The key components of the cash provided by operating activities in 2009were the income for the period, reduced inventories and other receivables, andincreased deferred revenue.  These werepartially offset by a reduction of accounts payable and a reduction in accruedcompensation and vacation, which was primarily due to the March and July 2009payments of incentive bonuses.  The March paymentrelated to compensation that was based on 2008 results.

 

### Cash Flow from Investing Activities

###  

Cash provided by (used in) investing activitiestotaled $3,693,000 and ($2,664,000) in the first nine months of 2009 and 2008,respectively.  The primary reasons forcash provided by investing activities in 2009 were net proceeds from maturitiesof marketable securities of $4,058,000, offset somewhat by purchases ofproperty and equipment, and patents and trademarks.  We presently do not believe that anysignificant property, plant and equipment expenditures are required toaccommodate our current level of operations.

 

Cash Flow from Financing Activities

 

Cash used in financing activities totaled $5,088,000and $846,000 in the first nine months of 2009 and 2008, respectively.  During the first nine months of 2009 werepurchased an aggregate of $3,602,000 of our common stock, $2,012,000 of whichwas in the third quarter.  In addition,we made dividend payments to our shareholders of $1,493,000.

 

In June 2009, our Board of Directorsauthorized, depending upon market conditions and other factors, the repurchaseof up to a total of $2 million of our common stock.  During the third quarter 2009, we used theentire amount of the authorization by purchasing 242,400 shares of our commonstock at an average price of $8.25 per share. Currently, the Board has not authorized any additional amounts to beused for stock repurchases.

 

***ContractualObligations***

** **

We refer you to our Annual Report on Form 10-Kfor the year ended December 31, 2008 for a summary 

 

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of our contractual obligations.  There has been no material change in thisinformation.

### *** ***

### ***Off-Balance SheetArrangements***

### ** **

Exceptfor operating leases entered into in the ordinary course of business andcustomary indemnification obligations under certain of our agreements enteredinto in the ordinary course of business, we do not have any materialoff-balance sheet arrangements.

 

***Recently Issued AccountingPronouncements***

*** ***

InJune 2009, new guidance was issued by the FASB, now codified in ASC Topic810, which amends the consolidation guidance applicable to variable interestentities and is effective for us beginning July 1, 2010.  We believe the adoption of this pronouncementwill not have a significant impact on our consolidated financial statements.

 

InSeptember 2009, the FASB ratified its guidance on two revenue recognitionstandards that will become effective for us beginning January 1, 2011,with earlier adoption permitted.  Underthe new guidance on revenue arrangements with multiple deliverables, whenvendor specific objective evidence or third party evidence for deliverables inan arrangement cannot be determined, a best estimate of the selling price isrequired to separate deliverables and allocate arrangement consideration usingthe relative selling price method.  Underthe new guidance on arrangements that include software elements, tangibleproducts that have software components that are essential to the functionalityof the tangible product will no longer be within the scope of the softwarerevenue recognition guidance, and software-enabled products will now be subjectto the new guidance for multiple deliverable arrangements discussed above.  In the initial year of application, companiesare required to make qualitative and quantitative disclosures about the impactof the changes under both standards.  Weare currently evaluating the impact of adopting the new revenue recognitionguidance on our consolidated financial statements and related disclosures.

 

***CriticalAccounting Policies***

*** ***

Our significant accounting policies are described inNote 1 to our consolidated financial statements.  This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  The preparation of these consolidated financialstatements requires management to make estimates and judgments that affect thereported amount of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  The Securities and Exchange Commission hasdefined a company’s most critical accounting policies as those that are mostimportant to the portrayal of its financial condition and results ofoperations, and which require the company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified the following criticalaccounting policies.  Although we believethat our estimates and assumptions are reasonable, they are based uponinformation available when they are made. Actual results may differ significantly from these estimates underdifferent assumptions or conditions.

 

*Revenuerecognition* — We recognize revenue when it is realized orrealizable and earned.  In accordancewith the Securities and Exchange Commission Staff Accounting Bulletin 104, *Revenue Recognition*,**we considerrevenue realized or realizable when persuasive evidence of an arrangementexists, the product has been shipped or the services have been provided to thecustomer, title and risk of loss of products has passed to the customer, thesales price is fixed or determinable, and collectibility is reasonablyassured.  Our terms are F.O.B. shippingpoint with no right of return, and customer acceptance of our products is notrequired.  The revenue recognition policydoes not differ among the various product lines, the marketing venues, orvarious geographic destinations.  We donot have 

 

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distributors who stock ourequipment.  We do not offer rebates,price protection, or other similar incentives, and discounts when offered arerecorded as a reduction in revenue.

 

Revenue for preventivemaintenance agreements is recognized on a per visit basis and extendedwarranties on a straight-line basis over the life of the contracts, inaccordance with FASB Technical Bulletin 90-1, *Accountingfor Separately Priced Extended Warranty and Product Maintenance Contracts*.

 

ASC Topic 605 providesrevenue recognition guidance for arrangements with multiple deliverables, andthe criteria to determine if items in a multiple deliverable agreement shouldbe accounted for separately.  If productsor services are sold on a standalone basis, revenue is recognized as theproducts or services are delivered.  Whenproducts or services are sold as part of a multiple element arrangement, weallocate revenue on a relative fair value basis.

 

*Allowance for doubtful accounts and sales returns* —Our allowance for doubtful accounts and sales returns is for accountsreceivable balances that are estimated to be uncollectible as well asanticipated sales returns.  The reserveis based on a number of factors, including: (1) an analysis of customer accounts and (2) our historicalexperience with accounts receivable write-offs and sales returns.  The analysis includes the age of thereceivable, the financial condition of a customer or industry and generaleconomic conditions.  We believe ourfinancial results could be materially different if historical trends do notreflect actual results or if economic conditions worsened for ourcustomers.  In the event we determinedthat a smaller or larger allowance for doubtful accounts is appropriate, wewould record a credit or charge to selling, general and administrative expensein the period that we made such a determination.  As of September 30,2009, we had $135,000 reserved against our accounts receivable for doubtfulaccounts and sales returns.

 

*Accrual for excess and obsolete inventories*—**We perform an analysis to identify excessand obsolete inventory.  We record acharge to cost of sales for amounts identified. Our analysis includes inventory levels, the nature of the finishedproduct and its inherent risk of obsolescence and the on-hand quantitiesrelative to the sales history of that finished product.  We believe that our financial results couldbe materially different if historical trends do not reflect actual results orif demand for our products decreased because of economic or competitiveconditions or otherwise.  As of September 30,2009, we had $312,000 accrued for excess and obsolete inventories.

 

*Recoverability of long-lived assets*—**We assess the recoverability of goodwilland other long-lived assets annually or whenever events or changes incircumstances indicate that expected future undiscounted cash flows might notbe sufficient to support the carrying amount of an asset.  We deem an asset to be impaired if a forecastof undiscounted future operating cash flows is less than an asset’s carryingamount.  If an asset is determined to beimpaired, the loss is measured as the amount by which the carrying value of theasset exceeds its fair value.  Changes inour business strategies, changes in the economic environment in which weoperate, competitive conditions, and other factors could result in futureimpairment charges.

 

*Accrued product warranties*—**Our products are generally covered by awarranty, with warranty periods ranging from ninety days to one year from thedate of sale.  Estimated warranty costsare accrued in the same period in which the related revenue is recognized,based on anticipated parts and labor costs, utilizing historical experience.  Additional warranty reserves are also accruedfor major rework campaigns.  Weperiodically assess the adequacy of our warranty reserves based on changes inthese factors and record any necessary adjustments if actual claim experienceindicates that adjustments are necessary. Although we believe the likelihood to be relatively low, warranty claimsexperience could be materially different from actual results due tomanufacturing changes that could impact product quality, a change in ourwarranty policy in response to industry trends, as yet unrecognized defects inproducts sold, or other factors.  As of September 30,2009, we had $211,000 accrued for future estimated warranty claims.

 

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* *

*Income taxes*—**In the preparation of our consolidatedfinancial statements, management is required to estimate income taxes in eachof the jurisdictions in which we operate. This process involves estimating actual current tax exposures togetherwith assessing temporary differences resulting from differing treatment ofitems for tax and accounting purposes. These differences result in deferred tax assets and liabilities, whichare included in our Consolidated Balance Sheets.

 

Management reviews the deferred tax assets forrecoverability on a quarterly basis and assesses the need for valuationallowances.  These deferred tax assetsare evaluated by considering historical levels of income, estimates of futuretaxable income streams and the impact of tax planning strategies.  A valuation allowance is recorded to reducedeferred tax assets when it is determined that it is more likely than not thatwe would not be able to realize all or part of our deferred tax assets.  At September 30,2009 and December 31, 2008, we provided a valuation allowance in theapproximate amount of $370,000 and $364,000, respectively, against our netdeferred tax assets, related primarily to the capital loss carryforward.

 

### ***Forward-LookingStatements***

### ** **

Thisquarterly report on Form 10-Q contains or incorporates by reference notonly historical information, but also forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended, and are subject to the safeharbor created by those sections.  Inaddition, we or others on our behalf may make forward-looking statements fromtime to time in oral presentations, including telephone conferences and/or webcasts open to the public, in press releases or reports, on our website orotherwise.  All statements other thanstatements of historical facts included in this report that address activities,events or developments that we expect, believe or anticipate will or may occurin the future are forward-looking statements including, in particular, thestatements about our plans, objectives, strategies and prospects regarding,among other things, our financial condition, results of operations, addressablemarket size estimates and business.  Wehave identified some of these forward-looking statements with words like “believe,”“may,” “could,” “might,” “forecast,” “possible,” “potential,” “project,” “will,”“should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate”or “continue” and other words and terms of similar meaning.  These forward-looking statements may becontained in the notes to our consolidated financial statements and elsewherein this report, including under the heading “Management’s Discussion and Analysisof Financial Condition and Results of Operations.”

 

Forward-lookingstatements involve risks and uncertainties. These uncertainties include factors that affect all businesses as wellas matters specific to us.  Some of thefactors known to us that could cause our actual results to differ materiallyfrom what we have anticipated in our forward-looking statements are describedbelow.

 

·                  Increases in prices for rawmaterials;

·                  Risks inherent in operatinginternationally and selling and shipping our products and purchasing ourproducts and components internationally;

·                  Fluctuations in foreigncurrency exchange rates and interest rates;

·                  Failure to develop newproducts and technologies, delays in new product introduction and lack ofmarket acceptance of new products;

·                  Failure to effect strategicacquisitions and integrate effectively newly acquired operations;

·                  Incurrence of additional debt,contingent liabilities and expenses in connection with future acquisitions;

·                  The effects of the globaleconomic downturn and continuing decreases in capital spending by our customersthat may occur as a result;

·                  Exposure to assertions ofintellectual property claims and failure to protect our intellectual property;

·                  Disruption in our ability tomanufacture our products or the ability of our key suppliers to

 

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provide us products or components or raw materialsfor products resulting in our inability to supply market demand for ourproducts;

·                  Reliance on independent salesdistributors and sales associates to market and sell our products;

·                  Highly competitive nature ofthe markets in which we sell our products and the introduction of competingproducts;

·                  Loss of customers;

·                  Failure to retain seniormanagement or replace lost senior management;

·                  Employee slowdowns, strikesor similar actions;

·                  Reliance on our managementinformation systems for inventory management, distribution, accounting andother functions;

·                  Effects of any pending orthreatened litigation;

·                  Failure to comply withapplicable laws and regulations and adverse changes in applicable laws orregulations;

·                  Changes in generallyaccepted accounting principles; or

·                  Conditions and changes ingeneral economic and business conditions.

 

Formore information regarding these and other uncertainties and factors that couldcause our actual results to differ materially from what we have anticipated inour forward-looking statements or could otherwise materially adversely affectour business, financial condition or operating results, see our annual reporton Form 10-K for the fiscal year ended December 31, 2008 under theheading “Part I — Item 1A.  RiskFactors” on pages 8 through 12 of such report and the risk factor below.

 

Wewish to caution readers not to place undue reliance on any forward-lookingstatement that speaks only as of the date made and to recognize thatforward-looking statements are predictions of future results, which may notoccur as anticipated.  Actual resultscould differ materially from those anticipated in the forward-lookingstatements and from historical results, due to the risks and uncertaintiesdescribed above and the risk factor set forth below, as well as others that wemay consider immaterial or do not anticipate at this time. Although we believethat the expectations reflected in our forward-looking statements arereasonable, we do not know whether our expectations will prove correct.  The expectations reflected in ourforward-looking statements can be affected by inaccurate assumptions we mightmake or by known or unknown risks and uncertainties, including those describedabove.  The risks and uncertaintiesdescribed above are not exclusive and further information concerning us and ourbusiness, including factors that potentially could materially affect ourfinancial results or condition, may emerge from time to time.  We assume no obligation to updateforward-looking statements to reflect actual results or changes in factors orassumptions affecting such forward-looking statements.  We advise you, however, to consult anyfurther disclosures we make on related subjects in our quarterly reports on Form 10-Qand current reports on Form 8-K we file with or furnish to the Securitiesand Exchange Commission.

 

***We have spent significant resources todevelop new products in the food and beverage safety and packaging  industries and we have thus far only realizedminimal revenues from these products.***

*** ***

As more fully describedelsewhere in this quarterly report, we have recently developed and begun to marketour newest BevAlert system and OpTech-O2 Platinum analyzer.  We believe that there are significantaddressable markets for both of these products and while we believe both ofthese products are superior in many respects to other similar products beingsold by our competitors, each one is new to the marketplace and may not gainthe market acceptance necessary to allow us to capitalize on what we believewill be an increasing demand in the food and beverage industries for safetytesting and monitoring products.  We haverealized modest revenues from sales of our BevAlert system and have just beguncommercial production of our OpTech-O2 Platinum analyzer.  If we are not able to successfully marketthese products, we will not recover the R&D and other expenses we haveincurred to bring these products to market.

 

Item 3.                                             Quantitativeand Qualitative Disclosures About Market Risk

 

*Equity Price and Interest RateRisk*

 

Allof our marketable securities, the majority of which are insured by the FDIC,are at fixed interest rates and mature within two years; therefore, we believethat the market risk arising from the holding of these financial instruments isminimal.

 

### *Foreign Currency Risk*

###  

Historically,in excess of 50% of our consolidated sales have been to internationaldestinations.  Since we invoice most ofthese customers in U.S. dollars, we do not have significant exposure to foreigncurrency transaction risk.  We invoice asmall amount to our international customers in their local currency whichexposes us to some transaction gain or loss when converting their payments intoU.S. 

 

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dollars.  We also pay a small number of ourinternational suppliers in their local currency which exposes us to transactiongain or loss.  However, these have notresulted in material amounts in the past. Our foreign operations expose us to foreign currency exchange risk whenthe euro and yuan currency results of operations are translated to U.S.dollars.  While we historically have notexperienced any material foreign currency translation losses, we may engage inhedging activity in the future to minimize this risk.  Our net investment in foreign subsidiarytranslated into U.S. dollars is not hedged. Any changes in foreign currency exchange rates would be reflected as aforeign currency translation adjustment, a component of accumulated other comprehensiveincome in stockholders’ equity, and would not impact our net income.

 

Item 4T.                                     Controlsand Procedures

 

*Evaluation of Disclosure Controlsand Procedures*

 

Wemaintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) that are designed to ensure that information required to bedisclosed by us in the reports we file or submit under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized, and reported,within the time periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, werecognize that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and we necessarily are required to apply our judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered in this QuarterlyReport on Form 10-Q.  Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end ofsuch period, to provide reasonable assurance that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms,and that material information relating to our Company and our consolidatedsubsidiaries is made known to management, including our Chief Executive Officerand Chief Financial Officer, particularly during the period when our periodicreports are being prepared.

 

*Changes in Internal Control OverFinancial Reporting*

 

Therewas no change in our internal control over financial reporting that occurredduring our quarter ended September 30,2009 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

PART II.                    OTHERINFORMATION

 

Item 1A.                                   RiskFactors

 

We are affected by risksspecific to us as well as factors that affect all businesses operating in aglobal market.  The significant factorsknown to us that could materially adversely affect our business, financialcondition or operating results are described in our annual report on Form 10-Kfor the fiscal year ended December 31, 2008 under the heading “Part I— Item 1A. Risk Factors.”  There has beenno material change in those risk factors.

 

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Item 2.                                             UnregisteredSales of Equity Securities, Use of Proceeds and Issuer Purchases of EquitySecurities

* *

*UnregisteredSales of Equity Securities*

 

We did not sell any equitysecurities of MOCON, Inc. during the third quarter ended September 30,2009 that were not registered under the Securities Act of 1933.

 

*IssuerRepurchases of Equity Securities*

 

The following table showsour stock repurchase activity during the third quarter ended September 30,2009:

 
| **Period**                                              | ** ** | **Total   Number of   Shares   Purchased** | ** ** | **Average   Price   Paid Per   Share** | ** ** | **Total Number   of Shares   Purchased as   Part of   Publicly   Announced   Plans or   Programs** | ** ** | **Maximum   Amount of   Authorization  Remaining   Under the   Plan** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| July 1, 2009 through July 31,  2009           |       | —                                     |       | —                                 |       | —                                                                                                  |       | $                                                                     | 2,000,000  |   |
| August 1, 2009 through August 31,  2009       |       | 242,400                                    | (1)        | $                                      | 8.25       |                                                                                                    | 242,400    |                                                                  | —     |   |
| September 1, 2009 through  September 30, 2009 |       | —                                     |       | —                                 |       | —                                                                                                  |       | —                                                                |       |
|                                                         |            |                                            |            |                                        |            |                                                                                                         |            |                                                                       |            |  |  |

 

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(1)          The 242,400 sharesrepurchased during the periods indicated above exhausted the amount remainingin the June 23, 2009 authorization by our Board of Directors.  We currently are not authorized by our Boardof Directors to make further repurchases of our common stock.

 

Except as set forth in thetable above, we did not purchase any shares of our common stock or other equitysecurities registered pursuant to Section 12 of the Securities ExchangeAct of 1934, as amended, during the third quarter ended September 30,2009.

 

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Item 6.                                             Exhibits

 

The following exhibits are being filed or furnished with this quarterlyreport on Form 10-Q:

 
| **Exhibit   No.** | ** ** | **Description**                                                                                          |
|------------------------|------------|----------------------------------------------------------------------------------------------------------|
| 31.1                   |       | Certification of Chief Executive Officer Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
|                   |       |                                                                                                     |
| 31.2                   |       | Certification of Chief Financial Officer Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
|                   |       |                                                                                                     |
| 32.1                   |       | Certification of Chief Executive Officer Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |
|                   |       |                                                                                                     |
| 32.2                   |       | Certification of Chief Financial Officer Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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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 theundersigned hereunto duly authorized.

 

 
|                         | MOCON, INC.                                            |
|------------------------------|--------------------------------------------------------|
|                         |                                                   |
|                         |                                                   |
| Date: November 13, 2009 | /s/ Robert L. Demorest                                 |
|                         | Robert L. Demorest                                     |
|                         | Chairman, President and Chief Executive Officer        |
|                         | (Principal Executive Officer)                          |
|                         |                                                   |
|                         |                                                   |
| Date: November 13, 2009 | /s/ Darrell B. Lee                                     |
|                         | Darrell B. Lee                                         |
|                         | Vice President, Treasurer and Chief Financial  Officer |
|                         | (Principal Financial and Accounting Officer)           |

 

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MOCON, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBER 30,2009

 

EXHIBIT INDEX

 
| **Exhibit  No.** | ** ** | **Description**                                                                                          | ** ** | **Method of  Filing** |
|------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 31.1             |       | Certification of Chief Executive Officer Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith        |
|             |       |                                                                                                     |       |                  |
| 31.2             |       | Certification of Chief Financial Officer Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith        |
|             |       |                                                                                                     |       |                  |
| 32.1             |       | Certification of Chief Executive Officer Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith    |
|             |       |                                                                                                     |       |                  |
| 32.2             |       | Certification of Chief Financial Officer Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith    |

 

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