**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

##### ** **

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

##### ** **

**(Mark One)**

| **x** | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

**For theQuarter Ended March 31, 2008**

 

**or**

 

| **o** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

**For thetransition period from                 to**

 

**CommissionFile 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 of principal executiveoffices)           (Zipcode)

 

**(763) 493-6370**

(Registrant’s telephone number, including area code)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES x  NO o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  Large acceleratedfiler o  Accelerated filer o Non-accelerated filer (do not check if a smaller reportingcompany) o  Smaller reporting company x

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

YES o NO x

 

5,543,520Common Shares were outstanding as of April 30, 2008.

 

 

----

 

MOCON, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

For the Quarter Ended March 31,2008

 
| ** **                          | **Page  Number**                                                                                     |
|-------------------------------------|------------------------------------------------------------------------------------------------------|
| PART I.  FINANCIAL INFORMATION |                                                                                                 |
|                                |                                                                                                 |
| Item 1.                             | Financial Statements                                                                                 |   |
|                                | Consolidated Balance  Sheets  March 31, 2008 (Unaudited) and December 31, 2007             | 1 |
|                                |                                                                                                 |   |
|                                | Consolidated Statements  of Income (Unaudited)  Three months ended March 31, 2008 and 2007      | 2 |
|                                |                                                                                                 |   |
|                                | Consolidated Statements  of Cash Flows (Unaudited)  Three months ended March 31, 2008 and 2007  | 3 |
|                                |                                                                                                 |   |
|                                | Notes to Consolidated  Financial Statements (Unaudited)                                              | 4-10 |
|                                |                                                                                                 |   |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          | 11-20 |
|                                |                                                                                                 |   |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                          | 20 |
|                                |                                                                                                 |   |
| Item 4T.                            | Controls and  Procedures                                                                             | 20-21 |
|                                |                                                                                                 |
| PART II.  OTHER INFORMATION    |                                                                                                 |
|                                |                                                                                                 |
| Item 1A.                            | Risk  Factors                                                                                        | 22 |
|                                |                                                                                                 |   |
| Item 2.                             | Unregistered  Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity  Securities | 22 |
|                                |                                                                                                 |   |
| Item 6.                             | Exhibits                                                                                             | 22 |
|                                |                                                                                                 |
| Signatures                          | 23                                                                                                   |
|                                |                                                                                                 |
| Exhibit Index                  | 24                                                                                                   |

* *

*In this report, references to“MOCON,” “the Company,” “we,” “our,” or “us,” unless the context otherwiserequires, refer to MOCON, Inc. and its subsidiaries.*

* *

*Alltrademarks or trade names referred to in this report are the property of theirrespective owners.*

 

----

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MOCON,INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                       | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                       | ** ** | **(Unaudited)**    | ** ** | **(Audited)**         | ** ** |
| ASSETS                                                                                                                                           |       |               |       |                  |       |
| Current assets:                                                                                                                                  |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                        |       | $                  | 5,445,165  |                  | $          | 5,207,105 |   |
| Marketable securities, current                                                                                                                   |       | 7,001,832          |       | 7,028,812             |       |
| Trade accounts receivable, less allowance for doubtful accounts of  $103,416 in 2008 and $125,797 in 2007                                        |       | 4,509,430          |       | 4,291,224             |       |
| Other receivables                                                                                                                                |       | 209,454            |       | 186,273               |       |
| Inventories                                                                                                                                      |       | 4,043,883          |       | 3,965,446             |       |
| Prepaid expenses                                                                                                                                 |       | 438,149            |       | 335,104               |       |
| Deferred income taxes                                                                                                                            |       | 306,977            |       | 291,943               |       |
| Total current assets                                                                                                                             |       | 21,954,890         |       | 21,305,907            |       |
|                                                                                                                                             |       |               |       |                  |       |
| Marketable securities, noncurrent                                                                                                                |       | 3,251,304          |       | 2,788,964             |       |
| Property, plant and equipment, net of accumulated depreciation of  $4,422,541 in 2008 and $4,290,311 in 2007                                     |       | 1,570,272          |       | 1,583,387             |       |
|                                                                                                                                             |       |               |       |                  |       |
| Other assets:                                                                                                                                    |       |               |       |                  |       |
| Goodwill                                                                                                                                         |       | 3,096,317          |       | 3,096,317             |       |
| Technology rights and other intangibles, net                                                                                                     |       | 570,136            |       | 572,675               |       |
| Deferred income taxes                                                                                                                            |       | 259,178            |       | 252,729               |       |
| Other                                                                                                                                            |       | 74,423             |       | 73,518                |       |
| Total other assets                                                                                                                               |       | 4,000,054          |       | 3,995,239             |       |
|                                                                                                                                             |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                     |       | $                  | 30,776,520 |                  | $          | 29,673,497 |   |
|                                                                                                                                             |       |               |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                        |       |               |       |                  |       |
| Current liabilities:                                                                                                                             |       |               |       |                  |       |
| Accounts payable                                                                                                                                 |       | $                  | 1,960,413  |                  | $          | 1,591,306 |   |
| Accrued compensation and vacation                                                                                                                |       | 1,117,704          |       | 1,340,500             |       |
| Other accrued expenses                                                                                                                           |       | 276,472            |       | 304,750               |       |
| Accrued product warranties                                                                                                                       |       | 203,310            |       | 201,373               |       |
| Accrued income taxes                                                                                                                             |       | 84,884             |       | 68,670                |       |
| Dividends payable                                                                                                                                |       | 443,296            |       | 442,244               |       |
| Total current liabilities                                                                                                                        |       | 4,086,079          |       | 3,948,843             |       |
|                                                                                                                                             |       |               |       |                  |       |
| Obligations to former employees                                                                                                                  |       | 64,778             |       | 60,387                |       |
| Accrued income taxes                                                                                                                             |       | 276,900            |       | 279,000               |       |
| Total noncurrent liabilities                                                                                                                     |       | 341,678            |       | 339,387               |       |
|                                                                                                                                             |       |               |       |                  |       |
| Total liabilities                                                                                                                                |       | 4,427,757          |       | 4,288,230             |       |
|                                                                                                                                             |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                       |       |               |       |                  |       |
| Capital stock — undesignated — authorized 3,000,000 shares                                                                             |       | —             |       | —                |       |
| Common stock — $0.10 par value. Authorized 22,000,000 shares; issued  and outstanding 5,541,195 shares in 2008 and 5,528,051 shares in 2007 |       | 554,120            |       | 552,805               |       |
| Capital in excess of par value                                                                                                                   |       | 2,315,468          |       | 2,127,183             |       |
| Retained earnings                                                                                                                                |       | 22,548,381         |       | 22,106,178            |       |
| Accumulated other comprehensive income                                                                                                           |       | 930,794            |       | 599,101               |       |
| Total stockholders’ equity                                                                                                                  |       | 26,348,763         |       | 25,385,267            |       |
|                                                                                                                                             |       |               |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                  |       | $                  | 30,776,520 |                  | $          | 29,673,497 |   |

 

See accompanying notes to consolidated financial statements.

 

1

----

 

MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **March 31,**     | ** ** |
| ** **                                    | ** ** | **2008**               | ** ** | **2007** | ** ** |
|                                          |       |                   |       |   |   |
| Sales:                                        |       |                   |       |   |   |
| Products                                      |       | $                      | 7,102,453  |   | $ | 6,487,171 |   |
| Consulting services                           |       | 359,981                |       | 389,378 |   |
| Total sales                                   |       | 7,462,434              |       | 6,876,549 |   |
|                                          |       |                   |       |   |   |
| Cost of sales:                                |       |                   |       |   |   |
| Products                                      |       | 2,919,612              |       | 2,677,641 |   |
| Consulting services                           |       | 234,303                |       | 258,533 |   |
| Total cost of sales                           |       | 3,153,915              |       | 2,936,174 |   |
|                                          |       |                   |       |   |   |
| Gross profit                                  |       | 4,308,519              |       | 3,940,375 |   |
|                                          |       |                   |       |   |   |
| Selling, general and  administrative expenses |       | 2,582,634              |       | 2,228,887 |   |
|                                          |       |                   |       |   |   |
| Research and development  expenses            |       | 543,951                |       | 535,520 |   |
|                                          |       |                   |       |   |   |
| Operating income                              |       | 1,181,934              |       | 1,175,968 |   |
|                                          |       |                   |       |   |   |
| Other income                                  |       | 131,693                |       | 127,383 |   |
|                                          |       |                   |       |   |   |
| Income from operations before income taxes    |       | 1,313,627              |       | 1,303,351 |   |
|                                          |       |                   |       |   |   |
| Income taxes                                  |       | 428,000                |       | 470,000 |   |
|                                          |       |                   |       |   |   |
| Net income                                    |       | $                      | 885,627    |   | $ | 833,351 |   |
|                                          |       |                   |       |   |   |
| Net income per common  share:                 |       |                   |       |   |   |
| Basic                                         |       | $                      | 0.16       |   | $ | 0.15 |   |
| Diluted                                       |       | $                      | 0.16       |   | $ | 0.15 |   |
|                                          |       |                   |       |   |   |
| Weighted average common  shares outstanding:  |       |                   |       |   |   |
| Basic                                         |       | 5,532,432              |       | 5,473,018 |   |
| Diluted                                       |       | 5,668,573              |       | 5,697,248 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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MOCON, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**     | ** ** |
| ** **                                                                         | ** ** | **2008**               | ** ** | **2007** | ** ** |
| Cash flows from operating  activities:                                             |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 885,627    |   | $ | 833,351 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                   |       |   |   |
| Share-based compensation expense                                                   |       | 77,639                 |       | 101,430 |   |
| Loss on disposition of long-term assets                                            |       | 13,500                 |       | 6,101 |   |
| Depreciation and amortization                                                      |       | 137,045                |       | 146,856 |   |
| Deferred income taxes                                                              |       | (8,549                 | )          | (12,171 | ) |
| Excess tax benefit from employee stock plans                                       |       | (5,667                 | )          | — |   |
| Changes in operating assets and liabilities:                                       |       |                   |       |   |   |
| Trade accounts receivable                                                          |       | (285,839               | )          | (300,677 | ) |
| Other receivables                                                                  |       | (19,624                | )          | (4,573 | ) |
| Inventories                                                                        |       | (39,532                | )          | 129,124 |   |
| Prepaid expenses                                                                   |       | (115,569               | )          | 4,305 |   |
| Accounts payable                                                                   |       | 470,389                |       | (343,328 | ) |
| Accrued compensation and vacation                                                  |       | (244,034               | )          | (277,247 | ) |
| Other accrued expenses                                                             |       | (30,593                | )          | 27,915 |   |
| Accrued product warranties                                                         |       | (740                   | )          | (14,250 | ) |
| Accrued income taxes                                                               |       | 17,285                 |       | 321,956 |   |
| Net cash provided by operating activities                                          |       | 851,338                |       | 618,792 |   |
|                                                                               |       |                   |       |   |   |
| Cash flows from investing  activities:                                             |       |                   |       |   |   |
| Purchases of marketable securities                                                 |       | (2,136,836             | )          | (1,741,656 | ) |
| Proceeds from sales or maturities of marketable securities                         |       | 1,701,475              |       | 2,039,919 |   |
| Cash paid for acquisitions                                                         |       | —                 |       | (574,568 | ) |
| Purchases of property and equipment                                                |       | (82,325                | )          | (91,026 | ) |
| Purchases of patents and trademarks                                                |       | (39,019                | )          | (24,004 | ) |
| Other                                                                              |       | (905                   | )          | (1,718 | ) |
| Net cash used in investing activities                                              |       | (557,610               | )          | (393,053 | ) |
|                                                                               |       |                   |       |   |   |
| Cash flows from financing  activities:                                             |       |                   |       |   |   |
| Proceeds from the exercise of stock options                                        |       | 106,295                |       | 87,039 |   |
| Excess tax benefit from employee stock plans                                       |       | 5,667                  |       | — |   |
| Dividends paid                                                                     |       | (442,372               | )          | (410,196 | ) |
| Net cash used in financing activities                                              |       | (330,410               | )          | (323,157 | ) |
|                                                                               |       |                   |       |   |   |
| Effect of exchange rate  changes on cash                                           |       | 274,742                |       | 27,996 |   |
|                                                                               |       |                   |       |   |   |
| Net increase (decrease) in  cash and cash equivalents                              |       | 238,060                |       | (69,422 | ) |
|                                                                               |       |                   |       |   |   |
| Cash and cash equivalents:                                                         |       |                   |       |   |   |
| Beginning of period                                                                |       | 5,207,105              |       | 3,549,042 |   |
| End of period                                                                      |       | $                      | 5,445,165  |   | $ | 3,479,620 |   |
|                                                                               |       |                   |       |   |   |
| Supplemental disclosures  of cash flow information:                                |       |                   |       |   |   |
| Cash paid during the period for income taxes                                       |       | $                      | 196,891    |   | $ | 160,216 |   |
|                                                                               |       |                   |       |   |   |
| Supplemental schedule of  noncash investing and financing activities:              |       |                   |       |   |   |
| Unrealized holding loss on available-for-sale securities                           |       | $                      | —     |   | $ | (1,032 | ) |
| Dividends accrued                                                                  |       | $                      | 443,296    |   | $ | 411,038 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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MOCON, INC. AND SUBSIDIARIES

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Consolidated Financial Statements

 

Theconsolidated balance sheet as of March 31, 2008, and the consolidatedstatements of income and cash flows for the three-month periods ended March 31,2008 and 2007 have been prepared by us, without audit.  However, all adjustments (consisting solelyof normal recurring adjustments) which are, in the opinion of management,necessary to present fairly the financial position, results of operations andcash flows at March 31, 2008, and for all periods presented, have beenmade.  The results of operations for thethree-month period ended March 31, 2008 are not necessarily indicative ofoperating results for the full year.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted.  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, 2007, 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 subsidiary 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 comprehensive incomeor loss in stockholders’ equity.  Gainsand losses on foreign currency transactions are included in other income orloss.

 

*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.  Actual results could differ from thoseestimates.

 

4

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*New Accounting Pronouncements*

* *

InSeptember 2006, the Financial Accounting Standards Board (FASB) issued theStatement of Financial Accounting Standard (SFAS) No. 157, *Fair Value Measurement* (SFAS 157).  This statement did not require any new fairvalue measurements, but rather, it provided enhanced guidance to otherpronouncements that require or permit assets or liabilities to be measured atfair value.  The changes to currentpractice resulting from the application of this statement related to thedefinition of fair value, the methods used to estimate fair value, and therequirement for expanded disclosures about estimates of fair value.  This statement became effective for usbeginning in 2008.  The effective datefor this statement for all non-financial assets and non-financial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring bases, has been delayed by one year.  We adopted the provisions of SFAS 157 relatedto financial assets and financial liabilities on January 1, 2008.  The partial adoption of this statement didnot have an  impact on our consolidatedfinancial statements.  It is expectedthat the remaining provisions of this statement will not have a material effecton our consolidated financial statements.

 

InFebruary 2008, the FASB issued FASB Staff Position (FSP) No.157-1, *Application of FASB Statement No. 157 to FASB Statement No. 13and Its Related Interpretive Accounting Pronouncements That Address LeasingTransactions*, and FSP FAS 157-2, *Effective Date of FASBStatement No. 157*.  FSPFAS 157-1 removes leasing from the scope of SFAS 157, *Fair ValueMeasurements*.  FSP FAS 157-2delays the effective date of SFAS 157 from 2008 to 2009 for all nonfinancialassets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  See SFAS 157 discussionabove.  Adoption of FSP FAS 157-1 did nothave an effect on our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement 115* (SFAS 159).  This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  SFAS 159 was effective for us beginning in2008 and was to be applied prospectively. As we did not elect to measure existing assets and liabilities at fairvalue, the adoption of this statement did not have an effect on our consolidatedfinancial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (SFAS 141(R)).  SFAS 141(R) retains the fundamentalrequirements of the original pronouncement requiring that the purchase methodbe used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains controlof one or more businesses in the business combination, establishes theacquisition date as the date that the acquirer achieves control and requiresthe acquirer to recognize the assets acquired, liabilities assumed and anynoncontrolling interest at their fair values as of the acquisition date.  SFAS 141(R) also requires thatacquisition-related costs be recognized separately from the acquisition.  SFAS 141(R) is effective for usbeginning in 2009.  We are currentlyevaluating the impact SFAS 141 (R) will have on any future businesscombinations.

 

InDecember 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements* (SFAS 160).  SFAS 160 clarifies that a noncontrollinginterest in a subsidiary should be reported as equity in the consolidatedfinancial statements.  Consolidated netincome should include the net income for both the parent and the noncontrollinginterest with disclosure of both amounts on the consolidated statement ofincome.  The calculation of earnings pershare will continue to be based on income amounts attributable to theparent.  SFAS 160 is effective for usbeginning in 2009.  We currently do nothave any subsidiaries in which we hold a noncontrolling interest and,therefore, we believe this pronouncement will have no impact on ourconsolidated financial statements.

 

5

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InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (SFAS 161), anamendment of SFAS No. 133.  SFAS 161establishes, among other things, the disclosure requirements for derivativeinstruments and for hedging activities. The intent is to provide users of financial statements with an enhancedunderstanding of a) how and why an entity uses derivative instruments, b) howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows.  To meetthose objectives, the Statement requires qualitative disclosures aboutobjectives and strategies for using derivatives, quantitative disclosures aboutfair value amounts of and gains and losses on derivative instruments, anddisclosures about credit-risk-related contingent features in derivativeagreements.  SFAS 161 is effective for usbeginning in 2009.  We currently have noderivative instruments or hedging activities but will assess the impact of SFAS161 if and when we engage in these types of transactions.

 

Note 2 — Inventories

 

Inventories consist of the following:

 

| ** **        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------|------------|--------------------------|------------|-----------------------------|------------|
| Finished products |       | $                        | 657,135    |                        | $          | 687,979 |   |
| Work-in-process   |       | 1,308,734                |       | 1,391,620                   |       |
| Raw materials     |       | 2,078,014                |       | 1,885,847                   |       |
|              |       | $                        | 4,043,883  |                        | $          | 3,965,446 |   |

 

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-month periods endedMarch 31, 2008 and 2007:

 

| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Weighted  shares of common stock outstanding — basic               |       | 5,532,432                              |       | 5,473,018 |   |
| Weighted  shares of common stock assumed upon exercise of stock options |       | 136,141                                |       | 224,230 |   |
| Weighted  shares of common stock outstanding — diluted             |       | 5,668,573                              |       | 5,697,248 |   |

 

Note 4 — Goodwill and Intangible Assets

 

Asof both March 31, 2008 and December 31, 2007, unamortized goodwilltotaled $3,096,317.  Other identifiableintangible assets (all of which are being amortized except projects in process)are as follows:

 

6

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| ** **                 | ** ** | **As of March 31, 2008** | ** ** |
|----------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **Carrying  Amount**          | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                    |       | $                             | 804,850    |   | $ | (338,906 | ) | $ | 465,944 |   | 10 to 17  years |   |
| Trademarks and trade names |       | 429,038                       |       | (324,846 | ) | 104,192 |   | 5 to 17  years |   |
|                       |       | $                             | 1,233,888  |   | $ | (663,752 | ) | $ | 570,136 |   |   |   |

 
| ** **                 | ** ** | **As of December 31, 2007** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **Carrying  Amount**             | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Estimated  Useful Lives** | ** ** |
| Patents                    |       | $                                | 790,269    |   | $ | (328,883 | ) | $ | 461,386 |   | 10 to 17  years |   |
| Trademarks and trade names |       | 418,101                          |       | (306,812 | ) | 111,289 |   | 5 to 17  years |   |
|                       |       | $                                | 1,208,370  |   | $ | (635,695 | ) | $ | 572,675 |   |   |   |

 

Totalamortization expense for the three-month periods ended March 31, 2008 and2007 was $28,058 and $42,362, respectively. Estimated amortization expense for the remainder of 2008 and each of thefour succeeding fiscal years and thereafter based on the intangible assets asof March 31, 2008 is as follows:

 

| ** **          | ** ** | **Estimated  Expense** | ** ** |
|---------------------|------------|------------------------|------------|
| 2008                |       | $                      | 84,364     |   |
| 2009                |       | $                      | 45,868     |   |
| 2010                |       | $                      | 38,446     |   |
| 2011                |       | $                      | 25,190     |   |
| 2012                |       | $                      | 21,541     |   |
| 2013 and thereafter |       | $                      | 18,534     |   |

 

### Note 5 — Marketable Securities

###  

As of January 1, 2008, the method of accountingfor our marketable securities was changed from available-for-sale toheld-to-maturity. This change was made due to our positive intent and abilityto hold these securities until maturity or the call date as the case maybe.  Currently, all of our marketablesecurities mature within two years.  Underthe prior method, these securities were recorded at fair value and theunrealized holding gains and losses were excluded from income and reported as aseparate component of stockholders’ equity until realized.  Held-to-maturity securities are measured atamortized cost and are adjusted for the amortization or accretion of premiumsor discounts.  For the debt securitiesthat were outstanding at December 31, 2007, there was approximately$25,000 of unrealized gain  that wasrecorded in stockholders’ equity.  Thisamount will be amortized as interest income over the remaining life of thesecurities.  At March 31, 2008 and2007, the net cumulative unrealized gain (loss) was $25,282 and ($2,509),respectively.

 

Note 6 — Comprehensive Income

 

Othercomprehensive income pertains to net unrealized gains and losses on marketablesecurities and foreign currency translation adjustments that are not includedin net income but rather are recorded directly in stockholders’ equity.  For 2008, there was no unrealized gain orloss on marketable securities recorded due to the change in accounting forthese securities as explained in Note 5 above.

 

7

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| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Net income                                    |       | $                                      | 885,627    |   | $ | 833,351 |   |
| Foreign  currency translation adjustment      |       | 331,693                                |       | 31,312 |   |
| Net  unrealized loss on marketable securities |       | —                                 |       | (1,032 | ) |
| Comprehensive income                          |       | $                                      | 1,217,320  |   | $ | 863,631 |   |

 

Note 7 — 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 three-month periods ended March 31,2008 and 2007 were as follows:

 

| ** **          | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| ** **          | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Beginning balance   |       | $                                      | 201,373    |   | $ | 246,737 |   |
| Warranty provisions |       | 72,964                                 |       | 34,326 |   |
| Warranty claims     |       | (71,027                                | )          | (47,784 | ) |
| Ending balance      |       | $                                      | 203,310    |   | $ | 233,279 |   |

 

Note 8 — Income Taxes

 

The Company adopted the provisions of FASB  Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109* (FIN 48) on January 1, 2007.  This interpretation clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with SFAS 109, *Accounting for IncomeTaxes*.  It prescribes arecognition threshold and measurement attribute for financial statementdisclosure of tax positions taken or expected to be taken on a tax return.  As of December 31, 2007, the liabilityfor gross unrecognized tax benefits was $220,000, which included potentialbenefits of $157,000 that if recognized would affect the effective tax rate onincome from continuing operations. During the three months ended March 31, 2008, there were no significantchanges to the total gross unrecognized tax benefits.  It is expected that the amount ofunrecognized tax benefits for positions which we have identified will notchange significantly in the next nine months.

 

MOCON, Inc. or one of its subsidiaries files income tax returns inthe U.S. Federal jurisdiction, several state jurisdictions, and Germany.  With limited exceptions, we are no longersubject to income tax examinations by taxing authorities for taxable yearsbefore 2004.

 

8

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Note 9 — Share-Based Compensation

 

As of March 31, 2008, we have reserved316,450 shares of common stock for options and other share-based incentiveawards that are still available for grant under our 2006 stock incentive plan,and 832,063 shares for options that have been granted under either the 2006stock incentive plan, the 1998 stock option plan or the 1992 stock option planbut have not yet been exercised.  Weissue new shares of common stock upon exercise of stock options.  There were no options granted in the firstquarter of 2008.

 

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

 

| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Total  cost of share-based compensation                     |       | $                                      | 77,639     |   | $ | 101,430 |   |
| Amount  capitalized in inventory and property and equipment |       | —                                 |       | — |   |
| Amounts  charged against income, before income taxes        |       | 77,639                                 |       | 101,430 |   |
| Amount  of income tax benefit recognized in earnings        |       | (12,552                                | )          | (13,126 | ) |
| Amount  charged against net income                          |       | $                                      | 65,087     |   | $ | 88,304 |   |

 

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 is calculatedbased upon the dividend payments made during the prior four quarters as apercent of the average stock price for that period.

 

A summary of the option activity for the first three months of 2008 isas follows:

 

| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|-----------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2007 |       | 856,437               |       | $                                                 | 8.73       |                                                | 5.4        |                            | $          | 2,061,171 |   |
| Options  granted                      |       | —                |       | —                                            |       | —                                              |       |                            |       |
| Options  cancelled                    |       | (4,837                | )          | $                                                 | 10.81      |                                                | —     |                            |       |   |
| Options  expired                      |       | (6,393                | )          | $                                                 | 11.05      |                                                | —     |                            |       |   |
| Options  exercised                    |       | (13,144               | )          | $                                                 | 8.09       |                                                | —     |                            |       |   |
| Outstanding at March 31, 2008    |       | 832,063               |       | $                                                 | 8.71       |                                                | 5.2        |                            | $          | 2,162,095 |   |
|                                  |       |                  |       |                                              |       |                                                |       |                            |       |
| Exercisable at March 31, 2008    |       | 659,333               |       | $                                                 | 8.14       |                                                | 4.8        |                            | $          | 2,068,051 |   |

 

The total intrinsic value of options exercised was $37,235 and $53,720during the three-month periods ended March 31, 2008 and 2007,respectively.

 

9

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A summary of the status of our unvested option shares as of March 31,2008 is as follows:

 

| ** **                         | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|
| Unvested at December 31, 2007 |       | 185,542               |       | $                                             | 2.93       |   |
| Options  granted                   |       | —                |       | —                                        |       |
| Options  cancelled                 |       | (4,437                | )          | $                                             | 2.79       |   |
| Options  vested                    |       | (8,375                | )          | $                                             | 3.21       |   |
| Unvested at March 31, 2008    |       | 172,730               |       | $                                             | 2.92       |   |

 

As of March 31, 2008, there was $503,590 of total unrecognizedcompensation cost related to unvested share-based compensation granted underour plans.  That cost is expected to berecognized over a weighted-average period of 1.5 years.  The total fair value of option shares vestedduring the three-month periods ended March 31, 2008 and 2007 was $26,884and $41,528, respectively.

 

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Item2.  Management’s Discussion andAnalysis 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 below under thecaption “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***

### ** **

MOCON, Inc. designs, manufactures, markets andservices products and provides consulting services primarily in the measurementand analytical instrument and services markets. Our products include instruments that detect, measure and monitor gasesand chemical compounds.  Although some ofthe markets for our products are maturing, we continually seek growthopportunities through technological and product improvement, by acquiring anddeveloping new products, and by acquiring new companies.

 

We have three primary operating locations in theUnited States — Minnesota, Colorado and Texas — and foreign offices in Germanyand China.  We use a direct sales forceand independent sales representatives to market our products and services inthe United States, Canada, Germany and China and use a network of independentsales representatives to market and service our products and services in otherforeign countries.

 

Historically, a significant portion of our revenueshave come from international customers.  Inthis regard, we acquired our subsidiary in Germany in 2004 to solidify ourpresence and opportunities in Europe. Similarly, in 2007, we opened our office in Shanghai, China, to betterserve our Asian customers.

 

Our current plans for growth include substantialfunding for research and development to foster new product development togetherwith strategic acquisitions where appropriate.

 

### ***Results ofOperations***

### ** **

The following table sets forth the relationshipbetween various components of our results of operations, stated as a percent ofsales, for the three-month periods ended March 31, 2008 and 2007:

 

| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Sales                                         |       | 100.0                                  |       | 100.0 |   |
| Cost of sales                                 |       | 42.3                                   |       | 42.7 |   |
| Gross  profit                                 |       | 57.7                                   |       | 57.3 |   |
| Selling,  general and administrative expenses |       | 34.6                                   |       | 32.4 |   |
| Research  and development expenses            |       | 7.3                                    |       | 7.8 |   |
| Operating  income                             |       | 15.8                                   |       | 17.1 |   |
| Other income                                  |       | 1.8                                    |       | 1.8 |   |
| Income  before income taxes                   |       | 17.6                                   |       | 18.9 |   |
| Income taxes                                  |       | 5.7                                    |       | 6.8 |   |
| Net  income                                   |       | 11.9                                   |       | 12.1 |   |

###  

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### *Comparison of Financial Resultsfor the Three-Month Periods Ended March 31, 2008 and 2007*

### * *

### *Sales*

###  

Sales for the three-month period ended March 31,2008 were $7,462,434, up 9% compared to $6,876,549for the same period in 2007.  On a productline basis, this increase was primarily the result of increased sales of ourpermeation products and services, which was evident in both our domestic andforeign markets. On a geographical basis, sales increased 9% in our domesticmarkets and 8% in our foreign markets. Approximately 38% of the total sales increase was due to foreigncurrency rate changes.  There were nosignificant price increases or decreases during the first quarter 2008,compared to the same period in 2007.

 

The following table summarizes total sales by product line for thethree-month periods ended March 31, 2008 and 2007:

 

| ** **                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Permeation  products and services                         |       | $                                      | 3,934,053  |   | $ | 3,459,165 |   |
| Gas,  headspace, and other analyzer products and services |       | 3,029,078                              |       | 3,072,014 |   |
| Other  instruments and services                           |       | 499,303                                |       | 345,370 |   |
| Total  sales                                              |       | $                                      | 7,462,434  |   | $ | 6,876,549 |   |

 

The following table sets forth the relationshipbetween various components of domestic and foreign sales for the three-monthperiods ended March 31, 2008 and 2007:

 

| ** **           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Domestic  sales      |       | $                                      | 3,492,931  |   | $ | 3,195,933 |   |
| Foreign  sales:      |       |                                   |       |   |   |
| Europe               |       | 1,982,901                              |       | 1,294,827 |   |
| Asia                 |       | 1,433,195                              |       | 1,706,000 |   |
| Other                |       | 553,407                                |       | 679,789 |   |
| Total  foreign sales |       | 3,969,503                              |       | 3,680,616 |   |
| Total  sales         |       | $                                      | 7,462,434  |   | $ | 6,876,549 |   |

*** ***

***Permeation Products and Services*** —Sales of our permeation products and services, which accounted forapproximately 53% and 50% of our consolidated first quarter sales in 2008 and2007, respectively, increased 14% during the first quarter 2008 compared to thesame period in 2007.  This increase,which was both in our domestic and foreign markets, was due primarily toincreased demand for instruments and testing services.  International sales of permeation productsand services accounted for 67% of the total sales of this product group in thefirst quarter 2008.

 

***Gas, Headspace, and Other Analyzer Products andServices*****— Sales of ourgas, headspace, and other analyzer products and services, which accounted for40% and 45% of our consolidated first quarter sales in 2008 and 2007,respectively, decreased 1% during the first quarter 2008 compared to the sameperiod in 2007.  Within this group, salesof our gas analyzer products through our Baseline subsidiary decreased 3% dueto a drop in instrument sales (i.e. gas

 

12

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chromatographs and total hydrocarbon analyzers),which was partially offset by an increase in sales of sensors and detectors(i.e. piD-TECH®sensors and FID detectors).

 

Sales of our packaging products, which includeheadspace analyzers and leak detection equipment, were consistent between thefirst quarter 2008 and the same quarter in 2007.  While we experienced an increase in foreignorders for leak detection equipment (primarily in Europe), this was offset by areduction in domestic orders, as well as a decrease in shipments of headspaceanalyzers across both foreign and domestic markets.

 

Sales of our weighing and pharmaceutical productswere also consistent between the first quarters of 2008 and 2007.  Our weighing and pharmaceutical productsgroup consists of a relatively fewer number of higher priced products comparedto our other product groups and will typically experience significant fluctuationsin demand.

 

***Other Instruments and Services*****— Sales in our other instruments and servicescategory, which accounted for 7% and 5% of our consolidated sales in the firstquarters 2008 and 2007, respectively, increased 45% in the first quarter 2008,compared to the same period in 2007.  Theincrease was primarily due to higher sales of sample preparation products whichwe manufacture under an exclusive contract, and also the sales of non-MOCONproducts by our German subsidiary.

 

On a geographical basis, domestic and foreign salesaccounted for 47% and 53%, respectively, of our total consolidated firstquarter sales in 2008, and 46% and 54%, respectively, for the same period in2007.

 

### *Gross Profit*

###  

The gross profit margins for our product sales wereconsistent at 58.9% and 58.7% for the three-month periods ended March 31,2008 and 2007, respectively.  The grossprofit margins for our consulting services were 34.9% and 33.6%, respectively,for the three-month periods ended March 31, 2008 and 2007.  This slight increase was primarily due tolower headcount in this area and the varying margins between consulting serviceprojects.

 

*Selling, General andAdministrative Expenses*

 

Selling, general and administrative (SG&A)expenses in the three-month period ended March 31, 2008 were $2,582,634,or 34.6% of sales, compared to $2,228,887, or 32.4% of sales in the firstquarter 2007.  The increase in SG&Aexpenses was primarily due to increased headcount and related benefits, increasedmarketing and travel expense attributable to introducing new products andopening new markets, and higher professional fees.

 

### *Research and Development Expenses*

###  

Research and development (R&D) expenses were$543,951, or 7.3% of sales in the first quarter 2008, compared to $535,520, or7.8% of sales, in the same period of 2007. This level of expense is within our planned range of R&Dexpenditures.  For the foreseeablefuture, we expect to allocate on an annual basis approximately 6% to 8% ofsales to research and development.

 

### *Other Income*

###  

Other income for the first quarter ended March 31,2008 of $131,693 consisted of interest income of $139,109, partially offset bya loss of $7,415 on foreign currency exchange and other small expenses.  Other income for the first quarter ended March 31,2007 of $127,383 consisted of interest income of $134,605, partially offset bya loss of $7,222 on foreign currency exchange. Interest income increased 

 

13

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for the first quarter ended March 31, 2008,compared to the same period in 2007, due to higher average interest bearinginvestments, partially offset by lower average yields.

 

### *Income Tax Expense*

###  

Our provision for income taxes from continuingoperations was 32.6% of income before income taxes for the first quarter ended March 31,2008, compared to 36.1% of income before income taxes for the first quarterended March 31, 2007.  The lowereffective tax rate in 2008 was primarily due to a reduction in the statutorycorporate income tax rates in Germany. Based on current operating conditionsand income tax laws, we expect the tax rate for the remainder of 2008 to be inthe range of 31% to 35%.  This ratefluctuates over time based on the income tax rates in the various jurisdictionsin which we operate, and also the level of profits in those jurisdictions.

 

### *Net Income*

###  

Net income was $885,627 in the first quarter 2008,compared to $833,351 in the first quarter 2007. Diluted net income was $0.16 and $0.15 per share in the first quartersof 2008 and 2007, respectively.

 

*Liquidity and Capital Resources*

 

We have historically financed our operations,capital expenditures and other liquidity needs through our cash flows generatedfrom operations.  Total cash, cashequivalents and marketable securities increased $673,420 during the first threemonths of 2008 to $15,698,301 as of March 31, 2008, compared to$15,024,881 at December 31, 2007. Our working capital as of March 31, 2008 increased $511,747 to$17,868,811, as compared to $17,357,064 at December 31, 2007.  Our investment in marketable securitiesconsists primarily of municipal bonds, certificates of deposits and U.S.treasury obligations.  We do notcurrently have any funds invested in auction rate certificates.  We believe that a combination of our existingcash, cash equivalents and marketable securities, plus an expected continuationof cash flow from operations, will continue to be adequate to fund ouroperations, capital expenditures, dividend payments and authorized stockrepurchases for at least the next twelve months.  Purchases of property and equipment wererelatively constant between the two periods mentioned above, and we had nomaterial commitments for capital expenditures as of March 31, 2008.

 

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.  We currently do not have any committed linesof credit or other credit facilities available for use.  If we raise additional funds by issuing debt,we may be subject to restrictive covenants that could limit our operationalflexibility and higher interest expense could dilute earnings per share.  Any plan to raise additional capital mayinvolve an equity-based or equity-linked financing, which may be dilutive toexisting shareholders.

 

*Cash Flow*

 

Cash Flow from Operating Activities

 

Our primary source of funds is cash provided byoperating activities which totaled $851,338 and $618,792 in the first threemonths of 2008 and 2007, respectively. The key components of the cash provided in 2008 were the net income andincreased accounts payable, partially offset by increased accounts receivableand decreased accrued compensation.

 

14

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###  

### Cash Flow from Investing Activities

###  

Cash used in investing activities totaled $557,610and $393,053 in the first three months of 2008 and 2007, respectively.  The primary reasons for cash usage in 2008were net purchases of marketable securities of $435,361 and purchases ofproperty and equipment.  For 2007, theprimary reasons for the cash usage were the final earnout payment of $574,568made for the Lippke acquisition and purchases of property and equipment, partiallyoffset by net proceeds from the maturity of marketable securities of$298,263.  We presently do not believethat any significant property, plant and equipment expenditures are required toaccommodate our current level of operations.

 

Cash Flow from Financing Activities

 

Cash used in financing activities totaled $330,410and $323,157 in the first three months of 2008 and 2007, respectively.  During the first three months of 2008 and2007, we made dividend payments to our shareholders of $442,372 and $410,196,respectively.  Partially offsetting these payments were theproceeds from the exercise of stock options in the amounts of $106,295 and$87,039 in the first three months of 2008 and 2007, respectively.

 

Our Board of Directors has authorized, dependingupon market conditions and other factors, the repurchase of up to a total of$2,000,000 of our common stock.  As of March 31,2008, we had repurchased an aggregate of 41,500 shares of MOCON common stockunder the program at a total cumulative cost of $363,125.  There were no shares of common stockrepurchased in the quarter ended March 31, 2008 and there was $1,636,875remaining in this authorization at that date.

 

***ContractualObligations***

** **

We refer you to our Annual Report on Form 10-Kfor the year ended December 31, 2007 for a summary of our contractualobligations.  There has been no materialchange in this information.

 

### ***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.

 

***New AccountingPronouncements***

*** ***

InSeptember 2006, the Financial Accounting Standards Board (FASB) issued theStatement of Financial Accounting Standard (SFAS) No. 157, *Fair Value Measurement* (SFAS 157).  This statement did not require any new fairvalue measurements, but rather, it provided enhanced guidance to otherpronouncements that require or permit assets or liabilities to be measured atfair value.  The changes to currentpractice resulting from the application of this statement related to thedefinition of fair value, the methods used to estimate fair value, and therequirement for expanded disclosures about estimates of fair value.  This statement became effective for usbeginning in 2008.  The effective datefor this statement for all non-financial assets and non-financial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring bases, has been delayed by one year.  We adopted the provisions of SFAS 157 relatedto financial assets and financial liabilities on January 1, 2008.  The partial adoption of this statement didnot have an  impact on our consolidatedfinancial statements.  It is expectedthat the remaining provisions of this statement will not have a material effecton our consolidated financial statements.

 

InFebruary 2008, the FASB issued FASB Staff Position (FSP) No.157-1, *Application of FASB Statement No. 157 to FASB Statement No. 13and Its Related Interpretive Accounting Pronouncements That Address LeasingTransactions*, and FSP FAS 157-2, *Effective Date of FASBStatement No. 157*.

 

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FSPFAS 157-1 removes leasing from the scope of SFAS 157, *Fair ValueMeasurements*.  FSP FAS 157-2delays the effective date of SFAS 157 from 2008 to 2009 for all nonfinancialassets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  See SFAS 157 discussionabove.  Adoption of FSP FAS 157-1 did nothave an effect on our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities — Including anamendment of FASB Statement 115* (SFAS 159).  This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  SFAS 159 was effective for us beginning in2008 and was to be applied prospectively. As we did not elect to measure existing assets and liabilities at fairvalue, the adoption of this statement did not have an effect on ourconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (SFAS 141(R)).  SFAS 141(R) retains the fundamentalrequirements of the original pronouncement requiring that the purchase methodbe used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains controlof one or more businesses in the business combination, establishes theacquisition date as the date that the acquirer achieves control and requiresthe acquirer to recognize the assets acquired, liabilities assumed and anynoncontrolling interest at their fair values as of the acquisition date.  SFAS 141(R) also requires thatacquisition-related costs be recognized separately from the acquisition.  SFAS 141(R) is effective for usbeginning in 2009.  We are currentlyevaluating the impact SFAS 141 (R) will have on any future businesscombinations.

 

InDecember 2007, the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements* (SFAS 160).  SFAS 160 clarifies that a noncontrolling interestin a subsidiary should be reported as equity in the consolidated financialstatements.  Consolidated net incomeshould include the net income for both the parent and the noncontrollinginterest with disclosure of both amounts on the consolidated statement ofincome.  The calculation of earnings pershare will continue to be based on income amounts attributable to theparent.  SFAS 160 is effective for usbeginning in 2009.  We currently do nothave any subsidiaries in which we hold a noncontrolling interest and,therefore, we believe this pronouncement will have no impact on ourconsolidated financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (SFAS 161), anamendment of SFAS No. 133.  SFAS 161establishes, among other things, the disclosure requirements for derivativeinstruments and for hedging activities. The intent is to provide users of financial statements with an enhancedunderstanding of a) how and why an entity uses derivative instruments, b) howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and c) how derivative instruments andrelated hedged items affect an entity’s financial position, financial performance,and cash flows.  To meet thoseobjectives, the Statement requires qualitative disclosures about objectives andstrategies for using derivatives, quantitative disclosures about fair valueamounts of and gains and losses on derivative instruments, and disclosuresabout credit-risk-related contingent features in derivative agreements.  SFAS 161 is effective for us beginning in2009.  We currently have no derivativeinstruments or hedging activities but will assess the impact of SFAS 161 if andwhen we engage in these types of transactions

 

***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 

 

16

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financial statements requires management to makeestimates and judgments that affect the reported amount of assets, liabilities,revenues and expenses, and related disclosure of contingent assets andliabilities.  The Securities and ExchangeCommission has defined a company’s most critical accounting policies as thosethat are most important to the portrayal of its financial condition and resultsof operations, 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 (SAB104), *Revenue Recognition,*weconsider revenue realized or realizable when persuasive evidence of anarrangement exists, the product has been shipped or the services have beenprovided to the customer, title and risk of loss of products has passed to thecustomer, the sales price is fixed or determinable, and collectibility isreasonably assured.  Our terms are F.O.B.shipping point with no right of return, and customer acceptance of our productsis not required.  The revenue recognitionpolicy does not differ among the various product lines, the marketing venues,or various geographic destinations.  Wedo not have distributors who stock our equipment.  We do not offer rebates, price protection, orother similar incentives, and discounts when offered are recorded as areduction 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*.

 

Emerging Issues Task Force(EITF) Issue 00-21, *Revenue Arrangements withMultiple Deliverables*, provides revenue recognition guidance forarrangements with multiple deliverables, and the criteria to determine if itemsin a multiple deliverable agreement should be accounted for separately.  If products or services are sold on astandalone basis, revenue is recognized as the products or services aredelivered. When products or services are sold as part of a multiple elementarrangement, we allocate revenue on a relative fair value basis. In the absenceof fair value for an undelivered element(s), the arrangement is accounted foras a single unit of accounting, resulting in a deferral of revenue recognitionfor the delivered elements until all undelivered elements have been fulfilled,at which time previously deferred revenue is recognized ratably over theremaining contract term of the arrangement.

 

*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 as anticipatedsales returns.  The reserve is based on anumber of factors, including:  (1) ananalysis of customer accounts and (2) our historical experience withaccounts 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 March 31, 2008, we had $103,416reserved against our accounts receivable for doubtful accounts and salesreturns.

 

*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 March 31,2008, we had $589,835 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 

 

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undiscounted cash flows might not be sufficient tosupport the carrying amount of an asset. We deem an asset to be impaired if a forecast of undiscounted futureoperating cash flows is less than an asset’s carrying amount.  If an asset is determined to be impaired, theloss is measured as the amount by which the carrying value of the asset exceedsits fair value.  Changes in our businessstrategies, changes in the economic environment in which we operate,competitive conditions, and other factors could result in future impairmentcharges.

 

*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 historicalexperience.  Additional warranty reservesare also accrued for major rework campaigns. We periodically assess the adequacy of our warranty reserves based on changesin these factors and record any necessary adjustments if actual claimexperience indicates that adjustments are necessary.  Although we believe the likelihood to berelatively low, warranty claims experience could be materially different fromactual results due to manufacturing changes that could impact product quality,a change in our warranty policy in response to industry trends, as yetunrecognized defects in products sold, or other factors.  As of March 31, 2008, we had $203,310accrued for future estimated warranty claims.

 

*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.

 

We have significant amounts of deferred taxassets.  Management reviews the deferredtax assets for recoverability on a quarterly basis and assesses the need forvaluation allowances.  These deferred taxassets are evaluated by considering historical levels of income, estimates offuture taxable 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 March 31, 2008 and December 31,2007, we provided a valuation allowance in the approximate amount of $324,000against our net deferred tax assets.

 

### ***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 andbusiness.  We have identified some ofthese 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” andother words and terms of similar meaning. These forward-looking statements may be contained in the notes to ourconsolidated financial statements and elsewhere in this report, including underthe heading “Management’s Discussion and Analysis of Financial Condition andResults 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 

 

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causeour actual results to differ materially from what we have anticipated in ourforward-looking statements are described below.

 

·                  Increasesin prices for raw materials;

·                  Risksinherent in operating internationally and selling and shipping our products andpurchasing our products and components internationally;

·                  Fluctuationsin foreign currency exchange rates and interest rates;

·                  Failureto develop new products and technologies, delays in new product introductionand lack of market acceptance of new products;

·                  Failureto effect strategic acquisitions and integrate effectively newly acquiredoperations;

·                  Incurrenceof additional debt, contingent liabilities and expenses in connection withfuture acquisitions;

·                  Decreasesin capital spending by our customers;

·                  Exposureto assertions of intellectual property claims and failure to protect ourintellectual property;

·                  Disruptionin our ability to manufacture our products or the ability of our key suppliersto provide us products or components or raw materials for products resulting inour inability to supply market demand for our products;

·                  Relianceon independent sales distributors and sales associates to market and sell ourproducts;

·                  Highlycompetitive nature of the markets in which we sell our products and theintroduction of competing products;

·                  Lossof customers;

·                  Failureto retain senior management or replace lost senior management;

·                  Employeeslowdowns, strikes or similar actions;

·                  Relianceon our management information systems for inventory management, distributionand other functions;

·                  Effectsof any pending or threatened litigation;

·                  Failureto comply with applicable laws and regulations and adverse changes inapplicable laws or regulations;

·                  Changesin generally accepted accounting principles; or

·                  Conditionsand changes in general 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, 2007 under theheading “Part I — Item 1A.  RiskFactors” on pages 8 through 12 of such report.

 

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, as well as others that we may consider immaterial or do notanticipate at this time. Although we believe that the expectations reflected inour forward-looking statements are reasonable, we do not know whether ourexpectations will prove correct.  Theexpectations reflected in our forward-looking statements can be affected byinaccurate assumptions we might make or by known or unknown risks and uncertainties,including those described above.  Therisks and uncertainties described above are not exclusive and furtherinformation concerning us and our business, including factors that potentiallycould materially affect our financial results or condition, may emerge fromtime to time.  We assume no obligation toupdate forward-looking statements to reflect actual results or changes in 

 

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factorsor assumptions affecting such forward-looking statements.  We advise you, however, to consult any furtherdisclosures 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.

 

Item 3.  Quantitativeand Qualitative Disclosures About Market Risk

 

*Equity Price and Interest RateRisk*

 

Substantiallyall of our marketable securities are at fixed interest rates and all of ourmarketable securities mature within two years or less; therefore, we believethat the market risk arising from the holding of these financial instruments isminimal.

 

### *Foreign Currency Risk*

###  

Historically,approximately 50% of our consolidated sales have been to internationaldestinations.  Since we invoice most ofthese customers in U.S. dollars, we are not exposed to foreign currency transactionrisk.  We invoice a small amount to ourinternational customers in their local currency which exposes us to sometransaction gain or loss when converting their payments into U.S. 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 currency results of operations are translated to U.S. dollars.  While we historically have not experiencedany material foreign currency translation losses, we may engage in hedgingactivity in the future to minimize this risk. Our net investment in foreign subsidiary translated into U.S. dollars isnot hedged.  Any changes in foreigncurrency exchange rates would be reflected as a foreign currency translation adjustment, a component of accumulatedother comprehensive income in stockholders’ equity, and would not impact ournet income.

 

Item 4T. Controls and 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 be disclosedby us in the reports we file or submit under the Securities Exchange Act of1934, as amended, is recorded, processed, summarized, and reported, within thetime 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 ExecutiveOfficer, and Chief Financial Officer, particularly during the period when ourperiodic reports are being prepared.

 

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*Changes in Internal Control OverFinancial Reporting*

 

Therewas no change in our internal control over financial reporting that occurredduring our quarter ended March 31, 2008 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

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PART II. OTHER INFORMATION

 

Item 1A.  Risk Factors

 

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, 2007 under the heading “Part I— Item 1A. Risk Factors.”  There has beenno material change in those risk factors.

 

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

 

*UnregisteredSales of Equity Securities*

 

We did not sell any equitysecurities of MOCON, Inc. during the first quarter ended March 31,2008 that were not registered under the Securities Act of 1933.

 

*IssuerRepurchases of Equity Securities*

 

We did not repurchase anyequity securities of MOCON, Inc. during the first quarter ended March 31,2008.

 

Item 6.  Exhibits

 

The followingexhibits are being filed or furnished with this quarterly report 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-OxleyAct of 2002  |
| 32.2                 |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-OxleyAct 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: May 15, 2008 |                                         |
|                    | Robert L. Demorest                           |
|                    | Chairman, President and Chief                |
|                    | Executive Officer                            |
|                    | (Principal Executive Officer)                |
|                    |                                         |
| Date: May 15, 2008 |                                         |
|                    | 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 MARCH 31,2008

 

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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